The WING Trust – Introduction and Planning Opportunities

The WING Trust – Introduction and Planning Opportunities

Scott Robinson

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Wyoming offers some of the most favorable, progressive trust laws in the United States. The combination of Wyoming trust and tax laws (no state level income tax) creates the opportunity for non-Wyoming residents to enjoy the benefits of Wyoming without residing in the state through the use of Wyoming trusts.  One such trust, the Wyoming incomplete gift, non-grantor trust (“WING trust” or “WING”), can be a powerful state income tax minimization tool for individuals residing in states that impose a state level income tax and who are facing significant liquidity events involving highly appreciated assets or have significant investment income.

The essence of a WING is the creation of a Wyoming resident to hold, either directly or indirectly, intangible assets in Wyoming for the benefit of the beneficiaries of the WING.  As a Wyoming resident, taxable gain and/or income attributable to assets disposed of or held by the WING are taxed in Wyoming.  Since Wyoming imposes no state level income tax on trusts, the state tax due on any taxable gain and/or income within the WING is zero.

WING is an acronym for an “ING” trust created and maintained under Wyoming law.  An ING trust is an irrevocable trust that is designed to be an incomplete gift for transfer tax purposes (i.e., gift, estate and generation-skipping transfer taxes) and non-grantor trust for income tax purposes (i.e., a separate taxpayer from the settlor (i.e., the person creating the trust)).  ING trusts have been around since at least 2001 and have become increasingly popular planning tools in recent years. ING trusts have become popular enough that the trusts have been recently been written about by Forbes and The Wall Street Journal as well as other media outlets.

PLANNING OPPORTUNITIES AND USES

There are many planning opportunities and uses of the WING structure.  The following are some of the common planning opportunities and uses with examples:

Liquidity Event

One of the most common planning opportunities for a WING is the pending liquidity event involving closely-held business interests or private equity.  Like all tax planning, the business interests or private equity must be transferred in advance of any writing, including e-mails, letters of intent or term sheets, specifying the purchase price offered for the business interests or private equity.

Example 1:  Andy Entrepreneur, a Colorado resident, is one of the founders of Tasty Treats, Inc. (“TT”).  Andy owns 50% of the shares of stock issued and outstanding in TT.  Andy has a tax basis in his stock of $100,000.  TT, which produces healthy meat snacks, approached Investment Bank about the possibility of marketing TT for an acquisition.  Investment Bank values TT at $50 Million and tells Andy and the other shareholders that it will take at least one year before TT is ready to be marketed for sale.  Andy, knowing that TT will be sold soon, then establishes a WING and transfers one-half of his shares of stock (25% of the stock of TT) to the trust.

Eighteen months later TT is acquired through a stock purchase transaction by a large food company for $56 Million.  Both Andy and Andy’s WING receive $14 Million ($28 Million total).  Both Andy and Andy’s WING realize taxable gain of $13,950,000 ($14,000,000 less $50,000 basis).  Both Andy and Andy’s WING pay the same amount of federal tax on their respective gains.  In addition, Andy, as a resident of Colorado, also pays $645,885 in state income tax. Andy’s WING, on the other hand, as a resident of Wyoming, pays $0 in state income tax.  Thus, Andy’s establishment of the WING saved him $645,885 in state tax liability. 

Example 2:  Sally Savvy, a California resident, is a serial entrepreneur.  Sally has experienced several liquidity events and now invests in startup and early stage companies (mostly in the software and computer technology space).  Sally has accumulated a nice portfolio of private equity investments in her wholly-owned personal investment company, TicToc LLC, a California limited liability company.  Sally believes that several of her private equity interests are poised for a liquidity event in the next three to six months. 

Sally establishes a WING and transfers all of her ownership in TicToc LLC to the trust.  TicToc LLC is then converted to a Wyoming LLC.  Several months later, one of Sally’s private equity investments realizes a gain of $2 Million.  By establishing the WING, converting the California LLC into a Wyoming LLC and having the WING be the sole owner of TicToc, Sally was able to save $266,000 in state income tax.  Now with the WING structure in place, Sally is able to continue saving the California income tax on every private equity monetization event, which allows her to invest the savings in other private equity investments.

Investment Holdings

Another common WING planning opportunity involves investment holdings.  Typically, the planning opportunity revolves around protecting the investment holdings from future creditor/predator claims and minimizing state income tax. 

Example 3:  Daniel Executive is a former executive at Yodel, an extremely successful Internet-based, publicly traded company.  Daniel lives in Boulder, Colorado.  Daniel received restricted stock units (“RSUs”) from Yodel as part of his compensation.  Upon his departure from Yodel, Daniel had accumulated 100,000 shares of Yodel with an average basis of $65 per share. 

Daniel is now involved in a tech startup company that is raising funds from investors.  Daniel is concerned about his personal liability exposure to investors relating to his startup’s fund raising.  He also wants to liquidate some of his Yodel stock to invest in the startup and to diversify his concentrated holdings in Yodel.

Daniel establishes a WING and transfers his 100,000 shares of Yodel to a Wyoming LLC (“HoldCo”) that has been established as a holding company owned by Daniel’s WING.  Daniel is the manager of HoldCo, which allows him to retain control over his shares of Yodel.  HoldCo sells 50,000 shares of Yodel and receives $6,500,000 ($130 per share).  HoldCo then invests $250,000 in the startup and the remainder in a diversified portfolio of marketable securities.

Daniel’s WING, through HoldCo, realized a gain from the sale of Yodel stock of $3,250,000 ($6,500,000 – ($65*50,000 shares)). If Daniel had personally sold the Yodel stock, he would have paid $150,475 of income tax to the state of Colorado for the gains realized.  By using the WING structure, Daniel was able to save the state income, invest those additional funds and achieve his asset protection goals.  Additionally, the WING structure continues to provide tax minimization benefits to Daniel by keeping the assets held in the structure outside of the tax coffers of the state of Colorado.  Daniel’s tax savings are able to be invested and continue to provide compounding growth.

Example 4:  Sally Successful, a resident of Utah, is a highly compensated executive at Food Storage Co. (“FSC”).  Sally’s salary, $500,000 per year, places her in the highest marginal federal tax bracket.  In addition to her salary from FSC, Sally has a significant investment portfolio comprised of publicly traded stocks, bonds and private equity interests.  Sally is engaged to be married and is interested in protecting her investment portfolio in the event of a divorce without engaging in what may be a contentious negotiation with her fiancé over a prenuptial agreement.

After learning about WINGs, Sally establishes her own WING and transfers her entire investment portfolio to her WING.  The WING accomplishes her asset protection goals.  In addition, the WING removes the investment portfolio income and gains from Sally’s personal income tax returns.  The removal saves Sally the Utah state income tax that would otherwise be levied upon the income and gains generated from her portfolio (5% on each $1 of taxable income and gain) and allows that savings to be reinvested.

ADDITIONAL INFORMATION

For additional information, including initial costs, ongoing costs, additional uses, timing and planning for specific circumstances, please contact Scott Robinson at 303.402.1600 or dsr@bhgrlaw.com.