Why Tennessee
Tennessee has two things every ING trust needs. The state has no income tax on wages or investment income, and the Tennessee Investment Services Act gives settlors strong asset protection through a self-settled trust. Most clients know the first point already. Fewer realize that the same no-tax status makes Tennessee an excellent home for an Incomplete Gift, Non-Grantor Trust, usually called an ING trust.
An ING trust is an estate planning tool with a single purpose, and it has become a standard part of tax planning for high-income families. It moves the state income tax on a trust’s accumulated income out of a high-tax home state and into a state that doesn’t tax it, without triggering gift tax on the transfer. Tennessee offers both pieces the structure needs: no income tax and a proven asset protection statute.
Most of the people who benefit don’t live here, and they usually reach us through their own estate planning attorney or financial advisor. They live in high-tax states and want a trust administered somewhere their home state can’t reach. For years, advisors elsewhere have sent that work to South Dakota, Delaware, or Nevada out of habit. Tennessee belongs on that list, and in many cases it should be at the top of it. As a Tennessee estate planning attorney, I see more of these trusts popping up every day.
How an ING Trust Works
An ING trust is an irrevocable trust the grantor funds with appreciated or income-producing assets. It has to accomplish two things at once.
First, the transfer has to be an incomplete gift for federal gift tax purposes. If it were a completed gift, the grantor would owe gift tax or use up lifetime exemption just by making it, and the trust property would leave the grantor’s estate at its current value. Incomplete gift status usually comes from a testamentary limited power of appointment: the grantor keeps the right to decide, at death, which members of a defined class of beneficiaries receive the trust property. That class excludes the grantor’s own estate and creditors. Under Treasury Regulation section 25.2511-2, a gift is incomplete to the extent the grantor keeps the power to change who benefits.
Second, the trust has to be a non-grantor trust for federal income tax purposes. That means the trust, not the grantor, is the taxpayer on its accumulated income and reports its own taxable income each year. A trust that only clears the gift hurdle but is still a grantor trust leaves every dollar of income earned inside it on the grantor’s home state return. The ING structure gets both results in one legal document: no completed gift, and no income taxed back to the grantor.
The piece that makes this work is the distribution committee. Instead of letting the grantor or the trustee decide lifetime distributions alone, the trust gives that power to a committee of trust beneficiaries whose interests are adverse to the grantor’s, usually adult children or other family members who would get less if money went elsewhere. Requiring an adverse party’s consent keeps the trust out of grantor trust status under Internal Revenue Code sections 674 and 677. And because the committee’s power and the grantor’s retained testamentary power don’t add up to a completed transfer of control, the transfer stays an incomplete gift.
Tennessee’s Advantages
The first advantage is simple: Tennessee has no income tax, so there is no state tax on trust income. A trust administered here owes no state tax on the income it accumulates. Tennessee also has no estate tax, no inheritance tax, and no gift tax, so no property in a Tennessee trust picks up a state tax at death.
The second advantage is the Tennessee Investment Services Act of 2007. It allows self-settled spendthrift trusts, so a settlor can be a discretionary beneficiary of a trust he or she created and still protect the trust assets from future creditors. The statute requires at least one qualified Tennessee trustee who participates in administration and keeps custody of trust property here, an instrument governed by Tennessee law, irrevocability, and a spendthrift clause. An ING trust doesn’t have to be an Investment Services Trust, but the two fit together naturally. Both call for a Tennessee fiduciary managing Tennessee-situs assets, and many clients who come for the income tax savings want the creditor protection too.
Additionally, Tennessee law offers more advantages. Trusts can last up to 360 years in Tennessee, which makes multigenerational planning practical. Tennessee permits directed trusts and trust protectors, so a settlor can divide investment, distribution, and administrative roles among different persons instead of placing every power in one person. It also allows decanting into a new trust, which gives a family room to adjust if the law changes down the road. And Tennessee has an established community of trust companies, banks, and professional advisors with the resources to handle this work.
Tennessee or South Dakota?
South Dakota has long been the default choice for ING work. It has no income tax, a domestic asset protection statute, no rule against perpetuities, and a large trust company industry. Many professional advisors elsewhere recommend South Dakota simply because they’ve always done so. South Dakota earned that reputation early, but Tennessee has caught up.
On the law that matters for an ING trust, Tennessee matches South Dakota point for point. Neither state levies an income tax on trusts, and in both states trust income that stays in the trust is free of state tax. Both have self-settled trust statutes, directed trust laws, and trust protector provisions. The federal tax treatment is the same in either state.
Where Tennessee pulls ahead is service and the estate planning process itself. Clients, referring attorneys, and other professional advisors across the Southeast and Midwest can work with Tennessee estate planning counsel in their own time zone, often within driving distance, and Tennessee trust companies compete hard on fees with their South Dakota counterparts. For families with any connection to Tennessee, choosing a Tennessee trust over a South Dakota trust is usually an easy call.
Drafting for Incomplete Gift Status
The testamentary limited power of appointment does most of the work, but the instrument usually goes further. The settlor often keeps a consent right over lifetime distributions to other beneficiaries and the right to remove and replace the fiduciary and committee members, subject to limits that avoid recreating grantor trust status.
These provisions have to be drafted carefully. If the IRS concluded the transfer was a completed gift, the client could owe tax on the full value of the property moved into the trust. That’s why the drafting process matters as much as the tax result. This is not DIY estate planning, and it isn’t a form a client can download and fill out over a weekend, and this is not an estate plan that can be done with AI. For example, clients who have handled their own simple will through DIY estate planning need to know that an ING trust is a different kind of legal document altogether. DIY estate planning tools aren’t built for it, and no online legal document service that I’m aware of drafts distribution committees or even offers this type of advanced planning.
How the Distribution Committee Works
The distribution committee decides when and to whom the trust makes distributions during the settlor’s lifetime. Its members are beneficiaries of the trust, usually the settlor’s adult children or other family members.
What makes the committee work is that its members are adverse parties, meaning each has a beneficial interest in the trust that conflicts with the settlor’s interest. Every dollar the committee sends to the settlor reduces the trust principal that would otherwise pass to the members themselves. Because each approval costs them something, the IRS respects their consent, and the trust is taxed as a separate taxpayer rather than as the settlor’s own. Each person’s decisions need to be his or her own.
A minor child can’t serve, and neither can a person who lacks capacity. A committee made up only of beneficiaries who are dependent on the settlor, financially or otherwise, invites the argument that their consent isn’t independent, so a dependent child still living at home is a poor choice. Most drafters require at least two adult members, set a process for filling vacancies after a member’s death, and avoid making the settlor’s spouse the only adverse party.
The trustee’s role has to line up with the committee. A trustee with independent power to pay income to the settlor without committee approval would undercut non-grantor status under section 677, so every lifetime distribution to the settlor runs through the committee.
How the Trust Is Taxed
Once it exists, the trust is its own taxpayer and files its own federal return each tax year. Federal rates for trusts are compressed. A trust reaches the top bracket on a small fraction of the taxable income it would take for single taxpayers or joint filers, and it can owe the 3.8 percent net investment income tax at a much lower level than an individual, whose threshold is based on modified adjusted gross income. For the right client, the state income tax savings far outweigh that cost, and good tax planning runs the numbers both ways before the trust is signed.
The savings come from income the trust keeps, and the non-grantor trust pays federal tax on it directly. When the trust makes a distribution, it takes a deduction for that amount and the beneficiary pays tax on it as a taxpayer in his or her own state. Income distributed to someone in a high-tax state gets taxed there. Income distributed to someone in Tennessee, Florida, or Texas doesn’t. The trust also claims its own deductions for fiduciary fees and other administration expenses, and it can take a charitable deduction if the trust agreement allows charitable gifts. Most ING trusts accumulate taxable income in the early years, tax year after tax year, and are careful about what gets distributed and to whom.
Moving income into the trust can also help the client personally. Some state credits, deductions, exemptions, and other benefits phase out based on a qualified taxpayer’s gross income or adjusted gross income, and income held in the trust no longer shows up on the client’s own return, which can preserve a deduction or exemption the client would otherwise lose. The trust company handles the trust’s estimated tax payment schedule and keeps a separate account of what was distributed and what was retained each year.
Home State Law: The Variable to Watch
The main risk with any ING trust has nothing to do with Tennessee. It comes from the client’s home state, whose legislature and department of revenue can change how it treats these trusts at any time. New York did so in 2014, treating ING trusts created by its residents as grantor trusts for New York purposes. California did the same in 2023, and its law applied to the entire taxable year starting January 1, 2023, even though it passed midyear. California taxpayers with ING trusts in South Dakota, Nevada, and other states lost the state income tax benefit for income they had expected to shelter.
That risk applies equally to a trust in any jurisdiction, and it is dependent on legislation no trust company can control. It’s why every engagement should start with a review of current law in the client’s home state, and why the instrument should give a trust protector authority to adapt if that law changes.
Where It Fits in the Estate Plan
An ING trust is an income tax tool, but it sits inside the client’s broader estate planning. Because the transfer is an incomplete gift, no exemption is used and the assets stay in the settlor’s gross estate for federal estate tax purposes. That usually works in the family’s favor, and it’s one reason the ING trust fits so well into estate planning for clients with appreciated assets. The property gets a basis adjustment at the client’s death, wiping out built-in gain for the beneficiaries, and the client hasn’t used any of the federal estate and gift tax exemption. That exemption is $15 million per person in 2026 under the 2025 federal tax legislation. For a client whose estate falls under the exemption, estate inclusion costs nothing and the basis adjustment at death is pure benefit. For a larger estate above the exemption, the estate planning team can pair the ING trust with strategies that use the lifetime exemption now.
The trust also keeps assets out of probate. Property titled in the trust passes under its terms at death, avoiding probate in the client’s home state and ancillary probate anywhere else, and keeping the family’s affairs out of the public probate record. Clients often ask how this compares with a revocable living trust, especially if the trust is intended to hold most of their wealth. A revocable living trust avoids probate too and remains the backbone of most estate plans. But a revocable living trust is a grantor trust, so it shifts no income tax, and because it can be revoked, it offers no protection from creditors or debts. The ING trust works alongside that core plan as an added layer of estate planning.
Good estate planning ties the pieces together, and it starts with a full picture of the client’s estate. The will and revocable trust should account for the ING trust, the power of appointment should be exercised (or deliberately left unexercised) in a way that fits the rest of the plan, and loved ones should know who will make decisions after the client’s death. A short family meeting, with the client’s adult children present, prevents a lot of confusion later. Estate planning counsel should also coordinate the trust with any business succession plan, life insurance trust, or charitable giving, so any charitable deduction at the estate level is coordinated too.
Who Benefits From a Tennessee ING Trust
Business owners and investors facing a large sale. A client in a high-tax state that still respects these trusts, with a business sale, real estate sales, or a concentrated stock position coming, can move the gain out of the home state’s tax base. Timing is everything. The asset has to be in the trust before a binding purchase agreement exists, or the assignment-of-income doctrine pulls the gain back to the client. For example, a founder who has signed a letter of intent has likely waited too long, while one still in early conversations with buyers may not have.
High earners with ongoing investment income. A client in a high-tax state with a large portfolio can shift dividends, interest, and capital gains into the trust year after year. For example, a client with $5 million of investments yielding 4 percent could move $200,000 of annual income out of the home state’s reach. The longer the trust accumulates, the more the savings compound.
Tennessee residents who want asset protection. A Tennessee resident doesn’t need the income tax benefit, since Tennessee already taxes no one’s investment income. But the distribution committee and retained power of appointment can still be useful, and the Investment Services Act gives strong protection for trust assets against future creditors and debts. Sometimes a standard Investment Services Trust is the simpler route, and part of good tax planning is knowing when the extra structure isn’t needed.
Practical Administration
The estate planning setup process usually takes a few weeks of professional time and involves the client’s home state tax professional, Tennessee estate planning counsel, and the Tennessee trust company that will serve. Clients should plan for drafting fees, an annual trust company fee, investment management costs, and preparation of the trust’s own returns. These costs, weighed against the value of the expected savings, make the planning best suited to clients with significant wealth and a large income stream or gain to shift. For a smaller estate, the time and resources involved may not pay off, and simpler estate planning resources are usually a better fit.
Tennessee administration needs to be genuine. The trust’s brokerage and bank accounts should be held with a Tennessee custodian, and records should show that investment and distribution decisions are made here. Every person serving in a trust role should understand that from day one. Certain assets need extra attention. Real estate in the client’s home state can give that state a basis to tax the income it produces, and a closely held corporation or other business may need restructuring before it goes into the trust. Marketable securities, mutual funds, and investment funds are the cleanest assets and property to transfer, and the funding process should be documented step by step, including the value of each asset on the date it moves. That value also fixes the record if the IRS ever asks about the transfer.
Asset protection under the Investment Services Act covers future creditors, not existing debts. A transfer made to dodge current claims can be unwound as fraudulent, so we review a client’s liabilities before any assets move, and the process is intended to be completed well before any problem arises.
Frequently Asked Questions
Can a Tennessee resident benefit from an ING trust?
Not for income tax purposes, since a Tennessee taxpayer has no state income tax to avoid. Their estate planning goals are usually about protection instead. A Tennessee resident may still want the creditor protection the Investment Services Act provides, and a standard self-settled trust under that statute is often the simpler way to get it.
Does the trust have to be administered in Tennessee?
Yes. At least one qualified Tennessee fiduciary has to participate in administration, the assets should be held here, and decisions should be made here. Tennessee trust companies are set up to handle exactly that.
Why choose Tennessee over South Dakota or Nevada?
The tax result is the same in all three states, so the decision comes down to service, fees, and convenience. Tennessee offers the same legal protections as South Dakota with counsel and trust companies that are easier to reach for families in the Southeast and Midwest.
What happens to the trust when the client dies?
At the client’s death, because the original transfer was never a completed gift, the trust property is included in the client’s gross estate and generally gets a new income tax basis, which can greatly reduce the tax when that property is later sold. The assets then pass under the trust’s terms, as directed by the client’s power of appointment, without probate.
Can the client still receive money from the trust?
Yes. The client can remain a discretionary beneficiary for his or her lifetime, but any payment to the client has to be approved through the committee. A client who needs regular, predictable access to the money, or a person who expects the trust to pay his or her bills, is usually better served by a different structure, since trust assets distributed that way can weaken both the tax result and the protection.
What if the client’s home state changes its law?
The trust could lose its state income tax benefit, as California residents saw in 2023. Most states have not followed California, but the trust should be ready if one does. A well-drafted Tennessee trust includes a trust protector who can modify administrative terms or convert the trust to grantor status, and Tennessee’s decanting law offers another way to adjust.
Conclusion
Tennessee has everything an ING trust needs: no state income tax, no estate or inheritance tax, a self-settled trust statute on the books since 2007, 360-year trusts, and modern directed trust and decanting laws. The federal tax treatment is the same as in South Dakota or Nevada. The real question for any client is whether their home state still allows the benefit, and that’s where careful estate planning starts. When it does, a Tennessee trust delivers the result the client intended. For clients who qualify, a Tennessee ING trust with a well-built distribution committee and a Tennessee trustee is one of the most effective income tax and asset protection tools available.