Trust planning for a Washington resident starts with ownership, beneficiaries, and the taxes the proposed structure actually changes. An out-of-state trustee or a nongrantor label does not establish a Washington tax saving.
Under the enacted income-tax law beginning in 2028, an incomplete-gift nongrantor trust does not remove its income from a Washington resident’s base merely by holding it elsewhere. RCW 82A.04.260, enacted as §307 of ESSB 6346, requires an addback to the extent that income is not otherwise included. The ING trust explanation covers that rule and existing trusts.
Separate the legal questions
A proposed trust requires separate answers to three questions:
- Who owns the income for federal tax purposes? Under the grantor-trust rules, a grantor or another person may be treated as owner of all or part of the trust. A nongrantor trust generally pays tax on retained taxable income, while distributions can carry taxable income to beneficiaries.
- Is the funding a completed gift? That depends on the donor’s retained dominion and control under Treas. Reg. §25.2511-2. Gift completion and federal income ownership are separate tests.
- Which states can tax the income? Examine attribution, residence, source, administration, and beneficiary distributions under each relevant state’s law.
A completed-gift nongrantor trust presents a different analysis from an ING. It can change who reports future income, but the family’s overall result depends on retained income, distributions, federal and state taxes, and the ownership consequences of the gift.
Evaluate the assets and timing
Review the trust instrument and actual administration together. An adverse party’s consent may address a particular federal ownership trigger; it does not establish compliance with every grantor-trust rule. Trustee decisions, records, and distributions must support the intended treatment.
For each proposed asset, identify transfer restrictions, tax basis, debt, income character, source, and entity eligibility. Partnership taxable allocations are not the same as cash distributions. Compensation attributable to your personal services cannot be shifted simply by directing payment to a trust.
A gift generally carries the donor’s basis for determining later gain under Section 1015; it does not erase appreciation. Basis alone also does not determine who recognizes a pending sale’s gain. Analyze federal ownership, completed transfer, distributions, and assignment of income before transferring assets near a transaction.
For qualified small business stock, review the separate QSBS trust-and-gift guide. A transfer does not establish eligibility for an additional exclusion by itself.
Apply both Washington tax regimes
The new income tax and existing capital gains tax use separate rules. The income-tax ING addback operates in the resident taxpayer’s Washington base-income calculation. Washington’s capital gains rule separately attributes gains from incomplete-gift trust assets to the grantor to the extent specified in WAC 458-20-301(2)(f), subject to Washington allocation.
A trust formed before implementing regulations has no automatic exemption from the enacted ING addback. A personal move requires its own domicile, residency, and income-source analysis; changing a trust’s address does not move its settlor. See the relocation guide.
Decide whether the structure serves your goals
Start with the intended beneficiaries, access to assets, control you are willing to give up, and any estate-planning purpose. Then compare the proposed arrangement with keeping the assets in your current ownership. Portfolio size alone is not a suitability test.
Request a written comparison covering:
- Federal income tax on retained income and distributions, including differences between trust and individual tax brackets.
- Washington and other state taxes, available deductions and credits, and continuing source-based exposure.
- Gift, estate, and generation-skipping transfer consequences, valuations, and reporting.
- Drafting, trustee, tax-return, investment-administration, and ongoing legal costs.
Multiplying proposed trust income by 9.9% does not establish savings. The comparison must account for the actual tax base, deductions, credits, taxes borne by other family members or the trust, and costs. For an ING subject to Washington’s resident addback, the assumed income-shifting benefit is absent in the first place.
Review the proposal before funding
For help reviewing how a proposed trust fits your assets, beneficiaries, and Washington tax position, book a 20-minute call with Joe Wallin or email wallin@carneylaw.com.
Last reviewed: September 10, 2026. General educational information, not advice for a particular trust or taxpayer.
