Nevada NING Trusts: Federal Tax Mechanics and Capital Gains Planning

A “NING” is generally understood as a Nevada‑situs, incomplete‑gift, non‑grantor trust created to have its income taxed at the trust level (rather than to the grantor) while leveraging Nevada’s trust law. For federal tax purposes, the critical design feature is “non‑grantor” status under the grantor‑trust rules so capital gains are taxed to the trust, and the timing and character of distributions are managed with the DNI/65‑day framework. Separately, state tax outcomes depend on the applicable state’s rules; Nevada provides a comprehensive trust law framework for administration and situs, but federal tax treatment drives the income tax results described here NRS: CHAPTER 163; NRS: CHAPTER 164.

How a non‑grantor trust can reduce or manage capital gains taxes

• Non‑grantor status is essential. If the trust is structured so the grantor isn’t treated as the owner of any portion under the grantor‑trust rules (e.g., no reversionary interest within statutory limits, no disqualifying powers to control beneficial enjoyment, no income that can be distributed or applied for the grantor/spouse), then the trust—not the grantor—reports and pays tax on its income, including capital gains. Capital gains and other items are then addressed under Subchapter J (estates and trusts) rules, including the income distribution deduction and DNI limits reflected in the Form 1041 framework 2024 Instructions for Form 1041.

• Capital gains are usually retained at the trust level unless carried out. By default, capital gains are generally excluded from a trust’s distributable net income (DNI) “to the extent allocated to corpus and not paid, credited, or required to be distributed” in the taxable year. Practically, that means capital gains are typically taxed to the trust at trust rates if not included in DNI (or set aside for charitable purposes), and this treatment is reflected in how trusts compute and report on Form 1041 2024 Instructions for Form 1041.

• Managing distributions and carryout. The trust can control whether capital gains are included in DNI (for example, if the governing instrument and local law allocate gains to income or direct that gains be distributed). If gains are excluded from DNI, the trust pays the tax; if they are included, they may be carried out and taxed to beneficiaries. Distributions in the first 65 days of the following year can, if elected, be treated as prior‑year distributions—allowing post‑year‑end planning to match distributions to DNI for that year 2024 Instructions for Form 1041.

• Accumulation rules today. Historically, accumulation distributions could trigger “throwback” taxation to beneficiaries. For most domestic trusts created after 1984, the throwback rules no longer apply; current rules for “qualified trusts” compute any accumulation distributions without regard to undistributed net income, eliminating the classic throwback effect for modern domestic non‑grantor trusts. The Form 1041 instructions reflect the current accumulation and distribution regime used by domestic trusts 2024 Instructions for Form 1041.

• In‑kind distribution basis and recognition. If appreciated property is distributed to a beneficiary, the beneficiary’s basis generally starts with the trust’s adjusted basis (subject to adjustments if the trust elects gain recognition). A trust may elect to recognize gain on all in‑kind distributions made in a year, which can be used strategically in capital‑gain timing and basis management; the reporting mechanics for these distributions and any related gain are covered in the Form 1041 context 2024 Instructions for Form 1041.

Who can benefit

• Founders expecting a large capital gain event. Business owners anticipating a significant sale can transfer ownership interests into a properly structured non‑grantor trust so the trust—not the founder—is the taxpayer on the sale. This facilitates distribution timing and the use of trust‑level strategies for capital gains (for example, retaining gains at the trust level rather than carrying them out) under the DNI rules and the Form 1041 reporting model 2024 Instructions for Form 1041.

• Families in high‑tax jurisdictions seeking centralized, trust‑level tax management. A Nevada‑situs non‑grantor trust can centralize control over whether gains are taxed at the trust vs. beneficiaries, subject to federal DNI rules and local law allocations, using the 65‑day election to match distributions to the most efficient year. Federal rules on pass‑through and DNI govern how much is taxed to beneficiaries vs. the trust itself, as reflected in the Form 1041 instructions 2024 Instructions for Form 1041; IRS Forms, Instructions and Publications.

• S corporation shareholders. Only certain trusts qualify to hold S stock. A Nevada non‑grantor trust may need to be an ESBT (electing small business trust) or a QSST to hold S shares; each has distinct income tax rules. ESBTs are permitted shareholder trusts, and the “S portion” of an ESBT is taxed under special rules (separate from standard DNI mechanics). Choosing the right trust type is critical before a sale; the Form 1041 instructions include special reporting guidance for ESBTs and other trust types 2024 Instructions for Form 1041.

Company sale scenarios

1. C corporation stock transferred to a non‑grantor trust before sale

• The founder settles an irrevocable, Nevada‑situs non‑grantor trust and contributes C‑corp shares. Provided the trust avoids grantor‑trust status, the trust is the taxpayer.

• The trust sells the shares. Capital gains are generally allocated to corpus and excluded from DNI, so the trust pays tax on the gain unless the governing instrument/local law or fiduciary accounting allocates gains to income and distributes them, in which case gains can be carried out to beneficiaries through DNI.

• Distribution timing. The trustee can decide whether to retain proceeds (trust pays the tax) or distribute amounts and use the 65‑day election to have those distributions treated as prior‑year distributions to manage DNI and beneficiary exposure. All of these decisions and their reporting are coordinated through Form 1041 and its instructions 2024 Instructions for Form 1041.

1. S corporation stock held through an ESBT and sold

• An ESBT is a permitted S‑corp shareholder trust. ESBT rules differ from standard DNI concepts; the “S portion” is taxed under special rules separate from the non‑S portion. Before the sale, confirm the trust qualifies (ESBT or QSST) and understand the applicable federal computation for the S portion.

• Sale proceeds and capital gain. Depending on classification, the trust’s S‑portion rules govern income taxation; post‑sale planning still can use general trust distribution rules (for amounts not part of the S portion) and DNI management as outlined in Form 1041 instructions 2024 Instructions for Form 1041.

1. In‑kind distribution of company shares prior to sale (basis planning)

• The trust may distribute appreciated property in kind. If the trust does not elect to recognize gain, the beneficiary’s basis is the trust’s adjusted basis; if the trust elects gain recognition for all in‑kind distributions for the year, it treats the distribution as if sold at fair market value, potentially increasing beneficiary basis and changing who bears the capital gain tax.

• Planning considerations. The annual gain‑recognition election applies to all property distributions for that year; trustees weigh whether recognizing gain at the trust level (and potentially increasing beneficiary basis) yields a better overall tax profile for the sale or downstream dispositions. The mechanics and reporting appear in the Form 1041 regime 2024 Instructions for Form 1041.

Key federal rules to observe when designing a “NING”

• Avoid grantor trust status. Powers or interests that would cause grantor ownership (e.g., powers to control beneficial enjoyment, certain administrative powers, revocation powers, or income that may be applied for the grantor or spouse) must be excluded to keep the trust non‑grantor. This is foundational to ensuring the trust—rather than the grantor—is the taxpayer for capital gains reported on Form 1041 2024 Instructions for Form 1041.

• Watch beneficiary ownership rules. If a beneficiary has a power exercisable solely by them to vest corpus or income in themselves, they can be treated as the owner of that portion—changing who is taxed and how income must be reported. Trust drafting and administration should avoid unintended beneficiary‑owner outcomes reflected in Form 1041 reporting 2024 Instructions for Form 1041.

• Domestic vs. foreign trusts. A Nevada‑situs trust is domestic; foreign trust rules (including recognition of gain on transfers to foreign trusts) don’t apply if the trust is domestic. Confirm classification to avoid unintended foreign‑trust consequences and associated recognition events; Form 1041 and the instructions provide the filing scaffold for domestic trusts 2024 Instructions for Form 1041.

• DNI mechanics and Form 1041. Understand how DNI caps the income distribution deduction and how trusts act as pass‑through entities to beneficiaries for income items included in DNI. Capital gains inclusion depends on governing instrument/local law allocations and actual distributions; the Form 1041 instructions detail these mechanics and computations 2024 Instructions for Form 1041.

• 65‑day rule and special exclusions. The 65‑day election allows distributions in the first 65 days of the year to be treated as made in the prior year for DNI purposes. Specific exclusions include gifts/bequests of specific sums or property paid in no more than three installments, which aren’t included in DNI or taxed to the recipient. See the timing and characterization guidance in the Form 1041 instructions 2024 Instructions for Form 1041.

Nevada trust law and administration

Nevada law provides a comprehensive statutory framework for trust creation, administration, and directed trusts; it allows robust fiduciary structures and judicial/nonjudicial mechanisms to administer trusts. While state tax consequences vary by jurisdiction, Nevada statutes support establishing and administering an irrevocable trust with Nevada situs (including trustee, administration, and governance provisions), which is often a prerequisite for state‑level planning layered on federal rules NRS: CHAPTER 163; NRS: CHAPTER 164.

Practical checklist

• Confirm non‑grantor status by eliminating grantor‑trust triggers in the governing instrument; file and report as a domestic non‑grantor trust on Form 1041 2024 Instructions for Form 1041.

• Align fiduciary accounting and governing instrument to control whether capital gains can be included in DNI or retained at the trust level; plan and report accordingly under Form 1041 2024 Instructions for Form 1041.

• Use the 65‑day election when appropriate to treat early‑year distributions as prior‑year distributions for DNI matching 2024 Instructions for Form 1041.

• If the company is an S corporation, confirm the trust qualifies (ESBT/QSST) before transfer to avoid jeopardizing S‑status; follow the special reporting instructions for ESBTs in the Form 1041 guidance 2024 Instructions for Form 1041.

• Consider whether in‑kind distributions before or after sale (and whether to elect gain recognition for the year’s distributions) better position beneficiaries’ basis and overall capital‑gain exposure; reflect the choice in Form 1041 reporting 2024 Instructions for Form 1041.

• Be mindful of accumulation rules for domestic qualified trusts; the modern regime generally eliminates classic throwback, simplifying multi‑year capital‑gain planning and distribution timing under Form 1041 2024 Instructions for Form 1041.

Summary

A Nevada‑situs non‑grantor trust can reduce or manage capital gains taxes by (1) ensuring the grantor is not treated as the owner under the grantor‑trust rules so the trust pays tax on its capital gains instead of the grantor, (2) using DNI rules to decide whether capital gains are carried out and taxed to beneficiaries or retained and taxed at the trust level, (3) timing distributions—including the 65‑day rule election—and (4) deploying in‑kind distribution and gain‑recognition elections to optimize basis and tax timing. These federal mechanisms, combined with Nevada’s robust trust law for administration and situs, make the “NING” structure attractive for founders anticipating a company sale and for families seeking centralized management of capital‑gain exposure within a domestic trust framework 2024 Instructions for Form 1041; NRS: CHAPTER 163; NRS: CHAPTER 164.

This essay is not tax advice. Always consult a qualified tax professional for your specific situation.