Vanderbilt Law Review

First Page



With the maximum rate of federal income tax at 39.6 percent, the Medicare surtax on investment income of 3.8 percent, and some state income tax rates exceeding 9 percent, taxpayers in the highest brackets have been seeking to develop strategies to lessen the tax burden. One strategy that has been receiving increased attention is the use of a highly specialized trust known as the NING, a Nevada incomplete gift nongrantor trust, which eliminates state income taxation of investment income altogether without generating additional federal income or transfer taxes. A major obstacle standing in the way of accomplishing this objective, however, are the laws of a number of high-tax states. These laws assert taxing jurisdiction over trusts created by grantors who were resident in the state when the trust was created, even if the grantor has long since departed the state or if the trust has been continuously administered from out of state. Other high-tax states claim jurisdiction to tax the trust as long as there is a beneficiary resident in the state at the time that the income is being accumulated out-of-state or at the time a distribution is made. One state, New York, simply outlaws the NING technique. In order to overcome these state laws, tax planners have found an unlikely ally federal constitutional law. This article explores whether and how the Federal Constitution can be used to avoid state income taxation. As it makes clear, interpretations of the Federal Commerce and Due Process Clauses, though developed in other contexts, are proving to be powerful tools in neutralizing state jurisdiction to tax high-bracket