Introduction

Income shifting remains a foundational strategy in the repertoire of sophisticated tax planning. Particularly for high-net-worth families and business owners in California, effectively redistributing income among family members or entities in lower tax brackets can materially reduce aggregate tax burdens.

The One Big Beautiful Bill Act (OBBBA) enhances opportunities for income shifting, especially through the use of non-grantor trusts that enable the layering of State and Local Tax (SALT) deductions and access to the Qualified Business Income Deduction (QBID).

This article explores the conceptual underpinnings, legal requirements, and practical implementation of income shifting strategies tailored for today’s tax landscape.

‍

Conceptual Framework of Income Shifting

Income shifting involves reallocating taxable income from individuals subject to higher marginal tax rates to those in lower brackets, typically family members or entities such as trusts.

This redistribution capitalizes on progressive tax rates to minimize total family tax liability while maintaining compliance with applicable tax laws.

‍

Non-Grantor Trusts as Vehicles for Income Shifting

Definition and Advantages

Non-grantor trusts are separate taxable entities that pay their own income taxes. When utilized effectively, these trusts:

• Shift taxable income from high-bracket taxpayers to beneficiaries in lower brackets.
• Allow each trust to claim up to a $40,000 SALT deduction (post-OBBBA).
• Provide additional tax planning flexibility through trust terms and distributions.

Establishment and Administration

Proper drafting of trust documents and administration is essential to ensure non-grantor status and avoid grantor trust reclassification.

‍

Implementation Strategies

Family Trust Networks

Creating multiple trusts for different family members can multiply tax benefits through individual SALT deductions and QBID optimizations.

Income Allocation

Trustees must balance distributions to beneficiaries with retention of income within the trust to optimize tax rates.

Compliance Considerations

• Trusts must have valid non-tax purposes.
• Adequate separation of trusts and clear documentation is mandatory.
• IRS aggregation rules under Section 643(f) must be considered.

Case Illustration

A taxpayer in California creates three non-grantor trusts for adult children, each receiving income-generating assets. Each trust claims a $40,000 SALT deduction and qualifies for QBID, significantly lowering the family’s overall tax liability.

‍

Risks and Mitigations

Improper or aggressive income shifting risks IRS challenge. Professional guidance, rigorous documentation, and adherence to fiduciary responsibilities mitigate such risks.

‍

Conclusion

Income shifting through non-grantor trusts offers a legally sound and effective method to reduce tax liabilities under OBBBA’s provisions. Customized planning with experienced advisors ensures maximum benefit and compliance.

SMB CPA Group specializes in designing and implementing sophisticated income shifting structures for California taxpayers.

For personalized assistance, detailed feasibility analyses, and ongoing PTET election support:

Schedule Your Consultation
Learn More About Our Specialized Services
Connect Directly with Levon Galstian