Some taxpayers with large state income tax bills have been trying to avoid them through the use of out-of-state trusts.

These trusts have been created in three states that have no or minimal state income tax – Wyoming, Nevada and Delaware. The idea is that people in high-tax states can set up trusts in these low-or-no-tax states to hold the investments that produce the income.

The trusts are called “incomplete non-grantor gift trusts.” A Wyoming incomplete non-grantor gift trust is known by the acronym WING. In Nevada and Delaware, there are NINGs and DINGs.

In theory, you can put income-producing assets into a WING, NING or DING and be an income beneficiary. You’ll pay no federal gift tax on the transfer to the trust, and no state income tax on the income you receive.

That’s the theory. In practice, some high-tax states (such as New York) hate this arrangement because they’re losing tax revenue. So they’re changing their laws in an effort to tax WING, NING and DING income. (According to the New York tax authorities, some $1.5 billion in income a year is being generated by assets in these trusts – and that’s just the assets owned by New York residents.)

The IRS is looking at these trusts, but it hasn’t given a conclusive answer about the tax consequences.

Another problem is that, to avoid the tax, you can’t have too much control over the trust. Generally, while you can be an income beneficiary, there must be other beneficiaries who also have a say on distributions, and there must be a trustee in the state where the trust is set up.

Out-of-state trusts have been particularly popular with people who are selling large appreciated assets, such as a family business. The idea is to transfer the asset to a trust prior to the sale.

However, because the law is unsettled, these trusts can be very risky. They’re certainly not for everyone, and they require careful thought and planning.