Thursday, January 27, 2022

Growing concern for charity: a tax haven for the rich

Highlighting how the rich and powerful shield their wealth is also intensifying a fear among philanthropic experts: that the tax havens being used by the wealthy will increasingly siphon money away from charitable causes. .

Wealthy Americans have long sought to use charitable contributions to reduce their tax burden. But the “Pandora Papers” report released Sunday by the International Consortium of Investigative Journalists showed how world leaders, billionaires and others have been using shell companies and offshore accounts to push trillions of dollars out of the reach of governments, which have been legalized. is believed.

One maneuver described in the report, a “dynasty trust”, could exist forever in states such as South Dakota. By using these trusts, Americans can legally protect themselves from estate and other taxes – and thus remove a major incentive for charitable giving.

When an American individual or couple’s assets exceed a threshold—$11.7 million or $23.4 million, respectively—the value of each dollar above that level, once bequeathed, amounts to up to 40% of the federal tax for each generation. The property is subject to tax.

But a carefully crafted dynasty trust helps future generations avoid those taxes. And the longer the trust lasts, the longer the user can avoid taxes and the longer he or she lacks the financial incentive to donate to a charity.

Experts note that some Americans are legally able to avoid state income tax on revenue generated from their assets by setting up trusts in states that do not impose income tax. One of them is South Dakota, which doesn’t even have its own estate, capital gains or inheritance taxes, making it an especially attractive destination to park a property.

“There is every reason to think that the ultimate impact of this type of funding in these vehicles will be a long-term loss in revenue for charitable organizations,” said Ray Madoff, a professor who teaches philanthropy policy at Boston College Law School. and do it. “The impact on the charitable sector, I would say, is probably already underway, but will increase over time.”

Tax policy, after all, continues to influence charitable giving. The Treasury Department reported that charitable donations declined by 1.3% in 2018, following a 2017 tax law change by President Donald Trump through Congress. Normally, such donations grow at a similar pace to the country’s GDP, which climbed 5.2% that year.

As the Biden administration boosts its plans to raise taxes on wealthy Americans, it is building into its projections the idea that many people most affected by the tax hike donate more to charities to reduce their tax burden. will do. But for many wealthy individuals, charitable giving such as the one mentioned in the “Pandora Papers” will reduce their tax burden without having to give.

Trusts allow an individual, a grantor, to transfer assets to a trustee, who then manages and directs them to a third beneficiary. In states such as South Dakota, Alaska, and Nevada, however, the person transferring the assets can name himself the beneficiary of the trust. These so-called “self-settled trusts” can shield assets from creditors and reduce the tax burden by moving assets out of taxable assets, said Hofstra University professor Mitchell Gans, who specializes in tax law.

South Dakota also enforces strict privacy laws to keep trusts out of the public eye. This is a feature that wealth advisors use when appealing to potential clients with the potential to grow multi-generational wealth. According to the investigation report, the state’s trust assets have increased to $360 billion in the past decade.

For charities, it is difficult to know what the long-term consequences of the trusts will be. Officials from several philanthropic and lobbying organizations declined to comment on the impact of the “Pandora Papers” disclosures on charitable donations because, they said, they lack data on how widespread the use of these tax havens is.

But some studies suggest that there may be some effect. According to a recent study by consulting firm CCS Fundraising, 25% of donors cited tax deductions as a motivation for their charitable donations. A joint study by Bank of America and Indiana University’s Lilly Family School of Philanthropy found that 22% of wealthy donors surveyed would have a reduction in donations if the tax deduction for charitable giving was eliminated. The same study found that 51% of wealthy donors said they sometimes contributed to charity to receive tax benefits.

Patrick Rooney, a professor of economics and philanthropic studies at Indiana University, said he believes dynasty trusts will undermine philanthropic donations. He added that removing incentives for charitable contributions inevitably raises the cost of giving. On the other hand, Rooney said, lower taxes may prompt payers to contribute more to causes they care about on their own terms.

“Most high-net-worth families are donors to a variety of charities for different causes,” he said. “So we would expect that some of these people, even if they are trying to evade taxes, (to) have some philanthropic impulse as well. But we will not know that for some time.”

Chuck Collins, director of the Inequality and Common Good program at the progressive think tank Institute for Policy Studies, said many wealthy Americans view their philanthropy as part of their wealth conservation techniques. Still, he said, some people who are inclined to philanthropy still want to avoid taxes.

“I think it’s probably a very large category (of people),” he said.


NWN Business Writer Glenn Gamboa contributed to this report.


The Associated Press receives support from the Lilly Endowment for its coverage of philanthropy and nonprofits. NWN is solely responsible for all content. For all of NWN’s philanthropy coverage, visit


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