A growing concern for charities: Tax havens for the wealthy

Highlighting the number of the rich and powerful protecting their fortunes has intensified fear among philanthropists: that tax havens used by the wealthy will increasingly pull money from philanthropy.

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, revealed how world leaders, billionaires and others stashed trillions of dollars from governments’ reach using shell companies and offshore accounts, which are considered legal.

One maneuver described in the report, “breed trust,” could exist forever in states like South Dakota. By using these trusts, Americans can legally protect themselves from estate and other taxes — thus removing the main incentive for charitable giving.

When the wealth of an American individual or couple exceeds a threshold — $11.7 million or $23.4 million, respectively — every dollar value above that level, once inherited, is subject to a federal estate tax of up to 40% per generation.

But a carefully designed breed fund helps future generations avoid those taxes. The longer the trusts last, the longer the user will be able to avoid taxes and the longer they will lack the financial incentive to donate to a charitable organization.

Experts point out that some Americans are also legally able to avoid state income taxes on revenue generated from their assets by setting up trusts in states that do not tax income. One is South Dakota, which also does not have its own real estate, capital gains or inheritance tax, making it a particularly attractive destination for wealth stops.

“There is every reason to believe that the end effect of the kind of wealth being invested in these vehicles will also be a long-term loss of revenue for charitable organizations,” said Ray Madoff, a professor at Boston College Law School who studies philanthropy policy. and taxes. “I think the impact on the charitable sector has already started, but it will grow over time.”

Tax policy, after all, constantly affects charitable giving. The Treasury reports that after tax code changes that President Donald Trump pushed through Congress in 2017, charitable giving fell 1.3% in 2018 compared to the previous year. Typically, these donations tend to grow at roughly the same pace as the state’s GDP, which was up 5.2% that year.

While the Biden administration touts its plans to raise taxes on wealthy Americans, it estimates that many of the people who will be affected by the tax increases will donate more to charities to reduce the tax burden. But for many wealthy people, trusts like those shown in “Pandora’s Papers” would reduce the tax burden without charitable donations.

Trusts allow a single person, a grantor, to transfer assets to a trustee who then manages them and directs them to a third beneficiary. However, in states such as South Dakota, Alaska, and Nevada, the person transferring the assets can call themselves the beneficiary of the trust. Mitchell Ganz, a professor at Hofstra University who specializes in tax law, said so-called “self-settling trusts” can protect assets from creditors and further reduce tax burdens by moving assets from the taxable property.

South Dakota also publishes strict privacy laws to keep trust out of the public eye. It is a feature that wealth advisors use when they attract potential clients who have the potential to grow multigenerational wealth. According to the investigative report, state credit assets have risen to $360 billion over the past decade alone.

For charities, it’s hard to know the long-term consequences of funds. Officials at several charities and lobbying organizations declined to comment on the impact of the Pandora Papers disclosure on charitable giving because they said they lacked data on the widespread use of these tax havens.

But some studies suggest there may be some effect. According to a recent study by consultancy CCS Fundraising, 25% of donors cited a tax deduction as motivation to give to charity. A joint study from Bank of America and Indiana University’s Lilly Family Charity College found that 22% of wealthy donors surveyed would reduce their giving if tax deductions for charitable donations were eliminated. The same study found that 51% of wealthy donors said they sometimes contribute to charity to receive a tax advantage.

Patrick Rooney, professor of economics and philanthropic studies at Indiana University, said he believes dynasty funds will undermine charitable giving. He said that removing incentives for charitable contributions essentially raises the price of giving. On the other hand, Rooney noted that lower taxes could prompt donors to contribute more to the causes they care about on their own terms.

“Most high net worth families are donors to different types of charities for different reasons,” he said. “So we expect that some of these people, even though they are trying to evade taxes, may have some charitable motive. But we won’t know that for some time.”

Chuck Collins, director of the Inequality and the Public Good Program at the Institute for Progressive Policy Studies, said many wealthy Americans view their philanthropy as part of their approach to wealth preservation. However, he noted that some philanthropists may nevertheless wish to avoid taxes.

“I think this is probably a very large group (of people),” he said.

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