WASHINGTON: The highlight of how the rich and powerful shield their wealth is also intensifying a fear among philanthropic experts: that tax haven money being used by the wealthy is increasingly being diverted to charitable causes. will remove
Wealthy Americans have long sought to use charitable contributions to reduce their tax burden.
But the ‘Pandora Papers’ report released on Sunday by the International Consortium of Investigative Journalists revealed how world leaders, billionaires and others have pushed trillions of dollars out of the reach of governments using shell companies and offshore accounts, which considered legal.
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 a U.S. individual or couple’s assets exceed a threshold — USD 11.7 million or USD 23.4 million, respectively — every dollar value above that level, once made, will be taxed by up to 40 percent for each. Subject to federal estate tax. generation.
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 Boston College Law School professor who teaches philanthropy policy. 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 1.3 percent in 2018, following a 2017 tax law change by President Donald Trump through Congress.
Normally, such donations grow at the same pace as the country’s GDP, which climbed 5.2 percent 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, trusts such as those mentioned in the “Pandora Papers” will reduce their tax burden without making charitable donations.
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 Michelle Gans, a professor at Hofstra University 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 investigative report, the state’s trust assets have grown to US$360 billion during 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 percent 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 percent of the wealthiest donors surveyed would reduce their donations if the tax deduction for charitable donations were eliminated.
The same study found that 51 percent 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 won’t 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.