Tax havens for the rich

The spotlight that has been shed on the number of the rich and powerful protecting their wealth also heightens the fear of philanthropists: that tax havens used by the rich will increasingly divert money 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, revealed how world leaders, billionaires and others hid billions of dollars out of the reach of governments using shell companies and offshore accounts, which are considered legal.

A maneuver described in the report, a “dynasty trust”, can exist in perpetuity in states like South Dakota. By using these trusts, Americans can legally protect themselves from inheritance and other taxes – and thus remove a major incentive for charitable giving.

When an American individual or couple’s wealth exceeds a threshold – $ 11.7 million or $ 23.4 million, respectively – every dollar value above that level, once bequeathed, is submitted federal inheritance tax of up to 40% for each generation.

But a carefully designed dynasty trust helps future generations avoid these taxes. And the longer the trusts last, the longer the user can avoid taxes and the more he or she may lack the financial incentive to donate to charity.

Experts note that some Americans are also legally able to avoid state income tax on income generated from their assets by creating trusts in states that do not levy income tax. One of them is South Dakota, which also doesn’t have its own estate, capital gains, or inheritance tax, making it a particularly attractive destination to park your fortune.

“There is every reason to think that the ultimate effect of this kind of wealth put into these vehicles will also be long-term revenue loss for charities,” said Ray Madoff, professor at Boston College Law School who teaches the politics of philanthropy. and taxes. “The impact on the charitable sector, I would say, is probably already underway, but it will increase over time. “

Tax policy, after all, systematically affects charitable giving. After the tax law changes proposed to Congress by President Donald Trump in 2017, charitable giving fell 1.3% in 2018 from the previous year, the Treasury Department reported. Normally, these donations tend to grow at about the same rate as the country’s gross domestic product, which soared 5.2% that year.

As the Biden administration promotes its plans to raise taxes for wealthy Americans, it incorporates into its estimates the consideration that many people who would be affected by tax increases would donate more to charities to reduce their tax burden. But for many wealthy people, trusts like those described in the “Pandora Papers” would reduce their tax burden without charitable donations.

Trusts allow one person, a settlor, to transfer assets to a trustee who manages them and then directs them to a third beneficiary. In states like South Dakota, Alaska, and Nevada, however, the person transferring assets can call themselves the beneficiary of a trust. These so-called “self-settled trusts” can protect creditors’ assets and further reduce the tax burden by moving assets out of the taxable domain, said Mitchell Gans, a professor at Hofstra University specializing in tax law.

South Dakota also deploys strict privacy laws to keep trusts out of the public eye. This is a characteristic that wealth advisers use when addressing potential clients with prospects for multi-generational wealth growth. According to the investigation report, the state’s trust assets have skyrocketed to $ 360 billion in the past decade alone.

For charities, it is difficult to know what the long-term consequences of trusts will be. Officials of many philanthropic and lobbying organizations declined to comment on the impact of the “Pandora Papers” revelations on charitable giving because they say they lack data on the extent of the use of these tax havens.

But some studies suggest there might be some impact. According to a recent study by consultancy firm CCS Fundraising, 25% of donors cited tax deduction as the motivation for their charitable giving. A joint study by Bank of America and Indiana University’s Lilly Family School of Philanthropy found that 22% of wealthy donors surveyed would reduce their giving if tax deductions for charitable giving were eliminated. The same study found that 51% of wealthy donors said they sometimes contribute to charity for a tax break.

Patrick Rooney, professor of economics and philanthropic studies at Indiana University, said he believed dynasty trusts would undermine philanthropic giving. Removing incentives for charitable contributions, he said, essentially increases the price of donations. On the flip side, Rooney noted, lower taxes could encourage donors to contribute more to causes they care about on their own terms.

“Most wealthy households are donors to different types of charities for different reasons,” he said. “So we would expect that some of these people, even if they are trying to evade taxes, (have) philanthropic impulses as well. But we won’t know for a while.

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

“I think that’s probably a pretty big category (of people),” he said.

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AP Business Writer Glenn Gamboa contributed to this report.

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