Tax Havens for the Rich – NBC Boston

A spotlight on how many of the rich and powerful shield their wealth also increases the fear among philanthropy experts: that the tax havens used by the rich are increasingly siphoning off money for charitable purposes.

Wealthy Americans have long sought to use donations to charity to help 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 have hidden trillions of dollars out of the reach of governments using letterbox companies and offshore accounts that acted as apply legally.

A maneuver described in the report, a “dynasty trust”, can persist in states like South Dakota. These trusts allow Americans to legally shield themselves from inheritance and other taxes – removing an important incentive for charitable giving.

If the wealth of an American individual or couple exceeds a threshold of $ 11.7 million and $ 23.4 million, respectively, any dollar value above that value, once inherited, is subject to federal estate tax of up to 40% for each Generation.

But a carefully designed dynasty trust will help future generations avoid these taxes. And the longer the trusts exist, the longer the user can avoid taxes and the longer they may lack the financial incentive to donate to a charity.

Experts point out that some Americans are also legally able to avoid state income taxes on income from their property by setting up trusts in states that do not levy income taxes. One of them is South Dakota, which also has no estate, capital gains or inheritance taxes of its own, making it a particularly attractive destination for fortune parking.

“There is every reason to believe that the ultimate effect of the kind of wealth invested in these vehicles will also be a long-term loss of revenue for nonprofits,” said Ray Madoff, professor of philanthropy at Boston College Law School teaches and taxes. “The impact on the nonprofit sector, I would say, is likely already underway, but will only increase over time.”

After all, tax policy consistently influences charity engagement. After President Donald Trump pushed through the tax law changes in Congress in 2017, charitable donations fell 1.3% year over year in 2018, the Treasury Department reported. Typically, such donations grow at about the same pace as the country’s gross domestic product, which has increased 5.2% this year.

As the Biden government pushes its tax hike plans for wealthy Americans, its estimates take into account that many people who would be affected by the tax hikes would donate more to charities to help lower their tax burden. But for many wealthy individuals, trusts such as those described in the Pandora Papers would reduce their tax burden without the charitable donations.

Trusts allow an individual, a giver, to transfer assets to a trustee who then manages and directs them for a third party beneficiary. However, in states such as South Dakota, Alaska, and Nevada, the person transferring assets might consider themselves the beneficiary of a trust. These so-called “self-settled trusts” can protect assets from creditors and further reduce the tax burden by removing the assets from the taxable estate, said Mitchell Gans, a professor at Hofstra University who specializes in tax law.

South Dakota also uses strict privacy laws to keep trusts out of the public eye. It’s a feature that wealth advisors use to target potential clients with prospects of growing multigenerational wealth. According to the investigative report, the state’s trust assets have risen to $ 360 billion in the past decade alone.

It is difficult for charities to gauge the long-term consequences of the trusts. Officials from numerous philanthropy and lobbying organizations declined to comment on the impact of the Pandora Papers’ revelations on charitable donations because they lacked data on the prevalence of these tax havens.

However, some studies suggest it could have an impact. According to a recent study by the consulting firm CCS Fundraising, 25% of donors named the tax deduction as a motivation for their donations. A joint study by Bank of America and Indiana University Lilly Family School of Philanthropy found that 22% of wealthy donors surveyed would reduce their donations if charitable tax deductions were abolished. The same study found that 51% of wealthy donors said they sometimes donate to charity for a tax break.

Patrick Rooney, a professor of economics and philanthropic studies at Indiana University, said he believes dynasty trusts will undermine philanthropic donations. Removing incentives for charitable giving, he said, essentially increases the price of giving. On the other hand, Rooney said, lower taxes could encourage donors to contribute more, on their own terms, to the causes that matter to them.

“Most wealthy households donate to different types of charities for different reasons,” he said. “So we would expect that some of these people, while trying to evade taxes, would also have some philanthropic impetus. But we won’t know for a long time. “

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 conservation technique. Still, he noted, some charitable people might still want to avoid taxes.

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

___

AP Business Writer Glenn Gamboa contributed to this report.

___

The Associated Press is supported by the Lilly Foundation for coverage of philanthropy and nonprofits. The AP is solely responsible for all content. For all of AP’s philanthropy coverage, please visit https://apnews.com/hub/philanthropy.