4 ms·

It's not a tax shield if you don't get to keep the money. Of course, if you were going to donate anyway, then sure, it's more tax efficient to give appreciated

It's not a tax shield if you don't get to keep the money. Of course, if you were going to donate anyway, then sure, it's more tax efficient to give appreciated stocks. But calling it a tax shield makes it sound like you can stand to gain personally by doing this.

_lex 11y ago
He may not keep it, but he can control it, and it will make him significantly more powerful.
nmjohn 11y ago
> But calling it a tax shield makes it sound like you can stand to gain personally by doing this. One (with that much wealth) absolutely stands to gain a ton from it. A family member of mine works in financial trusts / estate planning for multi-millionaires (many times over) and this is one of the things I've heard from them used to limit tax exposure while maximizing the most typical goal - not personal wealth (these people have more money then they will ever be able to spend, that isn't the concern for them) - but rather maximizing family wealth. And once you're extremely wealthy, it's amazing how large your family becomes. Essentially - many charitable foundations are absolutely charitable in their fundamental mission, and best case are helping thousands of people with most of the money directly helping - however what happens in practice, is this foundation then has family members work for it earning somewhere between a reasonable to a completely insane salary depending on any number of factors.
- murbard2 11y ago
  Sure, but the salary they draw from the charity will be taxed. It may be taxed at a slightly lower rate than capital gains if they don't earn much, but not extremely so.
  - nmjohn 11y ago
    Not exactly - you've also got to consider the tax consequences on cashing out directly so with the charity, the money only gets taxed once instead of twice. Scenario a: Bob starts Hooli - his stock is now worth 100 million. He wants to give half to his family. He cashes it out and pays long term capital gains on it - at 15% he is left with 85 million. He pays out half to his relatives, but don't forget, there is 35% gift tax when you gift someone more than ~15k So of that 42 million, only about 27 million will actually make it to it's intended target. Scenario b: Instead of directly cashing out, he starts the foundation with the 100 million. (using that to offset his entire income that year with a charitable tax deduction most likely). He wants to pay out half to his family still - this time he is starting with 50 million which will similarly be taxed at let's say 35% (income tax) - leaving 32.5 million to pay out. Also consider the case where he exercised a large cash performance bonus upon cashing out, that 5 million he will potentially not have to pay any taxes on either because he was able to make a large tax deduction from his "charitable" gift to the foundation. It is not a simple thing - depending on how exactly the money flows, there are ways to prevent a significant amount of double taxation. (Also a couple years ago gift tax was 55% so it would have been 19 million (scenario a) vs. 32.5 million (scenario b) in post tax money. What makes things an order of magnitude more complicated, is on top of all this one has to consider timing. Tax rates change significantly all the time (55 vs 35% on gift tax in 2010 vs 2015) - some of which are known far in advance, some changes may be a surprise - so in estate planning where the goal is to maintain wealth for many generations to come - strategies like this start to make a lot of sense
  - thaumasiotes 11y ago
    Capital gains isn't the relevant tax, though. You'd want to compare it to the inheritance tax.
deelowe 11y ago
Define "keep." This much money does him no good sitting in a bank account. I'm sure he intends to invest it. One option would be to cash out, take a huge tax hit (in CA) and then reinvest. That is pretty foolish if you have this kind of money. The better option is to form a company. Even better, form a non-profit. Sign over the stock to the non profit. The non-profit then re-invests the money. Make yourself an employee. Set your own salary and make yourself the CEO. Now he has reinvested the money and hasn't taken any tax hit EXCEPT on his income (which would have been taxed regardless of what he did). The other billions he has are sitting there earning interest tax free until he decides to take some out. On that taking some out bit... So, as the CEO of this non-profit, he could have the company buy a jet, build an office, schedule company retreats, etc... All of this would be tax free. I could go on, but I think that the point is clear. Non-profits are an EXCELLENT way to avoid tax hits in this sort of scenario. It's a numbers game. Once your net worth has a B at the end of it, forming an entirely new business just to avoid taxes becomes a much more sensible solution.

_lex 11y ago

He may not keep it, but he can control it, and it will make him significantly more powerful.

nmjohn 11y ago

> But calling it a tax shield makes it sound like you can stand to gain personally by doing this. One (with that much wealth) absolutely stands to gain a ton from it. A family member of mine works in financial trusts / estate planning for multi-millionaires (many times over) and this is one of the things I've heard from them used to limit tax exposure while maximizing the most typical goal - not personal wealth (these people have more money then they will ever be able to spend, that isn't the concern for them) - but rather maximizing family wealth. And once you're extremely wealthy, it's amazing how large your family becomes. Essentially - many charitable foundations are absolutely charitable in their fundamental mission, and best case are helping thousands of people with most of the money directly helping - however what happens in practice, is this foundation then has family members work for it earning somewhere between a reasonable to a completely insane salary depending on any number of factors.

murbard2 11y ago
Sure, but the salary they draw from the charity will be taxed. It may be taxed at a slightly lower rate than capital gains if they don't earn much, but not extremely so.
- nmjohn 11y ago
  Not exactly - you've also got to consider the tax consequences on cashing out directly so with the charity, the money only gets taxed once instead of twice. Scenario a: Bob starts Hooli - his stock is now worth 100 million. He wants to give half to his family. He cashes it out and pays long term capital gains on it - at 15% he is left with 85 million. He pays out half to his relatives, but don't forget, there is 35% gift tax when you gift someone more than ~15k So of that 42 million, only about 27 million will actually make it to it's intended target. Scenario b: Instead of directly cashing out, he starts the foundation with the 100 million. (using that to offset his entire income that year with a charitable tax deduction most likely). He wants to pay out half to his family still - this time he is starting with 50 million which will similarly be taxed at let's say 35% (income tax) - leaving 32.5 million to pay out. Also consider the case where he exercised a large cash performance bonus upon cashing out, that 5 million he will potentially not have to pay any taxes on either because he was able to make a large tax deduction from his "charitable" gift to the foundation. It is not a simple thing - depending on how exactly the money flows, there are ways to prevent a significant amount of double taxation. (Also a couple years ago gift tax was 55% so it would have been 19 million (scenario a) vs. 32.5 million (scenario b) in post tax money. What makes things an order of magnitude more complicated, is on top of all this one has to consider timing. Tax rates change significantly all the time (55 vs 35% on gift tax in 2010 vs 2015) - some of which are known far in advance, some changes may be a surprise - so in estate planning where the goal is to maintain wealth for many generations to come - strategies like this start to make a lot of sense
- thaumasiotes 11y ago
  Capital gains isn't the relevant tax, though. You'd want to compare it to the inheritance tax.

deelowe 11y ago

Define "keep." This much money does him no good sitting in a bank account. I'm sure he intends to invest it. One option would be to cash out, take a huge tax hit (in CA) and then reinvest. That is pretty foolish if you have this kind of money. The better option is to form a company. Even better, form a non-profit. Sign over the stock to the non profit. The non-profit then re-invests the money. Make yourself an employee. Set your own salary and make yourself the CEO. Now he has reinvested the money and hasn't taken any tax hit EXCEPT on his income (which would have been taxed regardless of what he did). The other billions he has are sitting there earning interest tax free until he decides to take some out. On that taking some out bit... So, as the CEO of this non-profit, he could have the company buy a jet, build an office, schedule company retreats, etc... All of this would be tax free. I could go on, but I think that the point is clear. Non-profits are an EXCELLENT way to avoid tax hits in this sort of scenario. It's a numbers game. Once your net worth has a B at the end of it, forming an entirely new business just to avoid taxes becomes a much more sensible solution.