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> 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 f

by 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.

by nmjohn 11y ago

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.