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You have just enough information about foundations to completely misunderstand them. It's true that a major reason for the popularity of foundations is legal t

You have just enough information about foundations to completely misunderstand them. It's true that a major reason for the popularity of foundations is legal tax avoidance: you can donate to a foundation in a year when you have lots of income, get the tax benefit in that year, and not have to make a charitable donation in the same year. The foundations is allowed to sit on most of the money for a long time. However, crucially, when the money leaves the foundation it must go to an approved charity. There have been some high-profile abuses of foundations, but that's simply illegal, the same way it would be illegal to not make a donation in the first place and claim a tax exemption.

kaesar14 4y ago
I'm guessing there's more wealthy people getting away with breaking those rules or being extremely creative with them then not.
Retric 4y ago
You are mistaken, it is very possible and legal to extract money from a 501(c)(3). “If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.” https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-501c3-organizations https://www.irs.gov/charities-non-profits/charitable-organiz... One example would be putting staff members up at a hotel you own.
- dabernathy89 4y ago
  I don't think it's clear how this contradicts the comment you're replying to.
  - Retric 4y ago
    “However, crucially, when the money leaves the foundation it must go to an approved charity.” They can spend money on expenses and those expenses can benefit you. Having family members work for and be generously paid by such an orientation is a common example. Anytime you control a cash flow you can benefit from that cash flow.
    - compsciphd 4y ago
      yes, but that income will be fully taxed by the recipient (at whatever their tax rate is). The recipient isn't getting it tax free.
      - weego 4y ago
        Not fully taxed, you have the next level of legal tax avoidance in the gap between company and person. The key to getting low single digit % tax burdens is adding in steps that allow you to add lots of % reductions and obfuscations because more overt methods tend to not be sustainable and in some jurisdictions (as in the UK) csn lead to the method being retrospectively classed as tax evasion and you end up paying the outstanding balance with interest.
      - Retric 4y ago
        You avoid both income and gift taxes and they don’t pay taxes on benefits like health insurance so it’s a significant tax savings over just handing out money. More importantly is the social benefits as working at a charity is seen more positively than living on a trust fund.
      - HDThoreaun 4y ago
        Paying all your family members $200k a year until the end of time has a much lower tax liability than taking a billion dollars of income in one year.
        compsciphd 4y ago
        I agree, but its also less valuable (money today is worth more than money tomorrow). It's a tax management strategy, I just don't find it "evil" and find the arguments that taxes aren't paid to be a bit false (less taxes in the end, but not no taxes, so perhaps my phrasing of "fully taxed" is also a bit off, not fully taxed at the level of the giver). The only way to get around it would be to hurt charities in general (which perhaps the more socialist amongst us would have zero problem with, but I personally think would be bad for society).
    - 4y ago
  - kinnth 4y ago
    I also think expenses, even salaries don't really amount to that much of a tax avoidance when the sums are in the billions. Hotels every night of the year for your staff would still be under $1M per staff member. I think (I don't know as i'm a UK citizen) that these are similar to trusts. It's fair to say that rich people avoid a lot of income tax when they fund these trusts, but the trusts themselves still then pay tax on income and expenditures. The main thing it allows is for wealth to remain in a family for longer periods of time with one big tax avoidance at the beginning (the recoup on income taxes)
nonameiguess 4y ago
Donations have to go to a qualified charity. Salaries don't. They do have to be disclosed, however, at least for a foundation. Churches don't even have to disclose, which is why they were so convenient for money laundering in The Wire (can accept arbitrarily large cash donations and don't have to tell anyone what they do with the money).
kkielhofner 4y ago
You are probably thinking of donor advised funds. A DAF lives in a broader 501c3 (typically setup by a financial institution) and you can put money in it for tax purposes. The money sits (and grows) while you decide where/when it will ultimately go. Crucially, with a DAF, because you took the deduction when you gave to the DAF the outflow from the DAF must go to another 501c3. If money leaving a foundation must go to another 501c3 how does the 501c3 loop ever break? It breaks because foundations can (and do all the time) pay individuals, contractors, for-profit companies, etc. Imagine the United Way trying to build an office. How could they possibly do that if their funds could only go to other 501c3s?
bradenb 4y ago
To that parent's point, < 1% has gone to charities which means the foundation is just spending money on the people that work in and own the foundation. I wouldn't need to get paid directly if I had a foundation that paid for everything I need or want.
- knorker 4y ago
  If you have $1B you can already pay for everything you need or want. Donating it to your own non-profit, only to pay for your own expenses, is an extremely expensive way to "launder" that $1B into a tax deduction.
  - s1artibartfast 4y ago
    Yeah, it is really unclear to me how some people think charity donation makes sense just to get back some Fringe non-monetary benefits
  - yunohn 4y ago
    Makes total sense, that’s why poor people commit tax fraud, not rich people who have no reason to want more money! /s
    - c22 4y ago
      Poor people and rich people alike commit tax fraud every day. It's more of a personality issue than a wealth one.
      - yunohn 4y ago
        > alike Could you detail this?
    - knorker 4y ago
      If I understand you right you're saying that a 501c3 is a net gain in money? Would you mind walking me through that? You start off with $1B net. Presumably these are capital gains. You donate it to your own 501c3, and get 125M back on your taxes. Now you take out salary (taxed at what, 37%?), and get a total of $755M (including the $125M). No, that was a losing bet. Ok, so you also spend it on other things. But to net gain on this you still have to actually spend less than $125M not only on actual charity, but also on overhead. Basically can you launder this money at less than 12.5%? Keeping in mind that once laundered it's still not really yours. Sure, you control it. But it'll always be just mostly assets under your control. You can't use that money to buy Twitter. Also keep in mind that real money laundering can cost about 20-30%. Is it even worth 12.5% if the billion comes with these huge restrictions? Am I missing something?

kaesar14 4y ago

I'm guessing there's more wealthy people getting away with breaking those rules or being extremely creative with them then not.

Retric 4y ago

You are mistaken, it is very possible and legal to extract money from a 501(c)(3). “If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.” https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-501c3-organizations https://www.irs.gov/charities-non-profits/charitable-organiz... One example would be putting staff members up at a hotel you own.

dabernathy89 4y ago
I don't think it's clear how this contradicts the comment you're replying to.
- Retric 4y ago
  “However, crucially, when the money leaves the foundation it must go to an approved charity.” They can spend money on expenses and those expenses can benefit you. Having family members work for and be generously paid by such an orientation is a common example. Anytime you control a cash flow you can benefit from that cash flow.
  - compsciphd 4y ago
    yes, but that income will be fully taxed by the recipient (at whatever their tax rate is). The recipient isn't getting it tax free.
    - weego 4y ago
      Not fully taxed, you have the next level of legal tax avoidance in the gap between company and person. The key to getting low single digit % tax burdens is adding in steps that allow you to add lots of % reductions and obfuscations because more overt methods tend to not be sustainable and in some jurisdictions (as in the UK) csn lead to the method being retrospectively classed as tax evasion and you end up paying the outstanding balance with interest.
    - Retric 4y ago
      You avoid both income and gift taxes and they don’t pay taxes on benefits like health insurance so it’s a significant tax savings over just handing out money. More importantly is the social benefits as working at a charity is seen more positively than living on a trust fund.
    - HDThoreaun 4y ago
      Paying all your family members $200k a year until the end of time has a much lower tax liability than taking a billion dollars of income in one year.
      - compsciphd 4y ago
        I agree, but its also less valuable (money today is worth more than money tomorrow). It's a tax management strategy, I just don't find it "evil" and find the arguments that taxes aren't paid to be a bit false (less taxes in the end, but not no taxes, so perhaps my phrasing of "fully taxed" is also a bit off, not fully taxed at the level of the giver). The only way to get around it would be to hurt charities in general (which perhaps the more socialist amongst us would have zero problem with, but I personally think would be bad for society).
  - 4y ago
- kinnth 4y ago
  I also think expenses, even salaries don't really amount to that much of a tax avoidance when the sums are in the billions. Hotels every night of the year for your staff would still be under $1M per staff member. I think (I don't know as i'm a UK citizen) that these are similar to trusts. It's fair to say that rich people avoid a lot of income tax when they fund these trusts, but the trusts themselves still then pay tax on income and expenditures. The main thing it allows is for wealth to remain in a family for longer periods of time with one big tax avoidance at the beginning (the recoup on income taxes)

nonameiguess 4y ago

Donations have to go to a qualified charity. Salaries don't. They do have to be disclosed, however, at least for a foundation. Churches don't even have to disclose, which is why they were so convenient for money laundering in The Wire (can accept arbitrarily large cash donations and don't have to tell anyone what they do with the money).

kkielhofner 4y ago

You are probably thinking of donor advised funds. A DAF lives in a broader 501c3 (typically setup by a financial institution) and you can put money in it for tax purposes. The money sits (and grows) while you decide where/when it will ultimately go. Crucially, with a DAF, because you took the deduction when you gave to the DAF the outflow from the DAF must go to another 501c3. If money leaving a foundation must go to another 501c3 how does the 501c3 loop ever break? It breaks because foundations can (and do all the time) pay individuals, contractors, for-profit companies, etc. Imagine the United Way trying to build an office. How could they possibly do that if their funds could only go to other 501c3s?

bradenb 4y ago

To that parent's point, < 1% has gone to charities which means the foundation is just spending money on the people that work in and own the foundation. I wouldn't need to get paid directly if I had a foundation that paid for everything I need or want.

knorker 4y ago
If you have $1B you can already pay for everything you need or want. Donating it to your own non-profit, only to pay for your own expenses, is an extremely expensive way to "launder" that $1B into a tax deduction.
- s1artibartfast 4y ago
  Yeah, it is really unclear to me how some people think charity donation makes sense just to get back some Fringe non-monetary benefits
- yunohn 4y ago
  Makes total sense, that’s why poor people commit tax fraud, not rich people who have no reason to want more money! /s
  - c22 4y ago
    Poor people and rich people alike commit tax fraud every day. It's more of a personality issue than a wealth one.
    - yunohn 4y ago
      > alike Could you detail this?
  - knorker 4y ago
    If I understand you right you're saying that a 501c3 is a net gain in money? Would you mind walking me through that? You start off with $1B net. Presumably these are capital gains. You donate it to your own 501c3, and get 125M back on your taxes. Now you take out salary (taxed at what, 37%?), and get a total of $755M (including the $125M). No, that was a losing bet. Ok, so you also spend it on other things. But to net gain on this you still have to actually spend less than $125M not only on actual charity, but also on overhead. Basically can you launder this money at less than 12.5%? Keeping in mind that once laundered it's still not really yours. Sure, you control it. But it'll always be just mostly assets under your control. You can't use that money to buy Twitter. Also keep in mind that real money laundering can cost about 20-30%. Is it even worth 12.5% if the billion comes with these huge restrictions? Am I missing something?