News You Can Use: Charitable solutions for hedge fund managers facing repatriation of fees
Four charitable strategies to offset tax liability
Pursuant to Section 457A of the Internal Revenue Code, hedge fund managers who hold offshore incentive fees earned prior to 2009 must recognize those fees as compensation income for U.S. income tax purposes by December 31, 2017. This may lead to a spike in income tax liability for those managers in the 2017 tax year. By leveraging the income tax deduction available for charitable gifts, managers may offset a significant portion of this tax liability while having an impact on nonprofit organizations meaningful to them.
Four charitable giving strategies may be of particular interest in this context:
1. An outright gift to charity may result in an income tax deduction up to 100% of the gift.
2. For a manager who is interested in making a charitable gift, but who has not yet identified charities that he or she is interested in supporting, a gift to a donor advised fund may provide helpful flexibility. With this technique, a manager may transfer assets to a donor advised fund in 2017 and receive an income tax deduction this year. The gift assets are set aside in a fund and invested; fund assets are then distributed for use by charities over time, as advised by the donor.
3. A grantor charitable lead trust may be used to accelerate income tax deductions into 2017 while providing a stream of revenue to charity over a set period of years. At the end of that term, remaining trust assets (net of charitable transfers, investment performance and the cost of trust administration) are returned to the donor.
4. A non-grantor charitable lead trust may be used to support a charity for a set number of years; after that term of years has expired, the remaining assets in the trust would be transferred to heirs with reduced (or even eliminated) gift tax liability and estate tax liability.
With any of the techniques summarized above, the hedge fund manager/donor may designate how the gift should be used at the charity, within parameters set by that charity. For example, gifts to Duke may be designated to establish a named, permanent endowment fund that will provide scholarships to Duke students in perpetuity. Similar funds may be established to create a named professorship, provide research funding in a specific field/disease, bolster the operating budget of a special place on campus (such as the Duke Gardens, Duke Libraries or the Duke Chapel), support Duke Athletics, etc.
For more information on any to the charitable giving techniques summarized above, please contact the Office of Gift Planning at Duke University.
Please consult your personal advisors on all legal, tax or financial issues related to gift or personal matters. Nothing contained herein should be considered legal, tax or financial advice, or intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties.