Countless high-net-worth individuals are in for a rude awakening in 8 to 20 months. They could have significant tax bills due to significant spikes in income.
Under IRS § 457A, offshore deferred compensation accounts will no longer be permissible, and will need to be included in income, leading to significant “spikes” in taxable income. Who’ll be hit?
Hedge fund principals recognizing offshore (non-taxable) deferred funds. Current deferred amounts must be “repatriated” by the end of 2017.
In addition to hedge fund principals who may experience spikes in income, others may enjoy this “problem” as well, although not as a result of IRS § 457A. This may include real estate fund managers receiving incentive compensation.
Also, executives earning sizeable bonuses or golden parachutes. Collectors selling collectibles for large profits. Individuals recognizing significant Subpart F income from offshore holdings. Investors “who have significant recapture at ordinary income rates upon the sale of an asset.”
But here’s the rub. Many of these individuals want to do the right thing but face conflicting goals. They want to make meaningful donations to a favorite charity and ensure monies are left to their children or heirs, hopefully, tax free. Is it possible? Yes.
Special Trust Vehicles
A mechanism exists that offers a trifecta of benefits to these types of individuals. It’s a special type of trust which serves as a wealth management, charitable giving, and estate planning device all in one. And it offers an irresistible arbitrage right now: high-tax rates with low-interest rates.
Let’s share an illustration that will help you to better understand the power of this unique strategy. Consider the example of a 50-year old hedge fund manager living in New York City. He/she has earned $20 million in ordinary income plus $60 million of offshore deferred compensation, which is coming back to the States.
We advised the manager to set up a special trust with a $10 million contribution. Here’s how the numbers play out:
|No Planning||Trust Vehicle|
|After Taxes on Income NYC Resident||$4,645,000||$10,000,000|
|Investment Balance at Term (30 years)||$12,981,000||$43,229,000|
|Estate Tax @ 40%||$5,192,400||ZERO|
|Total to Heirs||$7,788,600||$43,229,000|
|Total to Charity||ZERO||$16,358,000|
Quite impressive, isn’t it? All three stakeholders walk away enriched and in gratitude.
Some Issues to Consider
As with all investments, it is essential to do your due diligence, which is why it is important to work with a professional. For example, as a taxable trust, trust income is subject to tax on any ordinary or realized capital gains income, so the nature of the investments owned by the trust are important.
Also, as an irrevocable trust, the trust vehicle is not subject to amendment; once established, it remains in effect under the terms of the trust─no distribution is allowed even in the face of family hardship, financial reversal or medical emergency.
These issues and many other considerations may be discussed with one of the EBS managing directors as you consider this unique solution to your income spikes this year and next. But get started now.
The use of a special trust vehicle deserves the respect of the money-wise individual because it fulfills three important desires in your financial life: 1) philanthropic; 2) tax-savings; and, 3) the ability to leave gift and estate tax-free assets to your heirs.
We invite you to a private conversation on how this unique strategy can effectively serve your needs.
Hugh Carter, Managing Director
Chris Rich, Managing Director
617.904.9444 ext. 2