Thursday, December 28, 2017

Death and (No) Taxes for Super-Rich: Give Gains to Charitable Foundations

Recently George Soros transferred more than $18 billion of his accumulated wealth to a private foundation that he controls. By doing so, he escaped paying taxes on the appreciated value of the assets forever. Here's how it works:

The super-rich who head corporations, such as Soros and Warren Buffett, can take a reduced yearly salary and pay income tax rates equivalent to that of middle-income Americans. However, they continue to have access to corporate private jets and other tax-deductible benefits unavailable to most middle-income Americans.

Meanwhile, the value of their shares of their companies grows. But instead of selling the appreciated shares and incurring capital gains taxes, the super-rich give the shares to private foundations and the income is forever untaxed.

For example, in 2017, Buffett donated 18.63 million Berkshire "B" shares valued at $170.25 per share with a tax basis of roughly $58.71 to the Gates Foundation. As a result, in 2017 alone, Buffett will avoid paying capital gains taxes of $141 million to Nebraska, and $463 million to the federal government. In the end, Mr. Buffett intends to donate more than $50 billion in appreciated stock to private foundations.

Buffett has ridiculed the current tax system, which taxes his secretary at a higher rate that what he pays. To rectify this injustice, he proposed that the capital gains tax be raised to 50%. But elevating the rate would have no tax impact on his accumulated stock wealth.

In the end, the current U.S. tax law allows death with (almost) no taxes for the super-rich. A potential remedy is to limit the amount of appreciated stock that may be gifted without taxes.

As stated by novelist F. Scott Fitzgerald to fellow writer Ernest Hemingway, "You know Ernest, the rich are different from you and me." To which Hemingway responded, "Yes they have more money." To be an even bigger wiseacre, Hemingway might have added "and the ability to die without taxes, Scott."
Ernie Goss

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