There has been much talk about the rule change in Section 457A made in 2008 that generally requires deferred compensation in offshore hedge funds that is attributable to services performed prior to January 1, 2009 to be included in gross income by the end of 2017. It seemed far off, and there was some speculation that President Trump and Congress would overhaul the tax code in ways that may have resulted in advantages for managers. But this reprieve did not come to fruition, and the deadline is around the corner. This means it is possible that a manager could be subject to a federal rate of 39.6 percent, combined state and city taxes totaling 12 percent, and an additional 3.8 percent tax on net investment income on these amounts. Estimates on the amount of deferred income vary, but by anyone’s calculations it is a significant number. Bloomberg Businessweek estimated that about $100 billion in previously tax-deferred income is likely to be affected. As hedge fund managers scramble to repatriate that revenue by the end of this year and deal with the tax consequences, they are seeking guidance from their trusted advisors. Accountants and financial planners agree that charitable giving is one of the few offsets available for hedge-fund managers to reduce their tax burden.
“The silver lining is the huge positive social impact of this potential surge in charitable giving. And, if planned properly, the set-aside of charitable capital can benefit the managers and their charities for many years to come,” JCF President, Zoya Raynes. Donor Advised Funds are considered the best and most flexible option for hedge fund managers for several reasons:
- Donors to a DAF receive an immediate tax deduction.
- The choice of the (IRS-qualified) charities to support, the timing of when to give grants to charities, and the amount of the grants are flexible and can be decided by the donor’s philanthropic goals, not a required minimum distribution. In fact, unlike a private foundation, the DAF does not have a 5% minimum annual distribution.
- A donor advised fund is the best vehicle to use for maintaining confidentiality. DAFs report in the aggregate and individual donor information is not disclosed.
- Independent (non-commercial) DAFs such as the Jewish Communal Fund (JCF) also provide a wide array of best-in-class investment options, including alternatives.
- DAFs can accept a large range of assets including complex assets.
“All of the administrative burden and recordkeeping is handled for you, and everything can be managed with ease from our secure portal,” stated Susan F. Dickman, CEO of JCF.
“This is the opportune moment for people to grow philanthropically and take steps towards creating their legacy,” noted Zoya Raynes. As the deadline approaches, Jewish Communal Fund is seeing an increase in inquiries from managers and their advisors seeking advice on donating their repatriated income. We welcome you to contact us to learn more by calling Michelle Lebowits and Ellen Israelson at 212-752-8277.