October 31, 2017

The One-Time $100 Billion Opportunity No One is Talking About

Author National Philanthropic Trust

On December 31, 2017, the sun will set on a tax provision that allowed hedge fund managers to avoid paying income taxes on certain offshore deferred compensation. This is big news in the hedge fund world and it should be big news in the charitable sector, but hardly anyone is talking about it. Until now.

What is happening?
Hedge fund managers were able to avoid paying U.S. income taxes on fee compensation earned from their offshores funds by deferring and reinvesting it. The Emergency Economic Stabilization Act of 2008 ended this practice prospectively and dictated that all deferred compensation for services performed before January 1, 2009 must be repatriated by December 31st this year. The legal changes created Section 457A of the Internal Revenue Code, so this event is often being referred to as the “457A Hedge Fund Deadline.”

How much money are we talking about and where will it go?
The money being repatriated has never been totaled or realized for tax purposes, so estimates range wildly—from $25 billion to $100 billion or more. As hedge fund managers plan for this income event, they will likely consider donating to charity to reduce their tax bills. Donating to a donor-advised fund and private foundations offers a way to offset or reduce taxable income with a tax deduction in the same year, but make grants to charities and even involve the next generation over time.

Who needs to know about this?
Hedge fund managers who are impacted by the December 31, 2017 deadline are planning now. Their financial and personal advisors will help them find the most tax efficient ways to accomplish their goals—including philanthropy. Charitable fundraisers should identify which donors and prospective ones may be impacted by this one-time event. Then they need to plan the best way to appeal to their passion. Together, hedge fund managers, their advisors and charities can use this income event to have a major social impact.