Why are Billionaires Giving Away Fortunes?By Dr. Jerome CorsiBillionaires touted for giving away half their fortunes may be motivated more by dodging taxes than the impulse to do good. In May 2009, word was conveniently leaked that two of the richest men in America, investor Warren Buffett and his friend Bill Gates, founder of Microsoft, organized and presided over a supposedly confidential meeting of billionaires in a meeting hosted by David Rockefeller. Fortune magazine reported that New York Mayor Michael Bloomberg and TV billionaire Oprah Winfrey were both attendees. The subject was billed as philanthropy, and the result was what amounted to a $600 billion challenge in which Buffett and Gates confronted the wealthy in the room to pledge to give at least half their net worth to charity. Fortune noted that the 2009 net worth of the Forbes 400 was estimated to be around $1.2 trillion. So, if the Forbes 400 were to give half their net worth to charity during their lives or at their deaths, the result would be $600 billion given away. Ruth Sunderland, a business reporter for the Guardian in the U.K., reported on Aug. 8 that Buffett and Gates have recruited an impressive list, including "Star Wars" director George Lucas, CNN news mogul Ted Turner and fashion designer Diane von Furstenberg, whom have agreed to give away half their accumulated fortunes. "Cynics in our midst who will no doubt see this as a halo-burnishing exercise by individuals who can well afford to be generous," Sunderland wrote. "But we shouldn't sneer-Buffett and Gates are thoughtful and committed philanthropists. The sheer scale of their giving is inspirational, particularly at a time when the rich are routinely assumed to be uncaring and avaricious." "It is heartening to hear a group of wealthy individuals who are grateful for their good fortune and want to share it," Sunderland noted. It may be less heartwarming to realize the tax strategies that motivate many wealthy individuals to "give money away" in through some effective tax planning that actually allows the wealthy to reduce the tax bite so they can enjoy more of their accumulated fortunes while they're alive. Red Alert does not have the details of the financial planning done for the individuals named above, but a popular vehicle available for the wealth to shelter income from taxation is the Charitable Remainder Trust or CRT. CRTs are irrevocable trusts that allow taxpayers to reduce estate taxes, eliminate capital gains while claiming an income tax deduction and benefiting charities, instead of the IRS. Even more conveniently, a CRT has two sets of beneficiaries-the person establishing the CRT and the charities that receive the residual of the CRT assets after the person establishing the trust dies. The person establishing the CRT can draw lifetime income from the CRT, allowing the wealthy benefactor to continue benefiting from the funds, even though the funds are locked away in an irrevocable trust. The income paid to the creator of the CRT is then taxed as ordinary income. Moreover, because the assets of the CRT are ultimately intended for a charity, the CRT completely avoids capital gains taxes on investments the CRT may make. IRS rules demand that net distributions from CRTs must equal 6 percent of the trust's value; the higher the payout percentage, the lower the charitable tax deduction. Even more convenient, the CRT payouts to the creator of the trust can begin when the person retires, a feature that allows monthly CRT payouts to function much like monthly annuity payments. Unlike other qualified plans like IRAs or 401(k) plans, there are no limits to how much money can be deposited in a CRT. Attorney Harold Apolinsky explained why Warren Buffett is inclined to take positions that sound philanthropic, such as the suggestion we keep in place the estate tax. At first blush, it would seem Buffett is being generous, willing to share a large portion of his estate for the IRS to distribute to the less fortunate. Apolinsky warns us not to come to such a conclusion too quickly. "Do not kid yourself. The reason Warren favors the estate tax is that it furthers his business interests," Apolinsky wrote. Apolinsky noted that Buffett owns a life insurance company, and life insurance is often bought solely to pay for estate tax. Buffett also owns a company that sells executive jets to wealthy, older Americans. "A buyer's incentive to purchase a plane is the fact that the estate tax will take 50 percent of their assets anyway, so they might as well spend them while they are still able," Apolinsky commented. The Wall Street Journal noted that philanthropic giving can be a smart choice for the wealthy: "For starters, donors can reap the joy-and, in some cases, publicity-over their good deed. What's more, donors can keep tabs on their gift, eyeing whether the money is being used effectively." Wall Street Journal reporters Rachel Emma Silverman and Elizabeth Bernstein also noted the tax benefits: "When you make a lifetime gift, you get an income-tax deduction, reducing your tax bill, and you also move money out of your estate, which can trim estate taxes." In 2008, supply-side economist Arthur Laffer warned not to be too overwhelmed with appreciation when hearing that a millionaire or billionaire had donated a fortune to charity. "You can't raise taxes on the rich," Laffer told TheStreet.com. "These people know how to get around taxes."
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