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How The Worlds Richest Make Money Giving It Away And Avoid Tax

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http://www.bloomberg.com/news/2013-09-12/how-wal-mart-s-waltons-maintain-their-billionaire-fortune-taxes.html

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‘Jackie O.’

These trusts are often called “Jackie O.” trusts after Jacqueline Kennedy Onassis, the former First Lady who died in 1994 and whose will called for one. According to IRS data, the Waltons are by far the biggest users of Jackie O. trusts in the U.S.

The money put into these trusts is ostensibly for charity. If the assets appreciate substantially over the years, though, the trusts have another desirable feature: they can pass money tax free to heirs.

A donor locks up assets in these trusts, formally known as charitable lead annuity trusts, or CLATs, for a period of time, say 20 or 30 years. An amount set by the donor is given away each year to charity. Whatever is left at the end goes to a beneficiary, usually the donor’s heirs, without any tax bill.

Treasuries Tie

The type of Jackie O. trust used by the Waltons doesn’t generate a break on income taxes. Instead, the big potential saving is on gift and estate taxes. When a donor sets one up, the IRS assesses how much gift or estate tax is due, based on how much of the trust’s assets will end up benefiting charity and how much will go to heirs. Most donors structure the trusts so that the heirs’ estimated leftover is zero or close to it.

The IRS makes its estimate using a complicated formula tied to the level of U.S. Treasury bond yields during the time when the trust is set up.

If the trust’s investments outperform that benchmark rate, then the extra earnings pass to the designated heirs free of any estate tax. The rate has been hovering near all-time lows since 2009. For trusts set up this month, it’s 1.4 percent.

With a big enough spread between the actual performance and the IRS rate, a Jackie O. trust can theoretically save so much tax that it leaves a family richer than if it hadn’t given a dime to charity.

Alice’s mother, Helen, chose an auspicious time to set up her first four Jackie O. trusts in January 2003. The IRS rate of 3.6 percent was the lowest since 1970, and Treasury yields rose the next month.

An interesting piece about how the owners of Walmart avoid paying inheritance tax, keeping the wealth in the family.

Clearly it prevents other individuals from winning back the wealth as those that have it can preserve it for a long time once it's been accumulated. Although it's amusing that you can give away your money to charity and make a profit on it.

Although from another point of view do these charity donations provide a better return than giving the money to govt to spend? Has anyone looked into what these charities achieve with the vast wealth at their disposal?

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