The Tax Scene: Tax planning: Donations and family offices

Few would argue that an investor would be advised to share at least a portion of his good fortune with a good cause.

By LEON HARRIS
taxes good 88 (photo credit: )
taxes good 88
(photo credit: )
Few would argue that an investor would be advised to share at least a portion of his good fortune with a good cause. My dear wife will often give a charitable donation to a doorstep caller if their cause is a charity ("public institution") approved under Section 46 of the Income Tax Ordinance. In this way, we can claim an Israeli tax credit for 35 percent of such donations, up to a little over NIS 2 million (approximately $440,000) a year. Alternatively, my wife can donate an appreciated asset to the Israeli state, an Israeli municipality, the JNF or the JIA, or to any other charity in Israel (it is unclear if the charity can be foreign) and avoid an Israeli capital gains tax liability. This could save us 20% to 49% capital gains tax in Israel. The same strategy may, in certain circumstances, have a similar effect for US tax purposes. Any such asset donation strategy should, however, be fully checked out with advisors in each country. Each country has its own rules for approving supposedly genuine charities. In the US, a donor can get a US tax deduction for a donation to a recognized US "friends of" organization or foundation that can then make an onward donation to a good Israeli cause. In addition, the US-Israel tax treaty allows US persons to claim a US tax deduction for donations to Israeli charities of up to 25% of adjusted gross income from sources in Israel. And an Israeli resident can claim an Israeli tax credit for donations to a US charity of up to 25% of taxable income from US sources. In any event, it is vital for an intelligent investor to keep a good grip on his finances and investments so that he can efficiently plan ahead and arrange personal matters appropriately. In addition, other family members will need to be groomed to take over these important tasks. Hence, the need for a family office. You may prefer to run the family office yourself or you may turn for advice and assistance to a number of interested parties - trust companies, banks and so forth. However, if your wealth exceeds $1 million to $3m. you should also consider a virtual family office consisting of a trusted team - independent investment advisor, private accountant and lawyer. You would consult with your team regularly or periodically to arrive at a coherent, long-term wealth strategy covering: * your business and private expectations * your business and private requirements * your plans to groom younger family members * your plans to transfer wealth to others in your lifetime or via your estate * your tax minimization strategy covering income and estate/gift taxes in all relevant countries. If your team is smart and proactive, their benefit to you should far outweigh their cost. In conclusion, taxes on your investments can be tamed by having an understanding of the basics and a long-term wealth strategy. Aim to be a sensible investor who plans the family finances by reference to your stage and status in life. Tax planning is one ingredient in this. The key requirements are: to have an organized family financial office; to use a tax-efficient investment vehicle(s); to beware of double taxation, especially if you are a US citizen resident in Israel; to beware of gift and estate taxes in countries where you live or hold assets; and to take advice in each country as appropriate. leon.harris@il.ey.com The writer is an International Tax Partner at Ernst & Young Israel