Let the Dogs Take a Bite Out of Your Tax Bill

July 15, 2008

I just read an interesting article in the NY Times, about Leona Helmsley’s $8 billion bequest to be used to the care and welfare of dogs. This is great. Or is it?

First off, this is not technically an $8 billion donation from Leona Helmsley. It is technically a $4.4 billion donation from Leona Helmsley and a $3.6 billion donation from us – the other taxpayers. At some point, the $3.6 billion difference is going to have to be made up – and it isn’t going to be from the deceased.

Another major downside to this is that all of the funds are not required to go toward the “dogs” care and welfare. Current law requires that the Private Foundation disburse at least 5% of its assets annually. The kicker is that within this 5% includes administrative cost – including payments to Trustee’s. Who are these Trustees? Well, to my understanding, any one who is appointed. So, basically the Private Foundation can pay a salary to the individuals that Leona Helmsley (or others) selects.

In the Leona Helmsley case, I must point out that the Foundation must distribute a minimum of $400 million in year one. I find it unlikely that all of this will be paid in salary. My point is that on a smaller scale, individuals can use this strategy to avoid paying death taxes. Lets scale it down. Assume someone leaves $8 million to a Private Foundation. Disbursement requirements are only $400,000 in the first year. A large portion of this can be eaten up with administrative cost if salaries for the Trustees are included. This would leave very little funds for the actual charities that are purportedly supported by the deceased and by us – the other taxpayers required to pay into the system.

Of course, I believe that our taxes are way too high and that we pay for an astronomical amount of bureaucracy and government waste. I do not fault any individual, including Leona Helmsley, for finding a way to legally avoid paying the taxes due. Actually, that is my job, to legally reduce peoples tax bills. My issues lie with our elected officials and why these loopholes exist in the first place.

Personally, I believe the estate tax should be abolished. However, if we are going to have it – we should try to keep a fair playing field.

My suggestions to fix this issue:
1) Charitable Donations deductions to Private Foundations should be limited – both at death and while someone is still living. This is not to say that someone can not donate. They just should not get a full deduction for it. Give it to the actual charity where the good is being done, not another level of administrative overhead.

2) Why should one individual get a break because they are helping a charity that educates people on the historical contributions of the tractor, while another loses 45% of their money because they wanted to make sure their grandchildren and their great grandchildren had a quality education and lifestyle? I think there should be more stringent requirements as to what charities qualify for this deduction. There are far too many charities out there that qualify and only a portion of them actually help causes that can better the world.

3) Private Foundations should have a requirement to spend at least 5% of their assets on actual charity work annually – not including administrative overhead. This was introduced into Congress a few years ago but was axed after the Private Foundations (and their Trustees) whined that it would threaten their perpetual existence. Why should they have a right to exist forever? If they run out of money they just run out of money. Perhaps the Trustees can work to lower some of the administrative cost. If the work they are doing is actually beneficial, perhaps they can boost their chances at perpetual existence by receiving donations. Isn’t this how other charities survive?

Also, as a final note, I want to point out that Leona Helmsley did nothing wrong here – to my knowledge. It was actually great tax planning. As I said before, instructing my clients how to legally save taxes is part of my job. My problem is not with taxpayers who legally take advantage of the laws as they are written, but with the individuals in the Congress and the Senate who jack up taxes on the middle class and then leave loopholes open where select individuals can get around paying the tax. As much as I love dogs, I would rather the money have gone to help poor and disadvantaged children thatn dogs, but that was not my call. If Leona Helmsley liked dogs better than children, that is her business.

Donna Bordeaux, CPA with Calculated Moves

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly, and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux.  They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.