A little-known tax rule enacted during the financial crisis is giving fundraisers an extra opportunity this year to scoop up billions — if they are ready to take advantage of it.
The 2008 measure requires hedge-fund managers who earned fees outside of the United States and did not pay taxes on them because the money was deferred and reinvested to repatriate that revenue by the end of this year.
About $100 billion in previously tax-deferred income is likely to be affected, Bloomberg Businessweek estimates. And some fundraisers are already helping hedge-fund managers reduce their tax burden by directing some of that money to philanthropy.
“It’s going to be a big event, and charities who are ready for it have an opportunity to close some major gifts,” says Eileen Heisman, president of the National Philanthropic Trust, which manages donor-advised funds. She says her organization has been planning for the tax deadline for a year.
Fidelity Charitable, the world’s largest holder of donor-advised funds, calls the tax deadline “a tremendous opportunity for high-impact charitable giving.”
To many nonprofits, however, the sunset of the rule, and the one-time-only fundraising opportunity it presents, appear to be a well-kept secrets.
“The people who are going to be taxed know about it,” Ms. Heisman says, but she’s not hearing much chatter among fundraisers.
“It’s possible there’s a lot of activity, and no one wants to talk about it,” she adds. “Maybe they don’t want anyone to know, because they don’t want to split the pie up.”
As the deadline approaches, more hedge-fund managers are feeling a sense of urgency about making plans for their repatriated fees. This year, Ms. Heisman has been working on the issue with about 50 managers or their tax advisers. In 2016, she says, only about 15 managers sought advice from the National Philanthropic Trust on donating their repatriated income.
It might be more than just procrastination that has so many hedge-fund principals only now bringing their money back to the States, Ms. Heisman suggests. Some may have hoped President Trump and the Republican-led Congress would overhaul the tax code, making it possible for them to keep more of their offshore gains. But “if it hasn’t happened by now,” she says, “it’s probably not going to happen this year.”
Ms. Heisman says the hedge-fund managers she’s spoken with thus far are most often looking at two options: direct gifts to charities — usually donor-advised funds or big organizations like hospitals and universities — or charitable lead trusts. In the latter, an asset is set up to generate income for a charity over a specific period of time. When the period ends, the remainder goes to the trust’s beneficiaries. The donor gets a tax benefit for every payout to a nonprofit during the trust’s life span.
Only one client in the past couple years has said anything to planned-giving consultant Brian Sagrestano about taking advantage of the hedge-fund-fees deadline — probably because it affects such a rarified group of donors.
“Charities don’t know about it because honestly they have so few donors who fall into this group,” says Mr. Sagrestano, the chief executive officer of Gift Planning Development in New Hartford, N.Y.
But some large organizations — universities with prominent business schools, for example, or hospitals with Wall Street executives on their boards — already have access to these donors. And hedge funds, though clustered in California, Connecticut, and New York, are scattered across America.
Ms. Heisman and Mr. Sagrestano have some tips for approaching supporters with a possible hedge-fund bounty to share.
First, do careful prospect research, Ms. Heisman says. Determine who in a charity’s circle of supporters and their friends is a principal at a hedge fund, and find out if that fund has offshore interests. Then, get to know the potential donors’ passions.
“It’s one thing to do prospect research,” she says. “It’s another to find out what mission-related work you’re doing that would interest this person.”
Focus on teamwork to land one of these gifts, Ms. Heisman adds: “It’s a combination of a strong planned-giving, major-gift, and prospect-research project.”
Mr. Sagrestano recommends that fundraisers study up on the tax rules that are making this opportunity possible.
“They need to understand it themselves before they try and go out to their donors,” he says. “And they should go out to those donors who potentially qualify and share the opportunity with those it impacts one-on-one.
“But they need to do their homework first,” he adds, “to make sure they’re providing accurate information, and they’re comfortable that they’ve got it right.”
