How To Save Money By Giving It Away

AS U.S. incomes--and the taxes paid on them--have rapidly increased, so have the ways in which embattled taxpayers hold down the Government's take. Every businessman knows about such old standbys as the farm that runs at a tax-deductible loss, the "business" expense for a yacht, a car, a trip, even a country-club membership. But comparatively few are aware of another way of saving by the wise use of trusts and foundations, which can be set up for either charity or personal projects, and often reward the taxpayer with huge savings. Until recently only taxpayers in the 80% tax bracket ($500,000 or more annual taxable income on a joint return) took full advantage of trusts. Now, thousands upon thousands of smaller taxpayers in the 22% ($10,000 annually) and up brackets are learning that they, too, can reap impressive savings. And the number is growing so fast that Congress is currently investigating the whole business of tax deductions to see whether the laws should be tightened.

Starting with a basic provision in the tax law of 1954, which allows any taxpayer to donate up to 30% of his income to certain charities and count the gift as a tax deduction, smart tax lawyers have refined an endless series of methods to help clients reduce tax payments, or in some cases even make money. Texas oilmen and other mineral producers can donate part of their future production to charity, deduct both the expected income and the total value of the gift (since reserves are also being depleted) from their taxes. This "double deduction'' enables a Texas oilman with a taxable income of $100,000 to give away $30,000 annually while keeping $43,900 of his income after taxes. His net income if he gave nothing away: only $32,680.

There are dozens of other perfectly legal ways to save money by giving it away. One of the fastest growing is the short-term or temporary trust for both charitable and personal use. Theoretically, upper-bracket taxpayers can use it to cut their taxes from 87% to as little as 20%; it also works effectively for people with incomes as small as $10,000 annually. The wise taxpayer merely turns over part of his investments with their income to his child for his education or to an aged relative, for support for a minimum of ten years (and one day) or the lifetime of the beneficiary, whichever is shorter. While the trust beneficiary must pay normal income taxes on the trust income, his tax bracket is generally much lower than that of the donor, in effect drastically reducing the family's overall tax. One San Francisco financier cut the taxes on a big slice of his income from 50% to 20% by setting up nine separate trusts for the future education of his three children, reports that the savings "are so fantastic I don't even want to talk about them."

Temporary trusts can also be used to cut taxes by giving money to charity, are especially valuable for people with fluctuating incomes who want to lower their tax bracket in good years, but regain the funds at a later date. The taxpayer can set up a trust for a church, educational organization or hospital for as short a period as two years, deduct the income from his return, then take back both his securities and the income at the end of the trust period. The benefits are so big that organizations have been formed in Cleveland, New York, Chicago and San Francisco for the specific purpose of helping taxpayers save money. The San Francisco Foundation alone held 36 trusts last year with a book value of well over $1,000,000, issued grants totaling $268,628 to charities.

Businessmen are also learning to use trusts and foundations to reduce the standard 25% capital-gains tax on the sale of securities or property. Stockholders who want to diversify long-term holdings but hesitate because of heavy capital-gains taxes can donate the stock to a tax-free trust on condition that it will be sold and reinvested with the income going to the donor for life.

Actually, there is no limit to the uses of trusts and charitable donations to cut taxes. One Chicago executive in the $100.000 bracket, who wanted to spread his tax credit over a period of years, donated his $25,000 yacht to a university in two sections, half one year, half the next, got a $12,500 deduction each year. But tax lawyers warn that anyone who hopes to save money by giving it away had better read all the fine print in the law since the Internal Revenue Service rates each scheme on its individual merits.

While the tax loss to the U.S. Government is still comparatively small, Congress fears that the idea may soon get out of hand. But though a few obviously unintended benefits may be knocked out, it will be difficult to tighten the tax laws much without seriously cutting the flow of funds to charities. The great problem for Congress: taxes have reached the point where it is worth almost any taxpayer's time and trouble to avoid the full weight of the law.

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