A growing worry for charities: Tax havens for the rich

A spotlight that has been thrown on how many of the rich and powerful shield their wealth is also intensifying a fear among philanthropy experts: That the tax havens being used by the wealthy will increasingly siphon money away from charitable causes.

Wealthy Americans have long sought to use charitable contributions to reduce their tax burdens. But the “Pandora Papers” report, issued Sunday by the International Consortium of Investigative Journalists, revealed how world leaders, billionaires and others have stashed trillions of dollars out of the reach of governments by using shell companies and offshore accounts, which are considered legal.

One maneuver described in the report, a “dynasty trust," can exist in perpetuity in states like South Dakota. Using these trusts, Americans can legally shield themselves from estate and other taxes — and thereby remove a major incentive for charitable giving.

When the wealth of an American individual or couple exceeds a threshold — $11.7 million or $23.4 million, respectively — each dollar value above that level, once bequeathed, is subject to a federal estate tax of up to 40% for each generation.

But a carefully crafted dynasty trust helps succeeding generations avoid those taxes. And the longer the trusts last, the longer the user can avoid taxes and the longer he or she may lack a financial incentive to donate to a charity.

Experts note some Americans are also legally able to avoid state income taxes on revenue generated by their assets by setting up trusts in states that don’t levy income taxes. One of them is South Dakota, which also doesn’t have its own estate, capital gains or inheritance tax, thereby making it an especially attractive destination to park wealth.

“There’s every reason to think that the ultimate effect of...