I have been frankly amazed how hedge fund and private equity fund managers have been able to dodge the Silver Bullet when it comes to changes in the taxation of carried interest. Just when you start to count them out, they survive to live another day. The deferral of offshore carried interest may gone – IRC Sec 457A – or has it?
Most hedge fund managers live in states with high income tax rates – California, New York, New Jersey and Connecticut. Wealthy hedge fund managers have star appeal now like rock stars, professional athletes and entertainers. All of this makes them the perfect target for any and all litigation. Most state laws and the federal bankruptcy code allow someone to keep the food on their table and clothes on their back but not much more. Sometimes fast women and cars are just too much trouble.
The proliferation of interest in the use of self-settled trusts in Delaware, Nevada, and South Dakota for asset protection purposes may also have some significant income tax benefits for state income tax purposes. With the top marginal bracket up to 10-12 percent in some states, this is important planning. A hedge fund manager adopting this planning can legally avoid state income taxation on the investment income in his fund and protect himself from creditor attack using the same strategy.
Why wouldn’t every principal in a hedge fund or private equity fund that is a limited partner in his or her own fund do this type of planning ? The tax and legal authority from both an income and estate tax planning perspective is sound. Someone needs to be the messenger because chances are your CPA or business attorney haven’t mentioned this.
Operators are waiting to take your call! Before I forget, don’t forget to count your blessings today.