Some interesting, and seemingly simple, mechanics are pointed out in this short article on how the top hedge fund managers shelter their income from the tax man.
Could we create a similar vehicle for Kindergarten teachers (aka the average man and woman on the street)?
Until recently, many fund managers would defer a portion of their fees in a Cayman Islands corporation, which would act as the equivalent of a titanic tax-deferred retirement account. Congress closed that loophole in 2009, although some investments parked offshore will not be deemed repatriated (and will not be taxed) until 2017. To replace the Cayman strategy, many top hedge fund managers have entered the business of reinsurance, using Bermuda-based reinsurance companies as a capital base for investment in their hedge funds. Insurance companies must hold capital in reserve, and there is nothing to stop an insurance company from holding a huge reserve and investing that capital in a hedge fund. By stapling a small reinsurance business onto billions of dollars of hedge fund capital, any profits can be indefinitely deferred from tax offshore. Better yet, when the fund manager sells an interest in the Bermuda company, the gain may be taxed at the lower long-term capital gains rates.