Planning with Private Derivative Contracts

In this edition of our Tax Spot, we delve into the intricate world of private derivative contracts, specifically focusing on income swaps, as a strategy for income and wealth transference.  These contracts allow for the tax-efficient exchange of wealth and income between parties and often result in minimal tax implications.  

An income swap is a derivative through which two parties exchange the cash flows or liabilities from two different financial instruments. Most swaps involve cash flows based on a notional principal amount such as a loan or bond, although the instrument can be anything. In a private swap agreement, the taxpayer’s business can serve as the reference asset for the swap agreement.  Usually, the principal does not change hands.

Private derivative contracts can utilize sophisticated charitable tax planning which provides an important tax benefit of avoiding Unrelated Business Taxable Income (UBTI).

In the current environment, it is becoming harder and harder to efficiently transfer wealth and income and reduce taxation. This is a brief introduction to a new method that UHNI should consider in their income and estate tax planning.

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