As if founding Facebook and reaching #16 on Forbes’ ranking of the world’s billionaires wasn’t impressive enough, Mark Zuckerberg – along with his wife, Dr. Priscilla Chan — is out to change the world for generations to come. But not everyone thinks his motives are pure.
Zuckerberg and Chan announced their decision to transfer 99% of their Facebook stock to a new charitable-based venture called the Chan Zuckerberg Initiative. This will do this through a new limited liability company, with the stated purpose to “to join people across the world to advance human potential and promote equality for all children in the next generation.” The stock will be handed over throughout their lifetimes, with no more than one billion dollars in stock gifted or sold annually for the next three years, according to a recent Facebook filing with the SEC. Zuckerberg and Chan write that the value of the stock, presently, is about $45 billion, but that will likely grow over time considering their youth (Zuckerberg is 31; Chan is 30).
Explained: Mark Zuckerberg’s Pledge To Give Away 99% Of Shares
Zuckerberg and Chan believe that they have a “moral responsibility to all children in the next generation.” They point to society’s obligation to help future lives. By explaining their motivations to their newborn daughter, Max, through an open letter for the public to read on Facebook, Zuckerberg and Chan seek to encourage others to follow their charitable lead. Many public figures, like Warren Buffett, Bill and Melinda Gates, and others, quickly applauded the move.
But some questioned Zuckerberg and Chan’s charitable intent or even gone so far as to accuse them of tax evasion. They claim that the tax benefit of donating appreciated assets, like Facebook stock, in a manner that avoids capital gains taxes on the appreciation harms society rather than benefiting it. They also point to the choice to use a limited liability company rather than a charitable foundation as proof of Mark Zuckerberg’s less-than-noble intent.
It’s true that, by transferring assets into an LLC, Zuckerberg and Chan avoid restrictions that apply to charitable foundations, such as how much must be donated to charity, to whom the funds can be donated to, and the mandatory public reporting of financial activity. Because of widespread criticism, Zuckerberg again posted on Facebook, defending the use of an LLC as a way to better advance their stated goals of helping society and future generations, while maintaining the flexibility of being able to donate to political causes and earn profits, which will be invested back into their charitable plan.
And it’s also accurate to point out that if Zuckerberg and Chan chose to donate stock itself to the LLC, rather than first selling the stock and transferring the proceeds, then they might not have to pay capital gains taxes on the sale proceeds when it’s eventually sold. They could also greatly reduce potential estate taxes on their estate down the road, to the extent their assets are ultimately transferred to charities (depending of course on what the estate tax laws are 60 years or so in the future). But, these taxes savings will only arise if they cause the LLC to donate the stock to charity. Unless and until that donation is made, they receive no tax savings.
So, should Zuckerberg and Chan be applauded … or chastised? Are they out to better the world … or trying to minimize taxes for their own selfish benefit?
The truth is that there is nothing wrong in seeking to advance their charitable intent and taking advantage of tax laws along the way. Mark Zuckerberg and Priscilla Chan did not write the tax laws that allow for a deduction. In fact, they have not said that they plan to use the tax laws in this way at all. Right now, the couple has publicly pledged to be charitable with their stock, but the act of transferring it into an LLC does not achieve any tax savings by itself. In fact, Facebook’s SEC filing specifically states that Zuckerberg and Chan may instead sell the stock instead of transferring it. If they choose that route, then they would not receive the very tax deduction that has many people so outraged.
The outrage is misplaced. Mark Zuckerberg earned his billions. He can — and should — do with his money what he wants to. Instead of keeping the money in his family, by setting up trusts for his kids and eventual grandkids, Zuckerberg promises to use 99% of the fruits of his labors to help others. By doing so, he has left himself the option to do it in a manner to increase deductions from his income and minimize or avoid capital gains taxes, and possible estate taxes, but he has not done so yet.
Zuckerberg and Chan should not be made to feel guilty for doing what our country’s tax laws give them and others incentive to do. By allowing specified tax savings, Congress rewards people who are charitable, leaving more money available to be donated to philanthropic causes. Those who argue that Zuckerberg should instead simply keep all of his stock and pay the maximum amount of taxes assume that money paid to the government in taxes will be used in a better and more efficient manner than Zuckerberg and Chan could achieve through individual donations and other charitable pursuits. Why should someone other than Zuckerberg and Chan decide what is the best way to use their own money and assets to benefit others?
William Buffet, Bill Gates, Richard Branson and others have it right. The tax laws encourage them — and you — to be charitable and to take deductions for it. The only difference, of course, is that Mark Zuckerberg and other billionaires have a great deal more money at their disposal to be charitable.
But, everyone can follow their lead and donate money to charitable causes of their choice and to receive tax incentives for doing so. Indeed, there are many legal methods available to encourage people to be charitable with their money, in ways that allow for a variety of tax advantages. For example:
Lifetime Giving — By making a gift of money or assets directly to a qualified charity, the giver is entitled to an immediate charitable deduction from his or her income taxes, capped at 30% or 50% of adjusted gross income (depending on the nature of the asset donated). The downside, of course, is that the giver loses control over the asset once it’s gifted.
Testamentary Transfer — Many people include charities in their wills or trusts, directing that a set amount or percentage of assets be donated after they die. This allows for continued control of the assets throughout lifetime, but no income tax deduction (although there can be estate tax deductions for high net worth individuals).
Charitable Remainder Trusts — These trusts allow the giver or other beneficiaries to receive income for the rest of the giver’s lifetime, with the remaining balance transferring to charity after death. The present value of the estimated remainder interest that passes to charity can be deducted at the time the assets are transferred into the trust, allowing for both control, lifetime income, and an immediate tax deduction (still capped at 30% or 50% of the adjusted gross income). When structured properly — especially for highly-appreciated assets like stock or real estate — this can maximize funds both for the charities and for those who need income, whether they are the giver or others the giver wants to benefit, such as his or her children.
Charitable Lead Trusts — Acting like the inverse of the charitable remainder trusts, these trusts allow for a stream of steady gifts of income to the charities, with the remainder interest passing on to others (usually family members) after the giver passes away. Again, these can serve to maximize immediate income tax deductions and allow people to increase what they pass onto charity. As with charitable remainder trusts, the tax benefits for highly-appreciated assets are ideal because capital gains taxes are avoided.
The various tax laws that apply to these vehicles, as well as to charitable foundations and limited liability companies, can be complex. But they carry similar incentives, encouraging people to maximize gifts to charity with what is, essentially, a matching program by the United States. Those who want to follow the lead of Mark Zuckerberg should work with experienced estate planning and tax attorneys to allow the greatest possible charitable gifts in a manner consistent with their charitable intents and needs, such as control, income, benefiting children or other family members, amount of potential gain if assets are sold, and income and estate tax status.
The various tax laws that apply to these vehicles, as well as to charitable foundations and limited liability companies, can be complex. But they carry similar incentives, encouraging people to maximize gifts to charity with what is, essentially, a matching program by the United States. Those who want to follow the lead of Mark Zuckerberg should work with experienced estate planning and tax attorneys to maximize their charitable plan in a manner consistent with their goals and needs, balancing factors including control, income, benefiting children or other family members, amount of potential gain if assets are sold, and income and estate tax status.
Mark Zuckerberg and Priscilla Chan deserve applause, not scorn. Hopefully others won’t be dissuaded by misguided criticism and will instead choose to follow their example.
Danielle and Andrew Mayoras are co-authors of Trial & Heirs: Famous Fortune Fights! For the latest celebrity and high-profile cases, with tips to protect yourself, your loved ones, and your clients, click here to subscribe to The Trial & Heirs Update. You can “like” them on Facebook and follow them on Twitter and Google+