Many of our clients are charitably inclined, and incorporate charitable planning into their overall estate planning. This can be as simple as making gifts to charities during life or via specific bequests in a Will. In addition, clients create donor advised funds and family foundations. They also implement charitable remainder trusts and charitable lead trusts – usually for a specific purpose or expected tax benefit (ie, to generate a tax deduction in a year with unusually high income).
Some charitable planning is more esoteric. Paul Newman famously created Newman’s Own, a for-profit food business that is owned by a charity whose objective is “to nourish and transform the lives of children who face adversity.” Warren Buffett created the “Giving Pledge” – “a movement of philanthropists who commit to give the majority of their wealth to charitable causes…”
Recently, Patagonia founder Yvon Chouinard joined this group of wealthy philanthropists with unique planning by giving his Patagonia stock to two nonprofit organizations. Chouinard gave the voting stock of Patagonia (2% overall) to the “Patagonia Purpose Trust,” a trust with a business purpose to protect the company’s mission and values. He gave the non-voting stock (representing 98% of the company’s value) to a new entity – the Holdfast Collective. The Holdfast Collective is structured as a 501(c)(4) organization known as a “social welfare organization,” which is not charitable in nature, but rather is permitted to engage in lobbying and other political activities (in this case, environmental causes and “thriving communities”). Patagonia is valued at approximately $3 billion, so this was a very substantial transfer of wealth.
Some takeaways from Chouinard’s unique planning: First, it is clear that there are not “standard,” “one size fits all,” or cookie-cutter solutions for clients. Families are all different, and their planning has to reflect that and be tailored to the particular client and situation. Chouinard’s plan helps further a main family objective to remain politically active and protect nature.
Second, tax benefits are important. In Chouinard’s plan, he will not receive an income tax charitable deduction for giving the Patagonia shares to the two nonprofits, since technically a business purpose trust and a 501(c)(4) organization are not “charitable” vehicles. Also, Chouinard did trigger a gift tax (estimated at $17.5 million) on the transfer of stock to the business purpose trust. On the other hand, Chouinard does not owe gift tax on the transfer to Holdfast Collective (the 501(c)(4) organization). He avoided the capital gains tax that would be triggered if he sold the company. And he removed the value of the Patagonia stock from his estate, saving an estimated $1.2 billion of estate tax (interestingly, a death transfer to a 501(c)(4) organization is subject to estate tax but a transfer during life is not subject to gift tax).
Third, many clients care about “legacy planning” as much as they do about tax planning. Advisors can do a better job covering this topic with clients. We generally are focused on trust structures, fiduciary choices, income and estate taxes. But we also should ask clients how they would like to implement planning with respect to family legacy, which can include letters of wishes, family-based charitable giving, and/or a “family purpose trust” established to ensure that funds are available for family legacy purposes. Yvon Chouinard’s “outside the box” planning with Patagonia underscores the importance of this interesting issue.