Make a few billion dollars over the course of your career, then set up and fund a charitable foundation to cater to the causes that interest you. That is the classic model of philanthropy used from the days of Rockefeller and Carnegie, to the more recent era of Buffett and Gates. Today's tech billionaires, led by Mark Zuckerberg, are taking a different approach to charitable donations that has people questioning the overall boundaries of philanthropy.
Zuckerberg and his wife, Priscilla Chan, recently announced that they would be giving away 99% of their Facebook shares over the course of their lifetimes. The announcement was made in an unconventional way — through a Facebook post in the form of a letter to their newborn daughter, Maxima. At current valuation, this gift is worth approximately $45 billion — easily eclipsing the largest single philanthropic gift. But is it really a gift?
The money will be used for philanthropic purposes; it is just being done through a different structure. Instead of being used to fund a non-profit foundation that will direct the money as desired, Zuckerberg has set up the Chan Zuckerberg Initiative as a limited liability corporation (LLC) with charitable intent.
The Double Bottom Line
Zuckerberg's approach combines a business and profit element with philanthropic goals, otherwise known as a "double bottom line." Companies that receive investment funds will have to show a financial return as well as a social one. This provides another level of evaluating the effect of a charitable effort that addresses some critics' concerns regarding traditional foundations. Without any good means of assessing the "social return" on investment, charitable foundations can become self-perpetuating entities that lose their way over time. The Zuckerberg approach demands oversight and, by definition, some degree of freshness to keep efforts on track socially and financially.
Critics of the approach simply call the LLC approach a way to produce an investment vehicle under the guise of philanthropy and to retain control. Indeed, donor control is one of the major benefits of the LLC. Private charitable foundations must spend a minimum of 5% of their endowment annually on charitable efforts. The LLC approach allows for greater flexibility in the use of capital and provides a lower disclosure burden — the Zuckerbergs may direct the funds however they wish. This includes political activity as well as for-profit organizations.
Another positive: as an LLC, the Chan Zuckerberg Initiative can replenish itself through profits on the fund's investments. Traditional foundations do not financially recoup anything on grants once the money is given away.
With respect to taxes, the LLC approach offers the benefit of donating appreciated shares to charity instead of selling the stock straightway and incurring capital gains taxes. By donating appreciated shares, the LLC enables a fair-market value deduction of the stock but does not incur any taxes.
What will the money be used for? According to the post, the "initial areas of focus will be personalized learning, curing disease, connecting people, and building strong communities." That is a broad enough goal to allow for wide latitude in investments.
Zuckerberg has pledged to give away no more than $1 billion of his Facebook shares annually over the next three years. Even with a 99% giveaway of their stock, you will hardly find the Zuckerbergs shopping at discount stores. If they chose to execute that giveaway today, the remaining 1% has an approximate value of $450 million.
One potential downside of the LLC approach: with the greater potential rewards of profitability and investment comes greater risk. Without sustainable profit, the LLC will not succeed. The Chan Zuckerberg Initiative could end up being a blueprint for successful charitable organizations of the future, an example for future charitable LLCs to examine and improve upon, or an outright failure. Given Zuckerberg's track record, the former is more likely.
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