It has been called the most exclusive club on the planet. When Warren Buffett and Bill Gates launched the Giving Pledge in 2010, they had persuaded 40 billionaires – themselves included – to donate the majority of their assets to good causes. By the spring of 2023, another 200 individuals and couples had signed the pledge. Philanthropy seems to be very much in vogue among the world's wealthiest people.
However, the team at Withers, the only global law firm focused on private clients, notes that their most successful clients are anything but trend-followers. Known for being visionary, driven and exacting in business, they are bringing those same qualities to bear on the question of how to give away the assets they have built up over their lifetimes.
With that in mind, they will have been watching closely when the Patagonia founder Yvon Chouinard donated his business to a specially designed non-profit in 2022. Compared with traditional approaches such as giving to charity or setting up a private foundation, this unusual move has brought to the forefront an extended world of possibilities for philanthropists, says Withers partner and philanthropy lawyer Elizabeth Bawden.
"Yvon Chouinard made it very clear that one of the major reasons he chose this approach is because his goal is to fight climate change, and he felt that the organization that owned Patagonia would have a lot more success in doing that if it had the ability to lobby and engage in political activity," says Elizabeth. "Ten years ago, if a founder said, 'I want to dedicate my business to a good cause, but I also want to be able to do lobbying and political activity', the typical lawyer's response would have been, 'sorry, you have to choose'. What the Patagonia gift has done is raise awareness that, actually, you can have both."
Suddenly people are realizing that maybe their business can stay intact and fund some of these things on a long-term basis – and then looking at what's the best way to accomplish their goals.
The traditional route for a philanthropist with a large asset base is to establish a foundation. Thanks to Paul Newman's philanthropic vision, there is now a narrow path to allow a private foundation to hold 100% of an operating business. While this exception is a great fit for Newman's Own, it isn't a workable option for every business owner. Otherwise, US regulations generally do not allow a private foundation to hold more than 20% of a business that is not related to its charitable purpose.
In one case seen by Withers, the founder of a publicly traded company had left a significant amount of stock to his family foundation – with the result that when he passed, his family had to come up with a strategy to dispose of their stock without overloading the market. A similar issue seems to have arisen for the Subway sandwich chain, which had to be sold following the death of a co-owner.
Such outcomes are all the more regrettable for being preventable, argues Steve Chidester, a partner at Withers who has extensive experience in advising on philanthropy. "A private foundation is not well suited to hold and perpetuate a business beyond the founder's death," he says. "The essence of my work is designing the kind of non-profit organization that is not subject to the rules constraining private foundations, that can continue the business and use its operations or the resulting revenue as part of the charitable cause."
In the Patagonia case, the Chouinard family opted to donate their voting stock to a trust and their common shares to a social welfare organization under Section 501(c)(4) of the Internal Revenue Code. They paid significant taxes on their gift but were able to ensure the business would continue and remain true to their values.
"The benefits are that the gift of common stock will avoid estate tax and commit the non-profit to pursue an environmental cause," explains Steve Chidester. "It's a very viable strategy for the right founder at the right age. But the gift to a social welfare organization should be completed during the donor's lifetime, and not everyone is ready to give up their company."
I feel like we're seeing a lot more people thinking outside the box and not stopping when the traditional answer doesn't work for what they want to accomplish.
Another project that has been watched with great interest is the Chan Zuckerberg Initiative, which describes itself as conducting "a new kind of philanthropy". It is certainly unusual in being a limited liability company that, unlike a charity or private foundation, will not achieve any upfront tax benefits for its founders, who have pledged it 99% of the wealth generated from their Facebook stock.
"What [Mr Zuckerberg] said is, I'm less concerned about the tax consequences if I feel that things are accomplishing good," says Elizabeth Bawden. "And because he's not using a charity, he's not bound by a lot of the restrictions a charity would have."
Both the Patagonia and Chan Zuckerberg approaches have been very much tailored to the specific individuals involved, and their personal priorities. Yet rather than dismissing them as outliers, other innovators seem to have been inspired to consider how they can make their own mark.
"I think it has stirred a lot of creativity in business owners in how they're thinking about these things," comments trusts and estates partner Helen Cheng. "Suddenly people are realizing that maybe their business can stay intact and fund some of these things on a long-term basis – and then looking at what's the best way to accomplish their goals."
A call to a lawyer with experience in designing this kind of charitable entity is a good start. Elizabeth Bawden helped one successful scientist who ultimately decided to sell his company but whose thinking she describes as very much "outside the box" in terms of how to use the proceeds. In that case, the firm helped the client to realize his goal of supporting scientific research through a tax-exempt organization.
Helping family is noble enough, but when a person has a vision for how they can use their wealth for the greater good, it's very inspiring.
Steve Chidester and Helen Cheng are currently assisting with the legacy plans of another client who built a business on innovation. After a number of consultations, the firm has come up with a novel solution that allows the business to keep running, support the person's chosen cause, avoid estate tax and even bring benefit to the business in the long term.
As the Giving Pledge continues to gather signatures, Withers has seen a sharp rise in inquiries from people who are looking for creative ways to make their own impact – a phenomenon Elizabeth Bawden describes as the Patagonia Effect. "I feel like we're seeing a lot more people thinking outside the box and not stopping when the traditional answer doesn't work for what they want to accomplish" she says.
Of course, the pool of people who are willing or able to move this kind of initiative forward is still relatively rare. "It tends to be a fairly unique individual," says Steve Chidester. "First of all, their business is very successful, and their family are already well taken care of. Next, they must be incredibly charitably minded and see giving back to a cause as one of their life's most important remaining missions. Finally, they have to be willing to engage in something that's not simple, because creating and setting the vision for a custom-built, charitable organization for those purposes takes time and careful preparation."
When the situation does arise, however, Helen Cheng says it is an honor to be a part of it. "Helping family is noble enough, but when a person has a vision for how they can use their wealth for the greater good, it's very inspiring."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
