Individuals whose net worth exceeds a few million dollars often have charitable goals. Some, like Bill and Melinda Gates, create foundations to further those goals. Others, like the late Paul Newman, use foundations to receive profits related to a specific endeavor and to ensure distribution to charitable causes. Others, like MacKenzie Scott, Jeff Bezos’ former wife, give outright to charitable groups and organizations. While others, like Warren Buffett, create initiatives (The Giving Pledge) designed to convince billionaires to donate at least half of their fortunes to charity. Those with extreme wealth often look for new and inspired ways to give back.
There’s a new name to add to the list of innovative, charitably minded billionaires, Yvon Chouinard. Mr. Chouinard founded Patagonia, an outdoor apparel company, in 1973. Over the years, the company grew and several published sources now value Patagonia at $3 billion. In a typical Estate Planning move, Mr. Chouinard moved his and his family’s voting shares, comprising 2% of the company, to an entity called “Patagonia Purpose Trust.” Mr. Chouinard created the trust to “protect the company’s values” of preserving nature through business practices. That gives us a hint that Mr. Chouinard wanted something outside the box for his business. He made headlines with the transfer of the nonvoting Patagonia shares representing the other 98% of the company to the Holdfast Collective, an Internal Revenue Code (“Code”) Section 501(c)(4) nonprofit organization. Use of a section 501(c)(4) organization rather than a section 501(c)(3) organization marks a departure from more traditional Estate Planning. Code Section 501(c)(4) defines organizations that qualify as social welfare organizations and allows them to engage in lobbying and certain other political activities tied to their exempt purposes whereas Code Section 501(c)(3) prohibits organizations that qualify thereunder from lobbying or otherwise engaging in political activities.
Many wealthy individuals incorporate charitable planning as part of their estate and tax planning. Mr. Chouinard’s deal, however, goes beyond estate and tax planning. In fact, Mr. Chouinard won’t receive any income tax deductions for this gift because he donated the shares to a section 501(c)(4) nonprofit organization, which makes political contributions, unlike the section 501(c)(3) nonprofit organization, as noted above. Even without the income tax deductions that normally accompany a large charitable donation, Mr. Chouinard avoided the capital gains taxes that he would have owed had he sold the company.
While few Estate Planning practitioners count billionaires as their clients, the transfer of Patagonia’s shares provides valuable lessons to us all. The first and perhaps the most universal lesson: understand your client’s goals and develop a plan that achieves them. Each individual’s unique circumstances should drive the recommendations that you make. We all have the same tools at our disposal; estate planning involves choosing among numerous options to devise a plan tailored to your client’s situation. Classic problems may require creative thinking. The Patagonia story underscores that idea in many ways. Mr. Chouinard and the company have a long history of dedication to the environment through charitable means. The family built the company, was involved in the business, yet didn’t have a clear path to achieve the collective family and company goals.
Undoubtedly, Mr. Chouinard and his advisors considered many options before ultimately settling on donation to a section 501(c)(4) organization, rather than a sale, taking the company public, making a gift to the next generation, or even using a section 501(c)(3) organization. Mr. Chouinard penned an essay published on Patagonia’s website describing their considerations and noting that the family discarded other options because those options involved sacrificing their underlying goals. This further underscores the idea of creative problem-solving to achieve a client’s goals. The obvious solution isn’t always the one that’s right for the family. Consider that had Mr. Chouinard donated the shares to a section 501(c)(3) organization, he would have avoided a massive estate tax bill, but the section 501(c)(3) organization would have restrictions that don’t apply to the Holdfast Collective. He would have sacrificed the family’s goal of continued political activism. Further, had he waited until death to implement the plan, Code Sections 2501(a)(4) and 2055 would have disallowed an estate tax deduction to his estate. It was imperative that Mr. Chouinard undertake the plan during life to have Code Section 2501(a)(6) exempt application of gift tax to the transfer to the Holdfast Collective. The transfer of voting shares to Patagonia Purpose Trust resulted in a gift tax liability of approximately $17.5 million.
For the curious, a quick Google search for “Patagonia” yields a plethora of information regarding implementation of the company’s mission, internal policies, dedication to the environment, and charitable goals. The outdoor apparel company was ahead of its time from inception and represents the next generation of companies, those dedicated to political activism. It’s clear that Mr. Chouinard’s advisors understood his goals and created a plan to achieve those goals, the ultimate homerun for both the Estate Planning practitioner and their client.
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