by
Senior Vice President of Philanthropic Services
by
Senior Director of Planning

In this Wealth Planning Update:

  • In early December, Facebook CEO Mark Zuckerberg and his wife, Dr. Priscilla Chan, pledged to give a large percentage of their fortune to help solve global problems.
  • They have chosen to set up a Limited Liability Company (LLC) to achieve their objectives as opposed to a private foundation, due to the greater control and flexibility the LLC structure offers.
  • While the LLC structure meets their specific needs, it may not be as suitable for individuals who rely on charitable deductions as part of their overall wealth plan or who have different goals.
  • We recommend that you discuss your individual situation with a philanthropic specialist to determine a strategy that is most appropriate for your needs.

In early December 2015, Facebook founder and CEO Mark Zuckerberg and his wife, Dr. Priscilla Chan, pledged to give away 99 percent of their Facebook shares, worth an estimated $45 billion. Their stated objective in making this pledge is to help solve the world’s problems, specifically promoting equality in areas such as health, education, scientific research, and energy. Their philanthropic goals also include promoting “personalized learning, curing disease, connecting people, and building strong communities.”

While somewhat controversial, the way in which the couple has chosen to gift these assets, through a Limited Liability Company (LLC) as opposed to a traditional charitable foundation, appears to be an astute planning move that offers them a number of advantages based on their specific needs.

Why create an LLC as opposed to a private foundation?

The primary reasons for choosing to establish an LLC as opposed to a private foundation are control and flexibility. The benefits of an LLC are as follows:

  • Less restrictive rules: LLCs are not subject to the federal regulations governing charitable entities, which include:
    - Prohibitions on self-dealing, excess business holdings, and jeopardizing investments, all of which limit investment freedom—in the Chan Zuckerberg Initiative’s case, the ability to hold Facebook shares.
    - Limitations on taxable expenditures, including on lobbying and other political activities.
    - A required annual payout of five percent of assets.
  • Anonymity: All of the activities undertaken by private foundations, including contributions and grants, are a matter of public record, whereas those of an LLC may avoid a similar degree of transparency. It is thought to be for this reason that other wealthy individuals, such as Laurene Powell Jobs, widow of Steve Jobs, and eBay founder Pierre Omidyar, established LLCs as part of their philanthropic activities.
  • Tax advantages: The LLC format allows assets to be moved in and out of the entity without tax consequences.
  • Flexibility: It is easier to dissolve the LLC should the founder or family objectives change.

Tax considerations associated with LLCs

As with any gifting strategy, there are potential benefits and drawbacks associated with LLCs. Tax benefits are associated direct gifts from LLCs to charitable organizations, resulting in:

  • An income tax deduction of the full market value of gifted shares.
  • Avoidance of taxes due on any capital gains

These tax advantages may be appealing to ultra-high-net-worth investors because they are unlikely to be able to deduct the full amount of their planned charitable contributions. The tax code limits deductions to public charities to a percentage of Annual Gross Income (AGI). For cash contributions, the allowable deduction is 50 percent of AGI, and for appreciated publicly traded securities the deduction is 30 percent of AGI, with 5-year carryforward.

Tax drawbacks for LLCs—the price that individuals pay for the anonymity and flexibility offered by these entities—include: 

  • No tax deduction when assets are transferred into the LLC, since these LLCs are not considered charitable organizations.
  • The LLC is a flow-through entity, meaning that any gains or losses inside the LLC will be taxable to the LLC’s shareholders.

Are other gifting strategies still relevant?

The high-profile decision by Mr. Zuckerberg and Dr. Chan to establish an LLC rather than a private foundation has highlighted the potential benefits of this type of gifting structure. As with any gifting strategy, however, whether an LLC is appropriate will depend on an individual’s specific circumstances and goals. In the example of the Chan Zuckerberg Initiative, LLC, Mr. Zuckerberg highlights these benefits on the LLC’s Facebook page: 

“The Chan Zuckerberg Initiative is structured as an LLC rather than a traditional foundation. This enables us to pursue our mission by funding non-profit organizations, making private investments and participating in policy debates -- in each case with the goal of generating a positive impact in areas of great need. Any net profits from investments will also be used to advance this mission.”

Clearly, an LLC is the best structure for achieving these types of objectives in this specific case, and it may be appropriate for other wealthy individuals who want similar control and flexibility and for whom deductions are not as important. However, if charitable tax deductions are a key part of your tax-planning strategy, or you have older children who you want to involve in a gifting strategy to reinforce family values, a private foundation or donor advised fund may prove a better option. 

To determine the most appropriate charitable gifting strategy to meet your philanthropic goals and one best suited to your tax situation and desired level of involvement, we recommend that you ask your relationship manager to introduce you to either a Philanthropic or a Wealth Planning specialist.