NCRP President & CEO Aaron Dorfman reflects on the billionaire trend of donating your company to a foundation or another kind of nonprofit.
With the news last week that Dr. Peter Buck bequeathed his 50 percent stake in Subway to the Peter and Carmen Lucia Buck Foundation, I think it’s safe to say that donating your company to a nonprofit is now a trend.
Last year, we saw Patagonia Founder Yvon Chouinard donate 2 percent of the company to the Patagonia Purpose Trust and 98 percent to the Holdfast Collective, a 501-c-4 nonprofit. Also last year, we saw Barry Seid, an ultra-conservative donor, give his $1.6 billion company to the Marble Freedom Trust, a 501-c-4 nonprofit.
This phenomenon is not entirely new — the Otto Bremer Trust, a private foundation, has owned Bremer Bank for decades — but I do sense that this approach is gaining popularity.
One major driver of this trend seems to be avoiding taxes. By donating their companies to nonprofits, these wealthy individuals avoid virtually all taxes on their fortunes. For some, this is the classic “win-win” scenario, where both donors and non-profits get what they want or need. But with the ultra-wealthy already having an oversized influence in our democracy, is this really where we want philanthropy to go?
And that’s not the only important question we should be asking.
Payout
Private foundations are required to spend 5% of the value of the corpus annually on grants and other qualifying distributions. When all of your assets are illiquid (shares of a privately held corporation), how do you generate enough cash to meet your payout requirement?
Otto Bremer Trust was concerned about this as the value of the Bank skyrocketed in recent years, but they have been able to make it work thus far. Will they be able to meet payout in the future without selling the bank?
Will the Peter and Carmen Lucia Buck Foundation generate enough cash from franchise fees and royalties to meet a payout requirement that will be approximately $280 million annually based on assets of $5.6 billion? Alternatively, it is rumored that a sale of Subway is in the works, which would solve this problem. The foundation would presumably take the proceeds from the sale and invest broadly to generate returns, as other private foundations do.
The Patagonia situation won’t have a payout requirement because neither entity is a private foundation. With the company valued at $3 billion, the payout requirement would have been $150 million annually if Chouinard had donated it to a private foundation. Profits paid to the Holdfast Collective are expected to be $100 million annually. If the Collective gives that entire amount away each year, that is still $50 million short of the $150 million that would have been required to meet payout.
Marble Freedom Trust also won’t have a payout requirement because it is a 501-c-4 nonprofit, not a private foundation.
Compliance with 1969 Tax Reform Act
The 1969 Tax Reform Act prohibits a private foundation from owning more than 20 percent of the voting shares of any one corporation. Otto Bremer Trust met the terms of this rule by converting most of its shares to nonvoting shares. The Trust owns 100 percent of the nonvoting shares and 20 percent of the voting shares of Bremer Bank.
How will the Peter and Carmen Lucia Buck Foundation comply if Subway is not sold?
Holdfast Collective and Marble Freedom Trust won’t have to worry about this because there is no private foundation involved.
Tax Implications
By donating their companies to nonprofits, these donors avoid virtually all taxes on their fortunes. I believe that tax policy should incentivize charitable giving. And giving to nonprofits is better than passing the wealth to heirs. But do we really want wealthy individuals to be able to avoid all taxes on the growth of their assets in this way?
If Peter Buck had chosen to sell his stake or transmit it to his heirs instead of giving it to a foundation (which also happens to employ his heirs), the public revenue from estate and/or capital gains taxes could have netted the public coffers as much as $2 billion. That happens to be almost 3 times what the CDC spends each year on “Emerging and Zoonotic Infectious Diseases.”
That’s why it’s so important that the public scrutinizes the policies and practices of private philanthropy. Philanthropy should be a complement to government spending as a way to serve the common good, not a replacement for it.
Democracy Implications
Holdfast Collective will be fighting Climate Change, an issue that NCRP and our members and partners’ support. The Peter and Carmen Lucia Buck Foundation are big supporters of charter schools. The Marbel Freedom Trust will be moving a conservative agenda broadly, with a strong focus on influencing the judicial system.
Regardless of where they fall on the political spectrum, the wealthy already have too much influence in our democracy. This trend helps them have even more influence. Do we want that?
Aaron Dorfman is President & CEO of the National Committee for Responsive Philanthropy.