A promise to give is not a guaranteed charitable gift.
In an open letter to their newborn daughter last December, Facebook CEO Mark Zuckerberg and wife Priscilla Chan announced they will eventually give 99 percent of their Facebook shares during their lives to a variety of important social causes. Over the past several months, commentators have expressed both enthusiasm and concern with the manner in which the couple chose to commit their wealth to advancing these causes.
Here are just a few of the opinions out there on the web:
“Unlike a charitable trust, which is compelled to spend its money on charity, Chan Zuckerberg Initiative, LLC will be able to spend its money on whatever it wants, including private, profit-generating investment.” – Sam Biddle, Gawker, on 12/01/2015
“My reaction to the critics is to get over it. It’s his fortune, he earned it and he can do what he wants with it. Plus, it points to a way that even the far less wealthy among us can achieve some tax savings of our own.” Ray Martin, CBS Moneywatch, on 12/10/2015
“For rich donors, the upside is more levers to pull when trying to change the world. For everyone else, the downside is that these new structures further blur the lines between business and philanthropy and partly circumvent the regulations that have governed charitable giving for decades.” Benjamin Herold, Education Week, on 3/7/2016
Initially, the media used language such as “donate”, “charitable”, “gift”, and “private foundation”, each of which imply in one way or another that the Facebook shares committed by the Zuckerbergs would immediately constitute a charitable deduction to a qualifying tax-exempt organization.Now, the message is clear that the couple’s Chan Zuckerberg Initiative is a pledge to contribute the Facebook stock to a limited liability company (LLC), which the Zuckerbergs will continue to own directly, and will use the LLC – or the proceeds of its sale – to either:
(a) donate to charity,
(b) give to an individual,
(c) invest in a for-profit company, or
(d) use to pay lobbying or other expenditures.
On its face, only option (a) is a qualifying charitable gift by an individual under U.S. tax law. The Zuckerbergs will not receive a charitable deduction for transferring the Facebook shares to the LLC. However, they may receive the benefits of the charitable deduction at some point in the future if the LLC makes a contribution to a charity because the LLC’s expenditures will flow through to the Zuckerbergs personal tax return for tax purposes in the year of the donation.
Pledging cash or property to a charity is a common practice. This means that the pledger intends to perform at a designated time in the future, or on the occurrence of a specified event. As a general rule, charitable pledges are not legally enforceable unless the charity detrimentally relies on the pledge. Usually this means that the charity incurred expenses specifically because of the pledger’s promise to donate, and the pledger knew this and the charity would be irreparably harmed if the pledger did not perform on the pledge. So here, the Zuckerbergs have made a written promise to contribute 99 percent of their Facebook shares to an LLC, that in turn can make charitable donations to a charity or pursue other investments that are not “charitable gifts” in the traditional sense. Who is to say those investments won’t have a positive outcome on the world?
What we do know is that the Chan Zuckerberg Initiative may not be a binding charitable gift under U.S. tax law, but it sure has disrupted – or at least created quite a riveting discussion about – the historical methods of making a charitable impact.
In the words of Laura Arrillaga-Andreesen, who teaches philanthropy at Stanford, to the New York Times: “The beauty of having an LLC in today’s world is No. 1, you have the ability to act and react as nimbly as need be to create change, and you have the ability to invest politically, in the for-profit sector and the nonprofit sector simultaneously.” She further stated, “and the reality is, we are now seeing a blurring of the lines between the sectors in a way that was not even discussed 10 years ago. The way that we are going to solve social problems is by working with multiple different types of investing.”
Only time will tell whether the Chan Zuckerberg Initiative will be successful in achieving its goals, as pledged.