Mark Zuckerberg's unusual method of charitable giving

Mark Zuckerberg's unusual method of charitable giving
Mark Zuckerberg's unusual method of charitable giving

Mark Zuckerberg is an innovation machine — first in creating and growing Facebook, and now in pledging 99 percent of his wealth to charity. But the unusual structure Zuckerberg created to give away his wealth may shield him from some of the typical requirements of charitable giving.

According to a company statement, Zuckerberg is transferring $45 billion of his Facebook shares to a new limited liability company called the Chan Zuckerberg Initiative. The filing says, "Over the course of their lives, these shares, or the net after-tax proceeds from the sale of such shares, will be used to advance the mission of the Chan Zuckerberg Initiative. Priscilla and Mark will decide together how best to allocate funds."

The company says the LLC will "pursue its mission by funding nonprofit organizations, making private investments and participating in policy debates, in each case with the goal of generating positive impact in areas of great need."

When most billionaires give money to charity, they create a foundation or give directly to a not-for-profit company or charitable trust. Zuckerberg is not doing either — he is pledging to someday turn over shares to a private LLC controlled by him and his wife, Priscilla Chan.

Why is Zuckerberg opting for an LLC?

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He didn't say in his letter or SEC filings, but trust and estate attorneys who specialize in charitable giving structures said the LLC provides Zuckerberg more flexibility and control over his giving. It also allows the 31-year-old budding philanthropist to change his mind about what he wants to fund and how much he wants to give over his lifetime, making the $45 billion number more like a pledge than a gift.

"It's what's known as an unenforceable promise," said William D. Zabel, partner at Schulte Roth & Zabel. "Who's going to enforce it? They can later decide to give away $45 billion or $5 billion, it's up to them."

The LLC also offers other benefits to Zuckerberg and his wife, which blur the lines between charitable giving, profit and political lobbying.

Nonprofits and foundations, to preserve their special tax status, are restricted in the types and levels of lobbying they can fund. They are also prevented from funding political campaigns. Zuckerberg's LLC will be able to do both — at any level and without the usual disclosures required of not-for-profits.

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In the SEC filing and letter, the Zuckerbergs said the LLC will "participate in policy debates."

"We must participate in policy and advocacy to shape debates," they said in their letter to their daughter. "Many institutions are unwilling to do this, but progress must be supported by movements to be sustainable."

Nonprofits are also restricted in the types of investments they can make, usually adhering to investments that are "program related" to their charitable mission. The Zuckerberg LLC will be able to invest for profit in any company it chooses. In its filing, the Zuckerbergs say "any profits from investments in companies will be used to fund additional work to advance the mission."

Finally, unlike foundations that have to file annual reports and financials to the Internal Revenue Service and public detailing their costs, spending, programs and activities, LLCs remain private companies. Although many expect Mark Zuckerberg will voluntarily make public some details of his charitable programs, he can be selective.

"There aren't really any public reporting requirements," Zabel said.

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So why don't more rich people use LLCs for charity?

The main reason is taxes. LLCs aren't normally granted tax-exempt status. And most rich donors want the income tax exemption. But Zuckerberg's adjusted gross income is modest — his official salary last year was $1. And since charitable deductions typically are capped at 20 percent of adjusted gross income, Zuckerberg could never use the full tax deduction he would get for his billions in charitable giving.

The big tax question, which remains unanswered, is whether the Zuckerbergs will be able to exempt their $45 billion from estate taxes and gift taxes. Typically, if a rich donor fully controls the assets in an LLC, it's counted as part of their estate.

But estate tax attorneys say the Zuckerbergs likely may have found a way to exclude it from their estate.

"I'd be surprised if he and his attorneys made this pledge without any tax benefit," said one attorney. "But it would have involved some creative structuring."

In the end, Mark Zuckerberg should be commended for pledging so many of his shares. But he hasn't given 99 percent of his wealth to charity — he has simply made a plan and pledge for a private company with few restrictions and very little disclosure to the public.

Correction: An earlier version of this story did not attribute news of Zuckerberg's donation to a company statement.