Why use an LLC for charitable gifts rather than a private foundation?
TAX BLOG |
Mark Zuckerberg, the 31-year-old co-founder of Facebook and billionaire, and his spouse, Priscilla Chan, pledged recently to donate 99 percent of their Facebook stock to charity. Instead of immediately funding a private foundation with Facebook stock and beginning to make charitable gifts from the foundation, the couple opted to transfer the Facebook stock to a wholly owned LLC, which is disregarded for tax purposes.
Their decision to use an LLC instead of a private foundation may have gotten you thinking about the benefits of this structure. Why did they go this route? While Zuckerburg and Chan are not our clients and we don’t know the details of their situation, here is our quick assessment of the pros and cons of each approach:
- An LLC can invest in for-profit companies and make political donations. Gifts of appreciated stock can be made directly to charities, with the LLC owners able to utilize the charitable deduction.
- A private foundation must make annual distributions of 5 percent of the average fair market value of the foundation’s investment assets to section 501(c)(3) charities. It is also subject to the self-dealing rules, excise taxes on unrelated business income and IRS oversight.
From an estate tax perspective, Zuckerberg and Chan have not reduced their taxable estates, which could have been accomplished by donating stock to a private foundation. Rather, they have merely shifted assets from one pocket to another. If you, like many other donors, are seeking to reduce your taxable estate and have appreciation on the donated assets occur outside your taxable estate, a private foundation may be a better option.
If you wish to make significant charitable contributions throughout your lifetime or through your estate, don’t simply follow the choices of the trendsetters. Consider the pros and cons of each approach and its alignment with your overall financial goals.