Charitable giving: Follow Mark Zuckerberg's strategy
Mark Zuckerberg, founder and CEO of Facebook (FB), made a big news splash last week when he announced his intention to donate most of his Facebook stock to charity. To begin this process, he'll transfer his Facebook shares, currently worth about $45 billion, to a limited liability company, or LLC, known as the Chan Zuckerberg Initiative.
This was followed by an immediate outpouring of both accolades and criticism. The critics complain that Zuckerberg's transfer of stock to an LLC isn't a charitable donation and that he'll retain control over those shares.
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.
Indeed, Zuckerberg's use of an LLC is good planning, and it's a simple and sound thing to do. An LLC is simply a pass-through entity, with little or no tax benefits. It may get some small state tax benefits, and some benefit regarding the timing of making estimated tax payments, but that's not the main value derived from using an LLC.
The more significant benefits are legal liability protection and administrative advantages. By using an LLC, Zuckerberg adds a layer of liability protection and also can appoint and remove entity members as his needs require. He can also better account for the various share classes of stock and the overall activity and expenses that are connected with this initiative.
The real tax benefit will come when Zuckerberg directs the LLC to donate its Facebook shares to a charitable organization. That's because many of these shares probably have a cost basis of pennies each, and given Facebook's current value of about $105 per share, that's a huge unrealized capital gain. When donating the shares directly to a charity, he may get a tax deduction for the fair market value of the shares, while his actual cost of those shares is next to nothing.
This way of donating is something any U.S. taxpayer who owns shares of appreciated securities in a taxable account can do. And it's good year-end tax planning to consider doing it now. Here's how.
If you own stocks or mutual funds with large unrealized gains in a taxable account (not in an IRA or other retirement account) and you intend to make a charitable donation, you should consider donating the appreciated shares "in kind," instead of making a cash donation.
That way you can claim a charitable donation deduction of the shares' market value and you will escape having to report the capital gain on the appreciated shares.
This is because of the general rule that the deduction for property donated to charity is equal to the property's fair market value. Where it's a "capital gain" property, the donor doesn't realize the gain.
Using Zuckerberg's situation, let's say he plans to donate 10,000 Facebook shares to a charity this year. They're worth about $1 million. Let's also assume he paid $1 per share for them. If he sold the shares and donated the cash proceeds of $1 million, he would have to come up with additional cash to pay capital gains taxes of approximately $360,000.
Alternatively, he could deduct the taxes owed from the share sale and be left with the net amount of $640,000 to donate to charity. In essence, he would be "donating" $360,000 to federal and state tax collectors and only $640,000 to the charity.
Now, let's assume he directs his LLC to transfer the same Facebook shares to the charity. The charity can then immediately sell the shares and get the $1 million in cash. Zuckerberg doesn't report any capital gain because he didn't sell the shares. The charity also doesn't report a gain because it's a tax-exempt organization.
Zuckerberg can also claim a deduction from his taxable income for the $1 million market value of the shares. Now, the only ones left out are the federal and state governments.
Because most charities have brokerage accounts and readily accept donations of securities, anyone can do this. And it really doesn't matter how much is involved.
Here's something to keep in mind. This doesn't work when you donate shares of stock or a mutual fund that you've owned for less than one year. In that case, the shares would be treated as ordinary income property, and the charitable deduction would be limited to the shares' cost basis.
