In December 2015, Facebook CEO Mark Zuckerberg announced he would transfer 99 percent of his Facebook shares—a sum currently valued at $45 billion—to the new Chan Zuckerberg Initiative, a philanthropic endeavor that will be led by Zuckerberg and his wife, Dr. Priscilla Chan.
Minimizing Taxes – Private Foundation Advantages
- A donor of appreciated marketable securities or cash to a foundation receives an income tax deduction for the value of such a gift up to a 20% or 30% limitation, respectively, of his/her adjusted gross income (“AGI”) with a 5-year carryover for any unused deduction. The transferor of such assets to an LLC receives no such deduction.
- When a foundation sells such securities, it does not pay any capital gain taxes on its appreciation whereas when an LLC, as a pass-through entity, sells such securities, the transferor pays the capital gain taxes.
- A foundation pays an excise tax of up to 2% on its net investment income (“NII”) whereas an LLC’s NII is taxable to the transferor (owner of the LLC) at his/her applicable tax rate which is higher.
- Note: While foundations generally offer more favorable tax treatment for donors, there are certain instances in which LLCs provide a better option. For example, when an LLC donates appreciated marketable securities or cash to a public charity, the transferor (owner of the LLC) receives an income tax deduction up to a 30% or 50% limitation, respectively, of his/her AGI, which is higher than the 20% or 30% allowable deduction a donor receives when transferring assets to a foundation.
Maximizing Control and Privacy – LLC Advantages
- The founder of a company who transfers his/her company stocks to an LLC may retain the voting rights and control the disposition of such stocks. In contrast, the donor of such stocks to a foundation must relinquish such rights and control to an independent “special representative.”
- An LLC may choose whether and when it makes charitable donations whereas a foundation must expend an annual minimum of 5% of its assets for charitable purposes.
- An LLC may freely invest in high risk for-profit companies with unknown returns whereas a foundation needs to consider the prudent investor rule, avoid “jeopardizing investments” and investments that may lead to unrelated business income taxation when making investment decisions.
- An LLC has no disclosure requirements whereas a foundation files an annual 990-PF return with the IRS, which is available for public review, to report its balance sheet, grant making and the names and salaries of its officers, directors, managers and top five paid employees.
CTC | myCFO is a brand delivering family office services and investment advisory services through CTC myCFO, LLC, an investment adviser registered with the U.S. Securities and Exchange Commission and a Commodity Trading Adviser registered with the Commodity Futures Trading Commission (“CFTC”), and a member of the National Futures Association (“NFA”); trust, deposit and loan products and services through BMO Harris Bank N.A., a national bank with trust powers; and trust services through BMO Delaware Trust Company, a Delaware limited purpose trust company. Family Office Services are not fiduciary services and are not subject to the Investment Advisors Act of 1940 or the rules promulgated thereunder. The information contained herein should not be construed as personalized investment advice, and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. Private Asset Management magazine is a financial services industry trade publication.