Many wealthy families set up a charitable vehicle to carry out their philanthropic legacy.
Often, these families choose the private foundation as their vehicle of choice.
For instance, the Gates Family, Rockefeller Family and other billionaire families created a private foundation to carry out their philanthropic endeavors.
Even so, the Metaverse leaders deviated from the status quo and chose a different vehicle.
Instead, the Zuckerbergs created a Charitable LLC.
Here’s (most likely) why –
1. PRIVACY
First, private foundation tax returns are subject to public disclosure.
Anyone can review these returns on the IRS website.
LLC returns, on the other hand, are not public information.
Ironically, the Zuckerberg’s opted for privacy.
2. PRIVATE BENEFIT
Second, private foundations cannot provide any private benefits to founders, Directors or any other disqualified persons.
In fact, the IRS’ position on private benefit is quite direct:
A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.
On the contrary, an LLC is allowed to enhance the pockets of its members (unless its operating agreement states otherwise).
3. POLITICAL ACTIVITY
Third, private foundations cannot engage in ANY political activity.
However, certain LLCs can.
According to the Federal Election Commission:
If an LLC is considered a corporation, it is generally prohibited from making contributions to political committees, although it is permitted to establish a separate segregated fund (SSF). If an LLC is considered a partnership, it is permitted to make contributions to political committees, but it is subject to the rules for partnerships.
If a single member LLC does not elect corporate tax treatment, it may make contributions; the contributions will be attributed to the single member, not the LLC.
4. GIFTING
Ownership implies that an individual can receive private benefits from the organization.
Per our previous point about private benefit, tax-exempt organizations cannot have owners.
This is NOT true for LLCs.
In fact, not only can LLCs have owners, the owner of an LLC can pass the business onto their children.
One of the most tax efficient ways to pass an LLC onto the next generation is through gifting.
Here’s how it works:
- Work with an attorney and licensed tax professional to confirm the operating agreement and tax code permits the LLC to gift interest to a family member.
- Every year, gift a portion of the LLC that is below the basic exclusion amount.
- Maintain control of the LLC by designating the beneficiaries as Limited Partners of the LLC.
- Update estate planning documents to ensure the LLC is property transferred to beneficiaries.
The gifted portion at time of death could permit a discounted value of the business at death, resulting in a lower taxable estate amount.
And, annually gifting below the basic exclusion frees up more of the exclusion to reduce estate tax.
Billionaires, including Donald Trump, have utilized this tax strategy.
Would you be surprised if this tax strategy motivated the Zuckerbergs to create a Charitable LLC?
5. NO REQUIRED MINIMUM DISTRIBUTION
Fifth, private foundations must distribute approximately 5% of their assets every year (with adjustments) towards a charitable purpose.
This is to prevent foundations from hoarding assets needed by the charitable sector.
LLCs do not have a charitable distribution requirement.
6. Tax Deduction
Finally, donations to Private Foundations are tax deductible.
Donations to LLCs are not.
BUT, stock donations to private foundations are limited to 20% of adjusted gross income.
If an LLC receives stock and then donates it to a public charity, the charitable deduction that passes onto each LLC member could be greater than the deduction for a private foundation donation.
It all comes down to tax strategy.
CONCLUSION
Although these are all speculations, the Zuckerbergs had legitimate reasons to create a Charitable LLC.
The Zuckerbergs are not the first to opt for this charitable vehicle and they will not be the last.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, investment or accounting advice. This information is not endorsed by a financial institution. You should consult your own tax, legal and accounting advisers before engaging in any transaction.
