Entrepreneurs who strike it rich through hard work and the success of their companies often feel an obligation to give back to their communities. And depending on the scale of their wealth, they may also donate to important world causes where their money can make a big difference, such as eradication of poverty and disease. But many times their giving isn't as straightforward as it seems.
And so it is that Mark Zuckerberg on Tuesday announced that he and his wife Priscilla Chan plan to donate 99 percent of their wealth during their lifetimes.
The size of the gift--estimated at $44 billion, roughly the present net worth of Zuckerberg's ownership in Facebook stock, minus 1 percent--is certainly staggering. And timed with the birth of the couple's daughter Max on the same day, the creation of the foundation certainly indicates a nod to future generations and posterity.
Yet the gift is one that's likely to keep on giving, particularly to the Zuckerbergs. Depending on how they structure their donations, it will enable them to write off millions of dollars on their annual tax bills, potentially for the rest of their lives. And should Facebook's stock tank in the future, it will also give them a vehicle to deduct losses in a big way. Further, while the intentions of the gifting are entirely laudable, the plan may not be legally binding, so it might not materialize.
In fact, Zuckerberg's charitable foundation plan is an example of how entrepreneurs can continue to benefit from the successful companies they've built, legal and tax experts say.
"As phenomenal as the generosity the Zuckerbergs are showing is, it comes against the background of the remarkably generous tax treatment he has gotten for the wealth he has earned," says Brian Galle, a professor of law at Georgetown University and a specialist in tax issues.
The Zuckerbergs will create a foundation called the Chan Zuckerberg Initiative LLC, reportedly incorporated on November 24. It's not clear what charities they will fund. But if the couple's past giving is any indication of the future, education and health care charities will be top priorities. In 2010, for example, the couple donated $100 million to the city of Newark, New Jersey, to improve charter schools. In 2014, the couple also donated $25 million to the CDC to help combat the Ebola virus. And they've given locally: a $75 million gift to San Francisco General Hospital in early 2015. (The Zuckerbergs' open letter to their daughter also suggests health care and education will be at least two of their goals.)
Yet the Zuckerbergs plan to start out with a very qualified big bang. In an SEC filing, Facebook has said Zuckerberg will begin by gifting no more than $1 billion in stock annually for the next three years, and that he "intends to retain his majority voting position in our stock for the foreseeable future."
It's also unclear, moreover, how much the foundation will pay out to various charities and causes. By law, many non-profit foundations would be required to distribute at least 5 percent of assets annually, according to the Council on Foundations. An LLC, however, is free of this requirement, says John Lieberman, managing director of accounting firm Perelson Weiner in New York.
Meanwhile, foundations set up by wealthy entrepreneurs in the past may indicate further snags for the newly minted Zuckerberg foundation. Prominent foundations, such as ones set up by heirs to Henry Ford and by David Packard, have extensive conditions put on them by their entrepreneurial benefactors that significantly constrain their giving, says Galle. While the Chan Zuckerberg Initiative is set up as an LLC, which will reportedly give it more flexibility in its giving, it's unknown if it will become hobbled by restraints similar to those of older foundations. (One way around this would be to stipulate, as Bill and Melinda Gates have, that the bulk of their wealth should be given away within 50 years of their death, tax experts say.)
There are also legal limits that the foundation will run up against, says Galle. Foundations may not own more than 20 percent of the shares of any one company, which is an IRS law that prevents such foundations from continuing to exercise control of companies whose shares are being gifted away. And since Zuckerberg owns about 30 percent of Facebook currently, that will mean his foundation will have to diversify its holdings of Facebook stock, or potentially create yet another foundation, though with different owners, to accommodate the rest of the stock.
In the meantime, the Zuckerbergs could enjoy large tax benefits from their donations. They may deduct potentially up to 30 percent of their annual income against their foundation's disbursements to charities, and they are likely to benefit from what's known as a carry-forward into subsequent years for amounts they can't deduct in a given year, Lieberman says.
There are also some questions about the timing of the Zuckerbergs' gifting. At least one academic report suggests chief executives tend to make significant stock gifts following a run-up in share prices. And given the current frothy environment around tech stocks, where Facebook's own stock is at a near-historic high of $107 a share as of Wednesday afternoon, the timing makes sense. "The gift date itself on average represents a turning point in the stock's trajectory, with company prices moving lower in the months after a gift is made," David Yermack, a professor of finance at the NYU Stern School of Business, wrote in a 2008 article in the Journal of Financial Economics.
So if Facebook's stock plummets after it's gifted to the Zuckerbergs' new foundation, the Zuckerbergs still get the full deduction value of the shares prior to the price decrease, tax experts say.
All in all, the creation of the foundation seems like a well-timed arrangement for the Zuckerbergs, even as its exact contours remain opaque. (Facebook declined to comment on the record for this story, through a spokeswoman.)
"I would not say, or join the chorus, that [Mark Zuckerberg] has made a $45 billion gift," says Roger Colinvaux, director of the Law and Public Policy program at Catholic University. "It remains to be seen how the money is used."
Corrections and amplifications: an earlier version of this article incorrectly stated the amount of funds that a non-profit foundation must distribute annually. That amount is 5 percent of assets.