Is the new Zuckerberg fake charity an estate tax avoidance scheme?

by philg

Mark Zuckerberg previously demonstrated an awareness of California family law by waiting until just after Facebook went public to get married. I’m wondering if his new non-charity charity shows a sophisticated approach to estate tax avoidance.

The letter to our daughter works pretty well as comedy, e.g., “Medicine has only been a real science…” (emphasis added). It also works pretty well as a dictionary example of “optimism”, with Zuckerberg imagining that a $1 billion annual budget is going to move the needle (NIH spent $31 billion in 2010, according to Wikipedia, and the drug companies keep telling us that they are spending some of their Irish dough on research). Apparently he and his wife think that the folks behind “Why Most Published Research Findings Are False” can’t waste another $1 billion/year.

The letter is a significant addition to the literature of comparative American victimhood: “Can we truly empower everyone — women, children, underrepresented minorities, immigrants and the unconnected?” (we were talking about this line at the airport and it evoked the question “So which is worse? Having a pussy or not being able to download porn at home?”)

I’m wondering if these small delights are distractions from the main point: working around the estate tax. The non-charity charity is apparently organized as an LLC. Let’s suppose that Baby Max owns shares in this LLC. If she acquires them today, before any Facebook stock or proceeds from selling Facebook stock are transferred in, she hasn’t received anything of value and has no tax liability. The LLC can invest its assets however it wants to, e.g., it could buy shares in an Ireland-based pharma company or fund a startup medical device firm in Singapore or China. If those investments prove more productive than Zuckerberg’s adventure in the Newark public school system, Grown-up Max will own a stake in something worth tens of billions of dollars.

What do readers think? Is this all about doing good or more about avoiding the world’s fourth-highest estate tax rates (actually we are higher than #4 if you add in estate taxes imposed by states)? Can it truly be this simple to say goodbye to $18 billion in federal estate taxes (plus potentially additional state estate taxes, depending on where the happy parents choose to live out their golden years)? (The links below suggest that a “family LLC” can substantially reduce but not entirely eliminate estate tax.)

Related:

  • “Using an LLC for Estate Planning”: “In a family LLC, the parents maintain management of the LLC, with children or grandchildren holding shares in the LLC’s assets, yet not having management or voting rights. … After you have established your family LLC according to your state’s legal process, you can begin transferring assets. … Here’s where the tax benefits really come into play – if you are the acting manager of the LLC, and your children are non-managing members, then the value of units transferred to them can be discounted quite steeply, often up to 40% of their market value. This discount is based on the fact that without management rights, LLC units become less marketable.”
  • “Limited Liability Company – Cutting Edge Estate Planning”

18 thoughts on “Is the new Zuckerberg fake charity an estate tax avoidance scheme?”

  3. The bigger scam is a publicly traded company with a PE ratio > 100:1, and a single stock holder (Mark Z) holding the majority of voting stock.

  5. Of course it is a tax dodge. What other reason would there be? He is free to do whatever charitable work he wants with his own money, and does not need this entity except to dodge taxes.

  7. Sorry, that’s the most misguided assertion I’ve ever heard. Do you for a moment think that Zuckerberg is actually concerned about estate tax? Do any of you understand that the money out of pocket is far more than any tax benefit?

    Look – you give away $100 and you get $35 or whatever tax benefit. But you’re still $65 poorer than if you had just kept the $100 and paid the taxes. I’m always hearing stupid assertions by people with no business background saying “oh, they’ll just take the tax write-off” without the slightest understanding that the write-off is always a fraction of the expense and the net result is a loss.

    You’re dealing with a new generation of super-rich geeks with more money than they’d ever need. Zuckerberg knows that he can use his gobs of cash for the greater good, to effect positive social change, and even giving away 99%, he’ll still have ample money. If you think it’s so self serving, then perhaps you should donate 99% of your money so you can reap all the rewards too!

  9. ted: I think that your comment shows the PR genius of Zuckerberg and Co.! He has created an LLC that he and his immediate family will own. He says that he will move assets into this new for-profit wholly-owned entity that can spend or invest money in any way that a person can. You are now celebrating him for “giving away” assets to this LLC that he controls and that his family, including an heir, own.

    paxtaran: I don’t think that the IKEA founder can be credited with anything like the creativity of Zuckerberg and his PR team. He created an actual charitable foundation, pretty much didn’t tell anyone, and then runs the charity for the benefit of insiders. If you look at guidestar.org you’ll see that he has plenty of company! (too bad you can’t sort by which nonprofits have executives earning more than $1 million per year) Building a standard “family LLC” to get around estate tax and simultaneously convincing Americans that he is a world-class do-gooder is a lot more impressive.

    Actually there is one more angle that I didn’t consider. Suppose that Zuckerberg had said “Facebook will one day go the way of Friendster. Therefore I am selling 99% of my shares.” Let’s assume that would have led other investors to try to sell as well, thus bursting the Facebook valuation bubble. Instead he says “I am going to cure cancer, poverty, and Ellen Pao‘s inability to keep a job. Therefore I have to sell 99% of my Facebook shares to fund this program of do-gooding.” Now any selling by Zuckerberg is not a signal to the market, but just more evidence of his benevolence toward humanity (even as the proceeds of the sale are invested in the S&P 500 and held by an LLC owned by his children).

  11. @Ted: “… then perhaps you should donate 99% of your money so you can reap all the rewards too!”

    Than _every_single_one_of_us_ should do the same and be able to live like the Zuckerberg’s with our remaining 1% income knowing that our kids future is secured.

    I don’t know about you, but with my income, and I’m considered “upper middle class” by the government standard, that remaining 1% of my income won’t buy me enough daily calories to live on.

  12. @ted here is a breakdown for you

    1. decide you want to cash-out billions from your 70:1 P/E stock, to use that cash

    2. realise of how much tax you must pay if you cash-out directly

    3. ideally your incentive is ‘giving’ back to the world but realise donating will cost you if not more at least the same, even if you gave all the stock to your own non-profit (how capital gains tax works?)

    4. since you are an idealist and your incentive is to give back to the world the optimal, how do you maximize the money you can invest, and getting back more for successful investments?

    5. create LLC, transfer stock to it, carefully or not in purpose, plan an announcement at the right timing (make shareholders happy) describing investing as ‘giving to a mission’, media interprets on purpose or by mistake the ‘giving wording’ as donation, gives impression to the world you are donating all your stock

    6. present a press release of cashing-out as a letter, mislead everyone in purpose or by mistake that you are donating, satisfy stakeholders the stock wont go down the river because of the imminent cash

    7. stock goes up at the time of sell, more money for the LLC

    8. take credit for building the internet, hamburgers and saving the planet

    9. colonize mars, create your own country, make your own tax-system

    [singature]
    zHmwaxscXl24usW7XLcul5OynQYlVZvrk+QznjNWdH8y8ZtVLXoiviW02fYYtfjr
    pU0GtLWrSo0opXmJgsLmlA==

    —–BEGIN PUBLIC KEY—–
    MFwwDQYJKoZIhvcNAQEBBQADSwAwSAJBANSrtYbRrdHti1DYkWC6XFCsR7sMALL/
    Log7T2IXhegMM7yIgYGH5tFC1oiZpCKnXc1ym7q7KPoMnhrcE/rkn0cCAwEAAQ==
    —–END PUBLIC KEY—–

  14. Why would anyone believe the junk that’s posted on “theVerge”. Do not post that noise here again pls.

  15. I think Philip hit the nail on the head with his “here’s how I liquidate my position in ridiculously overpriced Facebook stock, before the bubble bursts, without crashing the stock price” theory. The tax issues are just a (highly effective) smokescreen.

  16. They do have some real donations to some educational programs, but most of the money will undoubtedly be a tax free inheritance. More onerous is despite making 1000x more than his employees & using his wealth to drive up property values & drive his employees out of their apartments, he won’t give his employees just 1% of his income, won’t give them any time off, or give them severance packages during the next downturn.

  17. I guess you’re right but I can’t help thinking:
    Even if it’s PR and tax dodge, and even if only a fraction of the money is actually used for charity, I guess it would still be a lot more than anyone here has ever given (even considering the ratio donation/income), so it can do no harm, or am I missing something obvious?

  18. I am not familiar with estate tax in the U.S. but if the article is being technically correct then this is part of an estate tax scheme and I don’t see anything wrong with it. If you got money you got to think how to spend / protect.

    Many other articles which are critical to Zuckerburg on this decision calling it a tax evasion are being technically wrong I don’t even know where to start. They don’t even know the difference in between evasion and avoidance. They are also mixed up with LLC and charitable foundation. – put aside the fact that they don’t even know the difference in between charitable foundations and private foundations. Also LLC has to pay for capital gain unless he donates every single penny to charity he has to pay for the profit for what he didn’t donate to charity. All these, almost half the articles out on the net are wrong.

    Back to my first sentence, what I found it’s phony is his presentation of open letter to his daughter on the FB thing. Wish he didn’t do that then all these were just another normal business decision which anyone would make. Setting up a LLC to protect personal liabilities, to be able to invest on for-profit rather than being limited to non-profit etc. If you think non-profit is the only way to “make the world better” you got to be kidding… I think it is a wise choice not to limit to whether it profits or not.

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