There is a new powerful tool that billionaires can use to give their fortune away and it is called a 501(c)(4). Unlike 501(c)(3), contributions to 501(c)(4) groups are not tax deductible, however, they are not taxed either. This means that billionaires can take advantage of saving hundreds of millions of dollars in estate and gift taxes.
Those who are proponents of C4s argue that billionaires have the opportunity to be philanthropic with their money. Since the beginning of 2010, more than 100 U.S. billionaires signed the Giving Pledge stating they would give at least half of their wealth to charity. However, only a few have gifted enough to actually decrease their fortune. Critics of C4 philanthropy, on the other hand, believe that this opportunity increases the wealthy’s power and gives them too many tax-advantages to influence elected officials.
Now the C4 structure grabbed a lot of attention this past September, when Patagonia’s Chouinard donated 98% of his $3 billion company to an environmental 501(c)(4) group. The organization that engages in political activities will continue to influence our communities long after Chouinard’s lifetime, while he also gets advantages of saving millions in gift and estate taxes.
Due to the long debate over C4 philanthropy’s net benefits to society, advisors believe that billionaires are just beginning to utilize this strategy. However, it is important to know this method is not largely tested. The perceived benefit may not be as important over time. For example, executives of a company may choose to reinvest their profits over handing them over to a C4.
Although C4s do not have as many guidelines, they still have basic rules they must follow. For example, donors are not allowed to take any money back. Also, direct spending on political elections cannot be a C4’s primary purpose. The rule states they are allowed to devote up to 49% of spending to campaigns. Overall, the C4 strategy can be a great tax break for billionaires, however, it is still very new and needs to be tested.
