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Integrating Charitable Giving Into Your Succession Plan With Purpose Trusts

October 27, 2022 By wrlaw

In recent years, a growing list of entrepreneurs and business owners have been using their resources to effect social change through causes they support. Big names in business, such as Yvon Chouinard of Patagonia, Barre Seid of Tripp Lite, and others have successfully utilized succession planning to achieve their goals, and it’s something you can do as well with the right planning partner.

The Patagonia Route

Chouinard’s route, even in the light of many ultra-wealthy entrepreneurs subscribing to Buffett/Gates’ Giving Pledge (which you’ve likely heard of), is unique. The founder, his wife, and their two children irrevocably transferred company ownership into two different entities.

The voting stock was assigned to a purpose trust, reportedly incurring over $17 million in gift taxes. All of the nonvoting stock, representing 98% of the company value, was transferred to a nonprofit organization, Holdfast Collective. The nonprofit is funded by an annual dividend paid from the company earnings after reinvestment, which is estimated to be over $100 million. As a nonprofit organized under Section 501(c)(4), the entity must support the common good, civic betterment, and general welfare of communities.

Their goal in transferring the company in this manner was to both protect Patagonia’s employees and also make sure ownership would uphold company values moving forward.

Purpose Trusts And Their Usefulness In Succession Planning

Purpose Trusts are non-charitable trusts with no beneficiaries – they are designed to benefit a specific purpose, as opposed to most revocable trusts, where they are structured to benefit a person or group of people. As defined in Section 409 of the Uniform Trust Code, the trust’s purpose is selected by the trustee, and can have a term of up to 21 years.

Patagonia’s structure, the Patagonia Purpose Trust, now owns 100% of the company’s voting stock (which makes up only 2% of the company value). In this case, the gift of voting stock from the Chouinard family to the trust was taxable, but the tax only applied to this small percentage of the total company value.

Structuring the company transfer this way allowed the family to maintain control of the company by selecting individuals or committees to manage the company. Alternatively, they can elect to have existing managers run the company with trustee approval.

Purpose trusts can be an effective way to provide benefits to a family over generations while avoiding unnecessary taxes, control disputes, or many other obstacles for a business facing a succession planning situation.

In Patagonia’s situation, the family saved an estimated $700 million in taxes from 50 years of appreciation in the company. Thanks to the Protecting Americans From Tax Hikes Act of 2015, the transfer of nonvoting stock to the Holdfast Collective is also exempt from federal gift tax.

An Experienced Team Of Advisors Is Critical

While not every business owner is interested in giving away their company, the magic of succession planning is the ability to customize solutions. Every business owner has the power to design a plan for the future of their company, no matter the size or annual revenue.

If you are exploring succession planning options for your organization, having the right team of experts on your side is critical. Your attorneys, financial advisors, accountants and family are all important pieces of crafting a strategy that fits your business, estate planning, charitable and/or social goals.

The team at Wilson Ratledge has decades of experience helping business owners and entrepreneurs structure their succession plans to protect their legacy and dreams. Contact our team today to schedule a consultation.

Filed Under: Estates and Trusts

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