A short while back, you might have read the headlines about Yvon Chouinard, a reluctant billionaire and founder of Patagonia, giving away his 3 billion dollar company. Rather than sell it off or give it to his children, he transferred 98% of the company to a newly formed 501(c)(4) organization, Holdfast Collective. “We are going to give away the maximum amount of money to people actively working on saving this planet,” said Chouinard. It was quite a bold and generous move. News outlets around the world captured the story. By transferring his company’s ownership to Holdfast Collective, Chouinard ensured that Patagonia’s profits, estimated to be around $100 million annually, would go toward “fighting the environmental crisis and defending nature” – a cause near and dear to his heart.
There’s another less altruistic side to this story you’d be forgiven for not knowing. Chouinard used a remarkable tool to preserve family control for future generations, minimize his ongoing tax liability, and protect philanthropic privacy.
Introduction to the 501(c)(4)
Meet the 501(c)(4)—the little-known Swiss army knife cousin to your standard 501(c)(3) entity. Contributions to C4s (as they are known) are not tax deductible, so they don’t get much love. However, for cases where we run into charitable deduction income cap limits, have illiquid assets that exceed the lifetime gift tax exemption, or have clients who want to bolster philanthropy with political advocacy, donating to a C4 is an attractive strategy.
Whether you’re a founder, operator, or generational owner, “heavy is the head that wears the crown,” as Shakespeare wrote. Walking the tightrope to balance family, employee, and business needs while managing IRS regulations can be a difficult trade-off. Getting something like heir liquidity often involves giving up business control (usually clipped significantly by taxes).
The c4 has become an increasingly helpful vehicle for philanthropy beyond charitable donations to include community organizing and political advocacy. The Internal Revenue Service (IRS) has recognized it as a non-profit that promotes social welfare. While contributions to 501(c)(4) organizations are not tax-deductible, these entities enjoy tax-exempt status on their income, and our firm can help.
Flexibility and Control
Transferring assets to a 501(c)(4) offers families control without the burden of those dreaded federal gift taxes, an appealing perk for estate planning. Unlike private foundations, these entities aren’t restricted by excess business holdings rules, no 5% minimum distribution, or 1.39% investment income tax. So, if you’re a business founder, you don’t have to retire to the beach just yet. You can stay in the game, keep steering your company, and make sure the profits are doing good in the world, whether for social causes or political goals. It’s like having your cake, eating it, and sharing a piece to make the world better, too!
Political Influence and Privacy
Regarding political influence, 501(c)(4) organizations are like the secret agents of the charity world. They can lobby and participate in some partisan activities, provided these aren’t their primary focus. This gives donors a powerful tool to support specific candidates and legislative causes, all while avoiding Schedule B requirements. In addition, these organizations are not required to disclose their donors, offering privacy unavailable to other charities. Ever wonder where the term “dark money” came from? Look no further.
Tax Advantages
Did we mention the tax advantages? Well, it’s worth mentioning them again. 501(c)(4) organizations can engage in a wider range of activities than 501(c)(3) charities. While you don’t get a tax deduction for your donation, you can avoid capital gains and estate transfer taxes. In Chouinard’s case, this amounted to somewhere between $700-800 million on the $3 billion low-basis donation.
You don’t have a place in the Hamptons?
Let’s be honest for a second. You probably won’t be flying your private jet to the Hamptons for a weekend of champagne and caviar. It’s a small club, and as comedian George Carlin once said, “You ain’t in it.”
Still, Hill Island Financial provides alternatives like Donor-Advised Funds, Family Foundations, and super PACs for those with $2+ million in investable assets. These options deliver similar benefits regarding tax advantages, privacy, and political impact.
At Hill Island Financial, we prioritize personalized financial strategies, focusing on relationships over transactions. Our experienced advisors help you navigate complex wealth management issues, offering custom solutions to maximize charitable impact, influence political processes, or secure your legacy. Contact us today to start your journey towards a secure and impactful financial future.
