By Alicia Denton, CFP® and Mallon FitzPatrick, CFP®
You may have heard about Patagonia’s September giveaway…and we’re not referring to deep discounts on outdoor apparel! Yvon Chouinard, the founder of the company, recently announced a transfer of his company’s shares to two new entities. Patagonia is valued at approximately $3 billion with around $100 million in annual profits. These transactions avoided paying an estimated $700 million in capital gains tax if the company were sold, and an estimated $1 billion of gift or estate taxes if the shares were given to or inherited by heirs during Yvon’s lifetime or death. The mechanics of the transfers are somewhat unique and achieved multiple estate planning objectives.
Many founders pass their company to the next generation however, the Chouinard family was not interested in running the day-to-day business operations of Patagonia after their father retired. Yvon Chouinard likely considered various business succession options: selling the company to another buyer privately, taking the company public, or donating the Patagonia stock to a private foundation. Ultimately, he chose to create two new entities– A purpose trust (Patagonia Purpose Trust) and a social welfare organization (The Holdfast Collective).
A purpose trust is established for a noncharitable cause and is typically formed for the maintenance of family property, burial grounds, or for the care of animals. Purpose trusts have been enacted into most state legislatures. Business use of a purpose trust is less common and is viewed as a more creative planning technique. All Patagonia voting stock was transferred to the Patagonia Purpose Trust to allow the Chouinard family and trustees to retain control of the company. This mechanism helps ensure that Chouinard’s business objectives continue for multiple generations and separates the management of the company from most of its assets.
All Patagonia non-voting stock, which equates to approximately 98% of the total stock and most of the value of the company, was transferred to a new non-profit called The Holdfast Collective. The Patagonia website states, “Earth is now our only shareholder”. Going forward, profits that are not retained by Patagonia will be transferred to The Holdfast Collective. The goal of the Collective is to invest in causes that combat climate change.
The Holdfast Collective is a 501(c)(4) social welfare organization, which differs from the more common 501(c)(3) charitable organization. Both types of non-profits may advocate and use funds for various causes. However, a social welfare organization can commit funds to political activities such as: endorsement of candidates, lobbying on an unlimited basis, and support and oppose ballot measures. Charitable organizations are more restricted in their political activity. Social welfare organizations are tax-exempt, but donations are not tax-deductible for the donor.
By creating the two entities and transferring Patagonia shares, Chouinard has helped ensure that his charitable intentions and policy goals will outlast him. This a great example of a wealth creator maintaining a level of control after death and avoiding most estate, gift, and income taxes.
Sources:
- https://www.linkedin.com/posts/robertfrank-cnbc_earth-is-now-our-only-shareholder-yvon-activity-6976204578643922944-MVtH?utm_source=share&utm_medium=member_ios
- https://www.bloomberg.com/news/articles/2022-09-15/patagonia-billionaire-who-gave-up-company-skirts-700-million-tax-hit
- https://www.irs.gov/charities-non-profits/other-non-profits/social-welfare-organizations#:~:text=To%20be%20tax%2Dexempt%20as,exclusively%20to%20promote%20social%20welfare.
- https://www.irs.gov/charities-non-profits/other-non-profits/life-cycle-of-a-social-welfare-organization
- https://donorbox.org/nonprofit-blog/501c3-vs-501c4
- https://www.wealthmanagement.com/high-net-worth/patagonia-purpose-trust-what-it-and-will-it-work?NL=WM-07&Issue=WM-07_20221003_WM-07_807&sfvc4enews=42&cl=article_1&utm_rid=CPG09000011302181&utm_campaign=39595&utm_medium=email&elq2=a457fe16b0fc4cfb8b2fa287ceec74c0&oly_enc_id=7021J2654790A1B&sp_eh=5a66dd2db28c1dcbc1f35c60150b5c2d7853a257c674cdfc7496c5b7461f676b
- https://heinonline.org/HOL/LandingPage?handle=hein.journals/acteclj45&div=11&id=&page=
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