Can a Corporation Be a Philanthropist? California's Benefit Corporations Pursue Both Profit and Purpose

What do Patagonia, Give Something Back Office Supplies, and Thinkshift Communications all have in common?  They are California "benefit corporations" -- a new type of for profit corporation that is allowed -- or, more precisely, required  -- to put society and the environment at the center of how the company does business.  Six other states have enacted similar legislation.

Even though California's benefit corporation law is less than three months old, mission-driven corporations are not new.  Numerous for profit companies measure their success not only by their profits but also by their social and environmental impact.  The new form of legal entity offers companies an alternative model of corporate governance, and greater freedom to pursue their social and enviromental goals.  Sandra Stewart of Thinkshift Communications writes:

'I hope that five years from now, ten years from now, we’ll look back and say this was the start of the revolution. The existing paradigm isn’t working anymore—this is the future.'  Those were Patagonia founder and CEO Yvon Chouinard’s closing words as he led a parade of companies up the steps of the Secretary of State’s office . . . to become California’s first benefit corporations. . . . For Thinkshift, and I think for the other newly minted benefit corporations as well . . . , it felt like we took a significant first step in support of the kind of business culture that can build a sustainable, responsible and vibrant economy.

Proponents of the benefit corporation say this new form of legal entity will allow socially responsible companies to thrive.  Susan Carpenter writes in a Los Angeles Times blog post titled California's new B Corp law eyes social, environmental interplay:

Incorporating under [the benefit corporation law] allows companies greater access to social impact and venture capital investments; legal protection for directors and officers as they consider non-financial social and environmental goals; and validation of their social and environmental responsibility claims since their annual benefit report must assess their performance against a third-party standard.

The benefit corporation differs from traditional stock corporations in significant ways.

A traditional corporation can (with some exceptions) engage in any lawful business activity.  But, if a company is organized as a benefit corporation, its purpose must be to create a material positive impact on society and the environment

A director of a traditional corporation must perform his or her duties "in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders" under California law (Section 206 of the Corporations Code).  Directors of benefit corporations, on the other hand, are given explicit legal authority to consider a broader group of stakeholders and the company's social or environmental mission when performing their duties as directors.  The new law requires directors of California benefit corporations to consider:

  • Shareholders
  • Employees
  • Customers (as beneficiaries of the public benefit purposes of the corporation)
  • Community and society
  • The local and global environment
  • The interests of the benefit corporation, including the possibility that long-term interests of the company may best be served by retaining control of the corporation (rather than selling or transferring control to another entity)
  • Ability of the benefit corporation to accomplish its public benefit purposes

Laura Arrillaga-Andreessen, founder of a venture philanthropy fund, member of Stanford University's faculty, and author of Giving 2.0, defines a philanthropist this way:

A philanthropist is anyone who gives anything—time, money, experience, skills, and networks—in any amount to create a better world.

I like this definition and I think it gets down to the roots of what philanthropy is all about.

Philanthropists are kids who get involved through organizations like and the Jane Goodall Institute's Roots and Shoots program, individuals who aggregate their gifts with others by donating to organizations like the Jolkona Foundation and the Acumen Fund, families who make grants through the operation of their private family foundations and donor advised funds, and people who leave portions of their estates to nonprofit organizations in their wills and trusts.

And sometimes a philanthropist is a for profit corporation on a mission to use the funding and power of business to materially benefit humanity and the environment.

(This event took place April 2011) April 19th Speaking Engagement -- Incorporating Philanthropy into the Family Wealth Plan -- The City Club, San Francisco

I'm excited to have the opportunity to speak with Robert Lew, president and founder of Planning & Financial Advisors, on the topic "Incorporating Philanthropy into the Family Wealth Plan:  Different Approaches from a Financial Planner and an Estate Planning Attorney."   The event is co-hosted by the Northern California Planned Giving Council and the Financial Planning Association of San Francisco.  It takes place on April 19th, from 11:30 - 1:30, at The City Club in San Francisco.  Registration is available online and at the door.

Here's what we plan to cover:

Some wealthy families have strong charitable intent and would be receptive to charitable planned giving planning concepts.  Most families have weak or no charitable inclination so incorporating philanthropy into their wealth plan is often very difficult.  Bob Lew will share how, as a financial planner, he is able to integrate charitable concepts within wealth plans.  More importantly he will share how he has been able to foster charitable goals.

Attorneys are often uncomfortable talking about charitable giving unless the client brings it up first.  Or we reduce the conversation about charitable gifts to a simple yes/no question.  But attorneys, and other trusted advisors, are in a unique position to help the client articulate charitable goals, recognize time-sensitive opportunities, and sort through different planning strategies.  Karen Meckstroth will discuss how she and other attorneys are changing the way they practice to assist clients in making meaningful choices about charitable giving.  She will also touch on some of the ethical issues attorneys face when advising clients about charitable planning.

It is an honor to speak with Bob, and to learn from him.  Bob has dedicated enormous time and talent to enhancing the lives of his clients and the community through charitable planning.  He currently serves on the Board of the San Francisco Estate Planning Council and is a former Board member of the Northern California Planned Giving Council, the National Committee on Planned Giving, and the California State Bar Tax Specialization Committee.  Bob received the Phil Hoffmire Service Award from the Northern California Planned Giving Council in 2007 in recognition of his lifetime contribution to the charitable planned giving community. 

Connecting Children with Charity: Paper Cranes for Japan

As parents, we have the opportunity to teach our children compassion and empathy, to expand their perspective of the world, and to instill in them a sense that they have the power to make the world a better place.  Estate planning is an opportunity to continue this teaching process.  As Silicon Valley attorney John Hopkins says, when parents leave a portion of their estate to charity, when they treat the community as extended family, they pass along a powerful personal legacy to their children in addition to their wealth.

Estate plans do have their limitations though -- a testamentary gift in a will or trust will not do much to instill philanthropic values in children if parents miss the opportunity to do so during their lifetimes.  John Hopkins, Jon and Eileen Gallo and others emphasize the need to start young.  The letters posted at The Giving Pledge reveal that some of our biggest philanthropists learned the value of giving from their own parents:

Both of us were fortunate to grow up with parents who taught us some tremendously important values. Work hard. Show respect. Have a sense of humor. And if life happens to bless you with talent or treasure, you have a responsibility to use those gifts as well and as wisely as you possibly can. Now we hope to pass this example on to our own children. -- Bill and Melinda Gates

The challenge for parents is to find opportunities for volunteering and charitable giving that are meaningful and age appropriate. 

StudentsRebuild, in partnership with and Architecture for Humanity, have launched Paper Cranes for Japan.  This project involves making paper cranes to represent a message of support and healing for Japan and to cause a gift to be made by the Bezos Family Foundation:

These simple yet powerful gestures will trigger a $200,000 donation from the Bezos Family Foundation - $2 for each crane received - to Architecture for Humanity's reconstruction efforts in Japan. Once we reach our goal of 100,000 submissions, the cranes will be woven into an art installation - a symbolic gift from students around the globe to Japanese youth.

The Paper Cranes for Japan project is also an example of how philanthropy is changing -- it demonstrates how technology provides the opportunity for many individuals to coordinate efforts to make a substantial impact.  Somehow I believe we'll see more than 100,000 paper cranes.  Many more.

Making Donations to Help the People of Japan

The first thing I do each morning these days is check the Daily Beast and Huffington Post for news about Japan.  The stories break my heart.  I come from a family that has survived earthquakes.  My grandmother's sister used to tell me stories about the 1906 earthquake -- how scared and confused she and the other children were, how the family lost their business and their home, how they left San Francisco to start over in West Oakland.  I can't imagine what families must be experiencing today in Japan. 

What I do know is that I want to help, and others here in the United States want to help, through charitable donations.

Taxgirl has posted some things to keep in mind when making charitable gifts for disaster relief in Japan such as:

Do your homework. Check out the credentials of a potential donee/charitable organization before you make a donation. Charity Navigator is a great site to gather information (that link takes you directly to the Japanese earthquake relief part of the site). You can also confirm charitable status through the IRS web site – remember that some organizations (like churches) may not be listed, so ask the organization for more information if you’re not sure.

Remember the rules. The rules for charitable giving still apply, even in a disaster of this magnitude. That means that only contributions to domestic tax-exempt charitable organizations are deductible. However, those that provide assistance to individuals in foreign countries qualify for charitable deductions (think Red Cross, etc.) so long as they otherwise meet the rules as domestic tax-exempt charities. Again, check with the IRS – or ask to see the organization’s credentials.

Private foundations wanting to make grants for Japanese earthquake relief must be careful to comply with the rules governing cross-border grant-making.  The Council on Foundations has posted resources for grant-makers.

Some additional resources for those who want to donate:

Chronicle of Philanthropy  (Responses from Charities to the Japan Earthquake and Pacific Tsunami)

Silicon Valley Community Foundation (Support Japan Earthquake and Tsunami Efforts)

Can We Create More Meaningful Estate Plans?

A big part of my practice is working with clients to pass along as much of their wealth as possible to the people they love.  If you stopped by my office, you could find me doing the types of things estate planning attorneys do to minimize tax and preserve wealth.  I might be --

  • Drafting a GRAT to transfer appreciation on assets such as pre-IPO stock.
  • Structuring a transfer that reduces the value of assets for gift or estate tax purposes, perhaps through a gift of a partial interest in real property or a gift of family limited partnership interests.  
  • Drafting a GST trust or dynasty trust to pass more and more wealth to grandchildren, great-grandchildren, great-great-grandchildren and beyond.

But wealth preservation is not an end in and of itself.  (At least not for most clients.)  I believe that clients go through the time and expense of sophisticated estate planning because what they really want is to increase the opportunities for their loved ones to live happy, fulfilling lives. 

Of course, more wealth doesn't necessarily lead to greater happiness.  "The Joys and Dilemmas of Wealth," a new study out of Boston College's Center on Wealth and Philanthropy, funded in part by the Bill & Melinda Gates Foundation, reveals that parents worry an awful lot that wealth has the potential to do their children more harm than good.  An article by Graeme Wood in The Atlantic, "Secret Fears of the Super Rich," previews some of the results of the study:

the overwhelming concern of the super-rich—mentioned by nearly every parent who participated in the survey—is their children. Many express relief that their kids’ education was assured, but are concerned that money might rob them of ambition. Having money 'runs the danger of giving them a perverted view of the world,' one respondent writes.  Another worries, 'Money could mess them up—give them a sense of entitlement, prevent them from developing a strong sense of empathy and compassion

The study also reveals how some of the estate planning techniques used to address these fears (distributing wealth in stages, using incentive trusts) are not the answer in and of themselves, and may actually rob beneficiaries of a sense of personal autonomy or purpose:

Many wealthy parents structure their children’s inheritances such that the money arrives only in discrete packets, timed to ensure that during their formative years they have no choice but to find a vocation. But [Robert A. Kenny, one of the survey’s architects] hasn’t seen the strategy work, he says, because the children always know that the money is out there, and usually their friends do too. . . . Even if parents succeed in setting up a trust to parcel out the inheritance according to guideposts—get a degree, get a job, raise a family, etc.—they run the risk of setting up bitter intergenerational feuds. As one survey respondent from a wealthy family explains, 'I have grown up with a father who never wanted to give up control of his business but kept taunting me with the opportunity to step into his shoes.'  His wife adds, 'It has been difficult to feel financially independent when [my] spouse’s parents hold tight control over [our] children’s inheritance.'

So how do we create estate plans that move beyond enhancing wealth to enhancing lives?  Although wealth preservation is part of the estate planning process, the conversation between the estate planning attorney and the client needs to begin with people, not property.  Jon Gallo, a leader in the estate planning field (married to psychologist Eileen Gallo), blogs about how Eileen's work on the psychological impact of wealth caused him to change how he approaches meetings with clients:

For most of my thirty plus years in practice, I viewed myself as a teacher, whose job consisted of four functions:
  1. Obtain and analyze the necessary financial data.
  2. Determine the techniques that can be used to transfer the client’s assets to his or her intended beneficiaries in a tax-smart manner
  3. Present the alternatives to the client in such a manner that the pros and cons of each is clearly revealed and the client is able to make an informed decision.
  4. Implement the client’s decisions . . . .
After 30 years in practice, I changed my introductory meeting into one which explores the clients’ relationships with their children and grandchildren and focuses on the values that the client wishes the estate plan to convey. Asking the clients to prepare a family mission statement accomplishes far more than extolling the virtues of exempt generation-skipping trusts.

I think Jon's approach is correct, but that's not to say it is easy.  As estate planners, we can get pretty uncomfortable when we leave the familiar (and technical) realm of GRATs, IDGTs and FLPs and start talking with clients about things that can feel very personal -- hopes (and fears) for their children, attitudes about how wealth should (or should not) be used, charitable causes.  We may implicitly make decisions for our clients by asking closed-end questions that do not explore many possibilities ("Would you rather distribute assets to your children immediately upon your death or in stages at different ages?").  Or we may cut the conversation short through abrupt yes/no questions ("Do you want to leave a gift to charity?").

When I ask myself what I want for my own still-very-young children, I realize that my goals are more open-ended.  An attorney could not elicit them by asking narrow questions:

  • I want a safety net -- I want to make sure that my children will never fall through the cracks -- that they will always have the basics (a safe place to live, health care, and basic support if they can't earn a living)
  • I want my children to pursue a meaningful education, which, depending on who they grow up to be, might mean pursuing advanced degrees, attending a conservatory, training at a culinary academy, or something else
  • I want my children to have the opportunity to start a business to make the world a better place, or engage in philanthropic activities to make the world a better place, or supplement their income from the trust if they need to so they don't have to turn down a job that might make the world a better place
  • And, to round off the list, I want my children to be happy (in a meaningful way)

Estate planning attorneys may need to learn new communication skills.  Clients will need to accept that the planning process will be more time-consuming and more expensive.  But I think it will be worth it.  When we focus on something beyond wealth preservation -- to creating opportunities for our children, promoting happiness, enhancing lives -- the process of estate planning becomes more personally meaningful for our clients and the people they love.

Will Billionaire Dan Duncan's Estate Pass Free of Federal Estate Tax?

Professor Gerry Beyer (Wills, Trusts & Estates Prof Blog) links today to Scott Martin's post, Billionaire's Heirs First to Win 2010 Estate Tax Jackpot on The Trust Advisor Blog.

Dan Duncan is the first billionaire to die during the repeal of the federal estate tax.  Prof. Beyer notes:

If Congress reinstated the death tax for 2010 and made it retroactive for the year, Dan Duncan’s estate would generate up to $4 billion for the IRS. Although this seems to be a strong incentive for Congress pass a retroactive reinstatement, The Trust Advisor Blog predicts that Duncan’s death will actually have the opposite effect.

Will Congress retroactively restore the federal estate tax for 2010?  Scott Martin proposes that the deaths of individuals leaving large estates make it less and less likely that Congress will reinstate the estate tax for 2010:

. . . probate gurus say the sheer amount of money on the table makes a retroactive tax more unlikely. Big estates mean big lawyers ready to fight to see those billions of dollars go to the deceased’s heirs, and the headaches could go on for years. 

Planning an estate under the current 2010 rules (no estate tax; modified carryover basis rules) differs significantly from planning an estate if there is an estate tax and "traditional" basis rules.  As things currently stand, I draft estate plans to work under the current 2010 rules and at the same time build in flexibility in case Congress restores the estate tax for 2010.  Many estate planners are taking the same approach.

Congress has returned from its recess -- and I have returned from my blogging break. 

I'll keep you posted.

House Passes Pomeroy Bill HR 4154

Today the House passed HR 4154 to make permanent the $3.5 million individual federal estate tax exemption and 45% federal gift and estate tax rate (and to avoid the scheduled repeal of the federal estate tax in 2010).  It appears that all Republicans and 26 Democrats voted against the bill -- I will update this information if my numbers are off.  From what I hear from others closer to Washington, the Senate won't pass the bill without significant changes.  Chances are there isn't time to do this by the end of the year.

According to an article by Arthur D. Postal today in National Underwriter Life and Health Insurance News:

Observers expect the Senate to pass a measure that will merely extend the current rate on a temporary basis. The Senate probably will deal with the issue when it works on comprehensive tax reform legislation in 2010.

Although the House acted today, the future of the federal estate tax is still anybody's guess.

House to Vote on HR 4154 Today

The Office of the House Majority Leader released today's floor schedule.  The House is voting on HR 4154 today. 

House to Vote Soon on HR 4154

Today, OMB Watch posted House Set to Vote on Pomeroy Estate Tax Bill by Gary Therkildsen

According to the article, we could see a vote on H.R. 4154 as early as tomorrow.  (Admittedly, some of us were disappointed not to see a vote today.)   The OMB Watch article summarizes and provides links to:

H.R. 4154 provides for a $3.5 million federal estate tax exemption for individuals ($7 million per couple) and sets the federal gift and estate tax rates at 45%.  Therkildsen reports that the Center on Budget and Policy Priorities finds the Pomeroy bill "more than reasonable" and Citizens for Tax Justice "concludes that H.R. 4154 is somewhere in the middle of the spectrum between good and bad tax policy."

Therkildsen also reports:

On the other side of the debate, legislators looking to further reduce or eliminate the estate tax are preparing to introduce their legislation as well. A bi-partisan bill (H.R. 3905) sponsored by Rep. Shelley Berkley (D-NV), which almost mirrors a Senate proposal introduced by Sens. Blanche Lincoln (D-AR) and Jon Kyl (R-AZ), would reduce the estate tax to a $10 million per couple exemption at a 35 percent rate.

Stay tuned!

House Could Vote Wednesday on Estate Tax Legislation

Hani Sarji, an LL.M. candidate in Tax at New York Law School, is keeping track of Congress's increased activity to do something about the federal estate tax before the end of the year on his blog  -- Future of the Federal Estate Tax.  Hani Sarji recently provided a link to a Dow Jones Newswires article by Martin Vaughan (US House To Vote On Permanent Estate Tax Bill Next Week) that reports that the House will vote on a new bill:

The U.S. House of Representatives next week will vote on legislation to extend current estate tax rates permanently, but when and what action the Senate might take on the bill remains unclear.

The House will vote next week, Wednesday at the earliest, on estate tax legislation from Rep. Earl Pomeroy (D., N.D.), according to a schedule released by House Democratic leaders.

The Pomeroy bill would make permanent a 45% rate on inherited wealth, with the first $3.5 million exempt from the tax. Without congressional action, the tax will be repealed in 2010 and return in 2011 at a 55% rate with a $1 million exemption.

The Pomeroy bill appears to be HR 4154, which is the second estate tax bill introduced by Representative Pomeroy this year.  This bill -- known as the "Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009" -- does the following:

  • repeals the new carryover basis rules
  • retains the estate tax
  • provides for a $3.5 million exemption
  • freezes estate and gift tax rates at 45%

Check here for Hani Sarji's updated list of all the estate tax bills introduced in Congress this year.