That's What the Money's For
Vol #98: September 23rd, 2022
One of my favorite scenes in Mad Men is when Don Draper claps back at Peggy Olson for chiding him about not saying “thank you.”
“THAT’S WHAT THE MONEY'S FOR!”
It was a cold shower of agro-corporate (non) empathy, emphasizing that the purpose of all the advertising they created was simply to generate personal wealth - no time for pleasantries.
At my old firm we had a chat room that would post notifications of the firm results every month. While you knew PnL every minute of every trading day, seeing the final numbers each month - net of costs and whatever else the finance team slipped in there- still had a bit of a thrill. Don Draper’s three second sound clip was the perfect alert notification.
I haven’t thought much about this clip in a while - it’s been almost three years since I heard it. But when the news about rock climber, surfer, and Patagonia founder Yvon Chouinard giving away his $3 billion company hit the tape; “that’s what the money's for” was my first thought. This hero built an iconic and profitable business, and his legacy is putting 98% of the future profits towards fighting climate change and protecting nature.
While he could have sold the company and given the profits to charity, there was no certainty that the new owner would uphold the important values of the organization. Going public would have presented a similar problem, as once a single share is sold, you now have new interests to cater towards. In Chouinard’s own words, “"Earth is now our only shareholder."
The backstory is that when he saw his name on the Forbes billionaire’s list he was appalled enough to give it all away. Patagonia has long been a good corporate citizen (they were the first B-Corp in California), and billionaires have been philanthropists since long before the Giving Pledge. None of this is particularly new or surprising for Yvon or wealthy founders.
Even the way that he gave his money away isn’t particularly original - he used a 501(c)4 which is officially classified as a “social welfare organization.” It’s only one digit away from the typical 501(c)3 that most people are familiar with as charities, but there are some important differences.
When you give money to your local animal shelter (shout out to One Tail at a Time) you get to write off that donation against your taxable income. Every dollar you give lowers your AGI (Adjusted Gross Income), which effectively means contributions are discounted by your marginal tax rate.
With a 501(c)4, there is no tax write-off. Up until 2015, there was quite a bit of ambiguity even about liability for gift taxes for contributions to a 501(c)4. With the signing of the PATH Act, the number of these organizations exploded, and have been used for various purposes.
The lack of tax write-off comes with a very important benefit - unlike their charitable cousins, a 501(c)4 can engage in political activities and campaigns. This has led to a number of “dark money” political organizations leveraging this structure to hide their donors and agitate for change from behind the curtains.
Since no good deed goes unpunished, Yvon got his own little bit of clap back on the maneuver. But optimizing for the tax code isn’t a crime, it’s using your money effectively. Climate change is enough of a political issue that to tackle it, you do need to engage in campaigns.
With the bulk of Patagonia stock sitting in the 501(c)4, the remaining 2% of the shares were given all of the voting rights, and those are in a family trust (on which he did pay gift taxes of about $17m). The family controls the company, helping to keep it weird and make sure surf time is still available to employees. The bulk of the profits (~$100M/year) go to achieving the goals of the founder.
THAT, is what the money's for.
While not many of my readers have billionaire problems, we can still take advantage of a few tricks to optimize the effectiveness of our giving.
First of all, just simply giving to a charitable organization and keeping the receipts for tax time is a great start. At a 25% tax rate, every $100 you give to charity only costs you $75 in after tax dollars. There are plenty of organizations supporting whatever your passion might be (or, again, One Tail at a Time.)
For active givers, an interesting opportunity exists in Donor Advised Funds (DAFs). These are kind of like charity checking accounts. Brokerages like Fidelity and Schwab have their own flavors, and many charitable organizations like the American Endowment Foundation also have their own setups.
Contributions to a Donor Advised Fund are immediately deductible on your tax return, like a charitable contribution. This is because they are sponsored by a 501(c)3, and any remainder gifts in the account default to the sponsor. Once the money (or securities) are in the account, you’re free to invest them until your next giving opportunity. By putting your future charitable contributions into investments, you can increase your impact down the line. (Cue joke about equity donations to DAFs in January 2022…)
The fact that DAFs accept stock as a contribution reduces your tax burden and amplifies your impact. If you’re sitting on appreciated securities, donating them directly to the DAF increases your impact by the long term capital gains rate (15% or 20%) The charity gets more, and you get a higher deduction.
The next step up in complexity is private foundations or trusts. These have slightly different rules for contributions, as well as disbursement requirements of 5% a year. Overall they are more strict and require significantly more overhead for both setup and administration.
No matter how you earn your savings, money is more than just compensation. It’s a tool to fund your goals, and if charitable contributions are part of that goal, there are powerful ways to make the most of that gift.