Billionaires Gates and Buffet Donating Their Wealth to Charities Will Affect Economic Recovery in USA

At a conference hosted by David Rockefeller on May 20, 2009 in New York, billionaires of the United States gathered. Outside the conference, an attendee told news reporters that discussions centered on philanthropy, but nothing else was forthcoming at the time. Recently, the impetus for that conference was made public--Gates and Buffet asked billionaires to give away half of their wealth.

Some of the super rich who attended, included: Oprah Winfrey, worth $2.7 billion, who donated some $50 million in 2007; Michael Bloomberg, founder of Bloomberg LP and Mayor of New York City, who is worth $11.5 billion and donated $205 million from 2007 to 2008; financier Eli Broad who donated $100 million in 2008; and financier Peter Peterson, who committed $1 billion in 2008. Most billionaires approached with the idea of giving away half of their wealth have been very receptive.

What is half their wealth combined? Earlier this week, CNN reported that Gates and Buffett are going after their companions on the Forbes 400-one of the indices that ranks the richest people in the world. In 2009, the combined net worth of the Forbes 400 was approximately $1.2 trillion. 50% of $1.2 trillion is $600 billion (The 600 Billion Dollar Challenge)

Quite probably, many will donate to the Gates Foundation, owned by Bill and Linda Gates.

The Gates Foundation

In 2000, Gates and his wife combined three family foundations into one to create the charitable Melinda Gates Foundation. The foundation is set up to allow benefactors access to how its money is being spent, unlike other major charitable organizations such as the Wellcome Trust. The generosity and extensive philanthropy of David Rockefeller has been credited as a major influence. Gates and his father have met with Rockefeller several times and have modeled their giving in part on the Rockefeller family's philanthropic focus, namely those global problems that are ignored by governments and other organizations. As of 2007, Bill and Melinda Gates were the second most generous philanthropists in America, having given over $28 billion to charity.

The foundation has also received criticism because it invests the assets that it has not yet distributed with the exclusive goal of maximizing the return on investment. As a result, its investments include companies that have been criticized for worsening poverty in the same developing countries where the Foundation is attempting to relieve poverty. These include companies that pollute heavily and pharmaceutical companies that do not sell into the developing world. In response to press criticism, the foundation announced in 2007 a review of its investments to assess social responsibility. It subsequently cancelled the review and stood by its policy of investing for maximum return, while using voting rights to influence company practices. (Bill Gates)

Donating to a Foundation Protects Assets and You Can Do It Too!

Gates and Buffet are not the first billionaires to start a foundation. Over the last century, many of the richest families in our country set up private or public foundations. Such foundations are created either while the individual is alive or upon their death. Their children and heirs can work for the foundation, earning an income for themselves and also furthering the aims of the foundation.

Donating to a foundation is one legal way to protect wealth for descendants. Assets transferred into a foundation are immune to capital gains taxes, plus the donator still gets a tax deduction for the contribution. Additionally, the charity receives more money than if the donator sold assets, paid the taxes, and donated the remainder.

This may come as a surprise to some-that anyone, not just the super rich like Bill Gates and Warren Buffet--can set up a trust and/or foundation very inexpensively by doing all the research and drafting their own documents. There are many sources that provide templates. If your situation is straightforward, all you have to do is fill in the blanks. For those with more involved situations an experienced attorney is recommended. Even if you do it yourself, it's not a bad idea to have an attorney review it. The final step is transferring your assets into the foundation or trust, otherwise all your hard work is for naught.

Other Options

Banking through a Foundation

A foundation such as a Panama Private Interest Foundation can hold any number of assets for its beneficiaries. This includes a bank account. The beneficiaries can have access to the bank account's assets through the use of credit or debit cards that can be used worldwide. A foundation can also own a corporation that owns the bank account. (Ten Ways to Protect Your Assets Offshore - Asset Protection Using Offshore Company Structures)

For those with complicated estates, setting up a charitable foundation requires the expert advice of a lawyer and a financial planner or tax consultant. If you don't have the level of income or resources to justify the cost of setting up a foundation, here is another alternative. Umbrella organizations such as the National Heritage Foundation allow you to start your own foundation, under their auspices, at a lower initial cost. Later you can split off from the umbrella organization and run the foundation independently. Be careful when going this route however. Make sure that the umbrella organization you and your advisor choose has sound legal and administrative policies and an excellent reputation among the smaller organizations they have taken in. (Charitable Donations--Tax Deferred Benefits)

What Qualifies as a Charitable Foundation?

To qualify as a charitable foundation, you must earn your living by donating to educational pursuits or worthy causes. Worthy causes would be categorized as universities (all universities are non-profit foundations), large national organizations or small local enterprises that protect the environment, provide homes, vocational training and jobs for the impoverished, or promote the arts.

Advantages of a Charitable Foundation

The revenue from your activities goes directly into this public foundation, thereby escaping income taxation from the outset. This gives you the greatest tax-deferral benefits, something like a 401(k) plan or an IRA but on a much larger scale.

You can draw an income up to the value of your services, but you only need to draw what you must have to live on. The result is that the remainder of your income, or your revenues less expenses, is not taxed to begin with. The excess can be invested and the value compounded tax-free, which makes it possible to rapidly expand the assets of the foundation.

As long as you continue to serve the purposes of the foundation, you can continue to draw an income throughout your life from the tax-deferred income and the investment returns it generates. Simultaneously, the assets of the foundation will accumulate an accelerated rate, allowing you to generate wealth to give to your most cherished causes. Over time, you or your heirs can shift the goals and purposes of the foundation. This gives you the flexibility to choose the most worthy causes of interest to you, especially as your preferences change.

Primary Difference Between Public and Private Foundations

The primary difference between public foundations and private foundations is the number of restrictions on income sources and the amount of investment income the foundation can generate.

Private foundations offer fewer restrictions but they do minimally tax the investment income. Donors to private foundations can only make a tax-deductible donation of 20% of their adjusted gross income, or in the case of private operating foundations, 30%.

Public foundations have more restrictions, but their donors can make a tax-deductible contribution of up to 50% of their adjusted gross income.

For More Information

The Save Wealth website provides a summary of how Private Family Foundations work. See their website at http://www.savewealth.com/planning/estate/foundations/

How Will This Affect Economic Recovery in the USA?

If the wealthiest began putting money where it can't be taxed, the tax burden will as usual come out of the pockets of the middle-class. The sad fact is, however, that the middle-class is shrinking, leaving less people to pay taxes.

It would be great if the budget could be balanced without higher taxes. But, the reality is that if Americans want all the programs to continue that help youth, the unemployed, the disabled, and senior citizens, higher taxes will be necessary. The alternatives: 1) Get rid of or cut down on the number of representatives-thus saving money spent on salaries and life-long pensions 2) stop the wars 3) Cut or eliminate medicare and medicaid 4) Cut or eliminate unemployment 5) Cut or eliminate social security 6) Default on debts owed to other countries

Stopping the wars would save trillions of dollars a year, but, that is probably not going to happen. Nor, is this country going to heave-ho all of the legislators in office without a revolution and Americans are way too passive for that.

The problem with eliminating programs is that this would cause a large percentage of the population to be without income. As there are not enough jobs in this country (or any country for that matter) for everyone to be employed, this would result in homelessness and a greater burden on society. Additionally, defaulting on our debts to other countries would cause world-wide animosity, chaos, and severe reactions/penalties.

How Will Billionaires Donating to Charities Affect Financial Condition of the USA?

During the last eight years, inflation-adjusted income for a typical family actually fell, and more families are now living in poverty. As stated earlier, the middle-class is shrinking.

Under President Obama's budget plan, $636.7 billion in tax cuts for the wealthiest 2 percent of Americans will expire after 2010. The budget raises $353 billion mainly in corporate loophole closures, including taxing carried interest as ordinary income, reforming the international taxation of U.S. firms and subsidiaries, and repealing tax breaks for oil and gas companies. It trims itemized deductions for the wealthiest Americans, raising $317.8 billion to finance health care reform. The expiration of tax cuts on the wealthy and the budget's proposed revenue increases would not take effect until 2011, when OMB forecasts that the country will be out of the recession. The budget's tax policy provides tax relief to 95 percent of working families and will not increase taxes on families earning less than $250,000. (Summary of the President's Fiscal Year 2010 Budget)

SOURCES

Bill Gates, http://en.wikipedia.org/wiki/Bill_Gates

Carol J. Loomis, The 600 Billion Dollar Challenge, http://features.blogs.fortune.cnn.com/2010/06/16/gates-buffett-600-billion-dollar-philanthropy-challenge/

Charitable Donations--Tax Deferred Benefits, http://www.hsdent.com/investing-in-a-charitable-foundation/

Private Family Foundations, http://www.savewealth.com/planning/estate/foundations/

Summary of the President's Fiscal Year 2010 Budget, http://budget.house.gov/pres_budgets/fy2010/02.27.2009_FY2010_Pres_Budget_Summary.pdf

Ten Ways to Protect Your Assets Offshore - Asset Protection Using Offshore Company Structures, http://www.prlog.org/10678093-ten-ways-to-protect-your-assets-offshore-asset-protection-using-offshore-company-structures.html