Giving It All Away

 

Warren Buffett looks
at the Big Picture.

One of the biggest financial stories of the summer was not about someone making a pile of money, but rather about someone giving it away. That’s kind of refreshing, don’t you think? Of course, any big move by Warren Buffett is going to make news, but this one—his announcement that he is going to give away as much as $30 billion in stock from his holding company, Berkshire Hathaway—surely deserved as much notoriety as it received.

We’ve been talking about investing for the Big Picture, and Warren Buffett is about as Big Picture as investors get. “I buy on the assumption that they could close the market the next day,” he has said, “and not reopen it for five years.”

So are there lessons for smaller philanthropists that the rest of us can learn from Buffett’s big giveaway? Let’s take a closer look.

Buffett’s Plan

Here’s how Buffett’s gift is structured: After converting his Berkshire Hathaway A stock—worth about $37 billion at this point—into B shares, he’ll give away 5 percent of those B shares every year, probably until his death. The shares are earmarked for five different foundations—one for each of Buffett’s three children, one for his late wife, Susie, and one started by his friend Bill Gates of Microsoft.

There are two things worthy of note about this. First of all, Buffett is ensuring that a big chunk of his estate will go to charitable activities while he’s still around to see it happen. The Oracle of Omaha turns 76 at the end of this month, so you figure a man of his means probably has a good ten years left, which would let him see half his holdings put to charitable purposes.

There’s a real benefit to structuring your philanthropy that way, rather than just leaving the money to charities in your will. Buffett will see the foundations get his gifts and will be able to exert some pressure, even if unspoken, toward how those gifts will be used. And he will receive the benefit of seeing the good works in action—the progress made in fighting malaria by the Gates Foundation or the needy children who are offered educational opportunities by his daughter’s foundation.

Donating appreciated stock can be a great
tax strategy.

The second notable thing is that Buffett’s gifts are coming in the form of stock. Donating appreciated stock is a really efficient way to make sure your gifts go to the charity of your choice and do not get eaten up by taxes. The reason is that when you donate stock, no one—neither you nor the recipient—ends up paying capital gains taxes on the appreciated value.

Let’s say, for simplicity purposes, Buffett gives thirty shares of Berkshire Hathaway B stock, valued at about $91,000 (the B shares are worth a thirtieth of the A shares), to the Gates Foundation. Had he sold those shares and given the $91,000 in cash to the Gates Foundation, Buffett would have owed capital gains taxes on the appreciation of the stock. Given that Buffett has declared his favorite holding period as “forever,” he might have owed tax on something like $75,000 worth of stock—but by giving the stock itself, he avoids all that tax. You don’t get to be the world’s second richest man unless you know a few financial tricks.

The Rest of Us

Pay attention to
the decisions of experienced investors.

Of course, none of us are Warren Buffett, playing around with a $40 billion portfolio. His philanthropic strategy might not fit into the financial planning of mere mortals like us. For one thing, if you donate appreciated stock that’s been held for less than a year, you can only deduct the original value on your income taxes, not the full appreciated value.

But for the most part, Buffett’s decisions make a lot of sense, particularly for Big Picture investors. It’s always a good idea to look around at how other people are handling their investments and financial planning, especially ones with sterling reputations.

Leave a Reply

Your email address will not be published. Required fields are marked *