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The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

Hopefully this will influence a new form of capitalism that doesn’t end up with a few rich people and a bunch of poor people.”  So remarked Yvon Chouinard, the founder of outdoor clothing company Patagonia, as he announced his remarkably unique estate plan.  Rather than take a more conventional approach of either selling his Patagonia shares, or perhaps gifting the Patagonia shares to his two adult daughters, Chouinard recently gifted his entire $3.0 billion ownership stake to two entities: a specially designed “business purpose trust,” and to a 501(c)(4) social welfare organization.  In this month’s update, I provide a brief overview of the Patagonia plan, and consider what lessons we can draw from the Patagonia plan.

The Patagonia Plan

After the recent transfer, Patagonia will continue operations as a for-profit entity.  However, the Patagonia-Chouinard plan is particularly noteworthy in the following respects:

  • The Patagonia voting shares, comprising 2% of the total value of the company, were transferred to a “business purpose trust.” Unlike most trusts which name specific individuals as beneficiaries, a business purpose trust is created for the specific purpose of maintaining the health of the company itself. Whereas a “normal” trust directs the trustee to make decisions for the benefit of named individual beneficiaries, in this case the trustees must make decisions for the health and longevity of the company itself.  Since the purpose trust is not a tax-exempt entity, Chouinard is obligated for $17.5 million in federal gift tax on the gift of the voting shares.
  • The Patagonia non-voting shares, comprising 98% of the value of the company, were transferred to a social welfare organization, also known as a 501c(4) organization, called the “Holdfast Collective.” Since a 501(c)(3) organization is not allowed to engage in political activities or campaigns, Chouinard decided to form a 501(c)(4) organization, a type of nonprofit organization which is permitted to further environmental causes at a political level.  Whereas gifts to 501(c)(3) organizations receive a tax deduction, gifts to a 501(c)(4) organizations do not receive an income tax deduction.

Estate Planning Lessons

While we can’t relate to the size of the Patagonia plan, we can apply a few lessons to how we address estate planning decisions with our clients.

  • Special Purpose Trusts. The Chouinard family decided that the narrative of their legacy story, which is the advocacy of environmental causes, was best served through the continued viability of Patagonia.  In Minnesota, as in most other states, a Minnesota residents can create a “special purpose trust” which elevates a specific purpose to be achieved above the well-being of a person or charity.  At a modest level, this would look like creating an expense fund for a parcel of real estate or a unique asset.  While applied only in unique contexts, it is an estate planning tool that could be utilized for special purposes.
  • Tax Planning. By reason of Chouinard’s lifetime gift of the 98% to Holdfast Collective, no gift taxes are due. In contrast, had Chouinard directed the transfer to Holdfast Collective at death, estate taxes would have been owed, as post-death transfers to 501(c)(4) organizations do not receive an estate tax deduction.  Therefore, while the Patagonia plan elevates purpose above taxes, it nonetheless achieves some tax efficiency. When considering wealth transfers consistent with a client’s broader legacy narrative, consider how certain wealth transfers are more tax-efficient if made during lifetime.
  • Purpose-Driven Planning. Chouinard must be given credit for completing a plan consistent with his life’s narrative of environmentalism. We should follow Chouinard’s lead by elevating legacy objectives consistent with our personal legacy narrative above a historical cost-benefit analysis—perhaps what Chouinard meant when he referred to a “new form of capitalism.”  While Adam Smith’s theories of the free market can explain rational behavior and why we respond to incentives, those theories of rational behavior do not easily explain many legacy planning decisions.  These might include structuring gifts to charity, or perhaps create a special plan for the transfer of your family cabin or farm. If we believe in those legacy objectives, there is no financial or tax cost too high.  As advisors, we should not put up any barriers for our clients who are seeking to achieve their legacy planning objectives, even when Adam Smith cannot account for their behavior.