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Ray Dalio

A Powerful New Tool Transforms How Billionaires Give Fortunes Away

Ray Dalio and the Koch family have pioneered philanthropy through the 501(c)(4). More than just a charity, it can avoid punishing taxes, retain business control and even influence politics.

(Bloomberg) -- Ray Dalio, founder of the world’s largest hedge fund, has one. The Koch family, sitting atop a $137 billion fortune, has at least two. Still another entity, with unknown backers, owns a big stake in one of Wall Street’s fastest-growing financial technology startups. 

The vehicle, long deemed a dumping ground for nonprofits like low-income housing developers, Rotary International and even the AARP, drew controversy in the past decade as a “dark money” political giving tool. Now it’s attracting billionaires who realize it offers far more. 

The most important quality of the so-called 501(c)(4) organization boils down to one word: control.

Control over their business. Control over political influence. Control over disclosure. Control over taxes. And, of course, control over the crucial soft power of charitable giving.

All in one place. 

Gone are the days of steel baron Andrew Carnegie, who followed the tried-and-true path of minting a vast fortune, selling the business and then devoting time and energy to giving the money away. The key advantage of 501(c)(4)s (hereafter: C4s) — made clear earlier this year by Patagonia founder Yvon Chouinard — is the ability to tap the illiquid wealth of entrepreneurs and owners of private family businesses, without demanding that they step away.

Proponents of C4s argue they have the potential to break a philanthropic logjam among the world’s richest people. More than 100 US billionaires worth a collective $1 trillion have signed the Giving Pledge since 2010, promising to donate at least half their wealth to charity. Yet only a few have gifted enough to actually shrink their fortunes, frequently balking at the many rules and public disclosure requirements that come with traditional forms of charity.

Critics of C4 philanthropy include US Senator Sheldon Whitehouse, a Rhode Island Democrat who calls it an “increasingly powerful tool for mischief by the mega-rich.” Much of the backlash stems from giving billionaires a tax-advantaged way to exert secret influence over elected officials at the highest levels. C4s can spend unlimited amounts on political lobbying — and large sums on election campaigns. 

Billionaires around the world are drawing scrutiny for the influence they hold. In some countries, it’s more explicit — the close ties between Russia’s business elite and Vladimir Putin were put in the spotlight after the invasion of Ukraine. In India, it’s well known that  Gautam Adani, whose meteoric surge in wealth briefly made him the world’s second-richest person this year, has close ties to Prime Minister Narendra Modi. 

American billionaires, the world’s wealthiest, are unusually generous and powerful in more subtle ways. That’s in large part because US rules encourage them to donate huge sums to nonprofits by offering generous tax incentives. 

The C4 structure drew widespread attention in September, when Patagonia’s Chouinard, 84, donated his company to create a new $3 billion environmental nonprofit that will exert influence long after his lifetime.

Dalio’s C4 organization, with $3.5 billion, hasn’t been previously reported, nor has a $265 million entity controlled by the Koch family. Meanwhile, Chase Koch, the 45-year-old son of Charles Koch, deployed the strategy to build up a $1.3 billion philanthropic warchest all his own.

As a debate begins over C4 philanthropy’s net benefit to society, advisers in the US are convinced that billionaires are just beginning to tap the strategy, which circumvents a vast number of rules that have governed donors’ giving for more than 50 years. 

As far back as 2018, David Miller, a partner at Proskauer Rose LLP, called C4s “the ideal vehicle for grantmaking.”

“It’s definitely something I’m talking more about,” Marcum LLP national nonprofit tax leader Frank H. Smith said of C4s. “They have a lot of flexibility in what they can do.”

Dynastic Wealth

The origins of the C4 in its current form date back to an obscure 2015 tweak to the tax code. It made clear that transfers of assets into the structure weren’t subject to the 40% US gift tax. Since that levy is one of the only ways for the government to take a massive bite out of billionaire fortunes, dodging it is something of a prerequisite for dynastic wealth planning.

Chouinard was initially lauded for using a C4 because the transfer isn’t eligible for a charitable deduction on income taxes. But for many billionaires, that’s not really a factor because deductions are capped as a share of income. For many super-rich Americans, taxable incomes are minuscule relative to the size of their wealth.

Warren Buffett in 2021  figured he’d given away a cumulative total of $41 billion in Berkshire Hathaway stock, much of it to the Bill and Melinda Gates Foundation. But because he didn’t sell shares and rarely generated income in other ways, he said the deduction had only saved him 40 cents for every $1,000 in donations.

Far more valuable to the top 0.01%, including Chouinard, is avoiding capital gains taxes on the wealth they’ve earned. C4s do just that. Putting a $1 billion investment in a C4 rather than selling it can save $200 million in capital gains taxes and, if structured properly, $400 million or more in estate taxes when the donor dies.

“The point of the structure was never about tax efficiency,” Patagonia spokesperson Corley Kenna said. “It was to release more money to fight the climate and environmental crisis.” 

Dalio, 73, who stepped down as co-chief investment officer at Bridgewater Associates in October, created a C4 in 2018 whose contents were later transferred to the current “Dalio Family Fund.” With $3.5 billion, it has more than twice as much in assets as a 501(c)(3) foundation he started almost 20 years ago.

A Dalio Philanthropies spokesperson said his family “seeks the broadest flexibility to achieve impact, utilizing the most efficient, adaptable and appropriate means of doing so.”

Also in 2018, filings show the Koch family set up two C4s. One, called “Zero Zero One Inc.,” had assets of $264.5 million in its most recently available filing from 2020. Chase Koch’s C4, called “CCKC4 Inc.” after his initials, was launched with less than $40 million, but in 2020 received assets totaling more than $1.2 billion.

Chouinard, Dalio and the Kochs have little in common except they own multi-billion-dollar private businesses. That’s not a requirement for using a C4. In a 2018 journal article, Miller half-seriously pitched the structure to Jeff Bezos, founder of publicly traded Inc., who was the world’s wealthiest person at the time. 

‘Their Baby’

Still, C4s have unique advantages to owners of illiquid private companies because so-called “excess business holding” rules don't apply to them. Ordinarily, foundations aren't allowed to own more than 20% of any one company.

This attribute creates an appealing off-ramp for entrepreneurs loathe to disengage from their life's work.

“Lots of founders see their company as their baby,” Adler & Colvin principal Rosemary Fei said. 

Chouinard said in a statement in September that he gave 98% of Patagonia to a new C4, Holdfast Collective. A key architect of the deal was Daniel Mosley, a partner at BDT & Co., a merchant bank that advises some of the wealthiest US families and announced a merger with Michael Dell’s MSD Partners last month. Its founder, Byron Trott, is a former Goldman Sachs banker who in the past has counted Buffett and the Kochs among his clients.

Though eager for more resources to fight climate change, Chouinard said he worried selling Patagonia would bring in new owners who might cut staff and deviate from its environmental mission. Instead, his C4 will hold the business stake indefinitely, while 2% of shares – and all its voting stock – will be in the hands of a family-controlled trust he said is “created to protect the company’s values.” 

“This is a remarkably clever structure,” says Joan Bozek, director of trust services at Clarfeld Citizens Private Wealth. “The family stays in the driver’s seat. The company is continued to be managed for profit, but all the benefits instead of going to wealthy shareholders will go back to the Earth.” Patagonia has estimated $100 million will flow into Holdfast annually.

Untested Idea

Holding a private company in a C4 is a largely untested idea. And it’s one that may not always work out over time, said Josh Baron, a partner at Banyan Global who specializes in advising wealthy families. Company executives may prefer to re-invest profits rather than hand them over to a C4, while nonprofit managers may push to sell their stakes, knowing that a lack of diversification can backfire if business falters. 

“It opens up these complex questions,” Baron said. “The longer-term interests of the family and nonprofit might not be the same.” 

Even if infighting breaks out within a C4, the public need not ever know the details. C4s can opt out of many of the transparency requirements imposed on family foundations. 

While Dalio handed day-to-day control to the next generation and has reduced the size of his Bridgewater holding, he made clear he wasn’t exiting his stake in the firm, which makes up almost half his $16 billion net worth, according to the Bloomberg Billionaires Index. 

“Hopefully until I die, I will continue to be a mentor, an investor, and board member at Bridgewater,” Dalio said on Twitter.

It’s not clear whether Dalio holds any shares of Bridgewater in his C4. Its latest filing shows 95% of assets in privately held investments or closely held equity interests, without specifying their identity. The Koch C4s also contain unspecified private holdings, though past filings show both with large stakes in EFPRP Investments, a Koch-controlled LLC. 

Dalio and Koch spokespeople declined to elaborate beyond what was in the filings.

Opaque Structures

Other C4s are even more difficult to understand from the outside.

As much as about a third of fintech startup Clear Street LLC is indirectly owned by a C4 based in Bermuda, filings show. Based in Manhattan, the four-year-old company offers a brokerage platform for trading stocks and options. It was valued at $1.7 billion in a May funding round that almost certainly catapulted the assets of the nonprofit, EMT Action Fund, which at the end of 2020 held just $62 million. 

EMT Action Fund — which the minutes of a US Virgin Islands commission suggest owns a stake in at least one other investment company — listed its objectives in a 2019 filing as “supporting Jewish heritage, education, welfare, charity, healthcare and general communal growth and well-being.” One Orthodox Jewish charity lists EMT as a donor.  

What’s less clear is who controls EMT Action Fund, or the exact size of its startup stake, owned through various holding companies that appear in filings. EMT’s official headquarters, a four-story office building in downtown Hamilton, Bermuda, is home to countless offshore shell companies. 

Clear Street said it can’t comment on behalf of EMT or its founders. It relayed a statement saying “the nonprofit charity has donated millions of dollars to charitable causes and will continue to make significant contributions as its assets grows.” 

Several attempts to contact those listed as associated with EMT in filings were unsuccessful. 

‘Legislative Needle’

Despite their looser rules, C4s are still subject to basic guardrails. Donors can’t take the money back, for example. And direct spending on elections can’t be a C4’s “primary purpose,” a rule many lawyers interpret to mean it can devote up to 49% of its spending to campaigns. Though such spending is prohibited for C3s, traditional nonprofits can still reflect the political outlook of their donors, or even indirectly influence policy, such as by funding and publishing research.

A long-standing strategy among many nonprofits working on contentious issues is to pair a C3 organization with a C4 that can more easily lobby and give to campaigns. Examples of nonprofits with both arms include Planned Parenthood and the American Civil Liberties Union. Another is Everytown for Gun Safety, which is backed by Michael Bloomberg, founder and majority owner of Bloomberg LP.

Long outspoken on environmental issues, Chouinard made clear that influencing policy and politics is one of his goals for Holdfast Collective. Other donors are also likely to find a C4’s political influence appealing, said Karen Kardos, head of philanthropic advisory at Citi Private Bank. 

“Many philanthropists recognize that in order to make systemic change to truly drive impact, they must be able to move the legislative needle,” Kardos said. 

By contrast, Dalio’s “philanthropic entities do not make political donations,” a spokesperson said. His family’s giving, more than $1.3 billion so far according to Dalio Philanthropies, has focused on causes such as ocean exploration, child welfare in China and improving education in Dalio’s home state of Connecticut. 

The Koch family’s giving strategy has shifted in recent years. In a 2020 book, Charles Koch said he regretted his heavy spending to boost Republicans, arguing partisan politics won’t solve the country’s long-term problems. 

This year, Americans for Prosperity, a C4 founded in 2004 that’s part of the network established by Charles and his late brother David Koch, praised President Biden for pardoning marijuana convicts, while criticizing the tax hikes in his Inflation Reduction Act and boosting Republican-supported state ballot initiatives in the November election.

The Kochs’ new C4s don’t show the same overtly political bent. In filings through the end of 2020, all their gifts went to C3 nonprofits, including donor-advised funds and the Charles Koch Foundation, which can’t give to campaigns. Last year, Chase Koch’s C4 gave $85 million to Stand Together Chamber of Commerce with the condition that the Koch-funded group not “support or engage in any political activity” with the grant. 

“I don’t think about Republican versus Democrat,” Chase Koch said at the SALT conference at New York’s Javits Center in September. The head of Koch Disruptive Technologies, a venture capital arm of the family empire, he said his goal in both philanthropy and business is “finding those entrepreneurs that are going to change the way the world works.” 

Hanging over the C4 is also the threat that Congress could change the rules. The reforms most commonly discussed are limits on their tax benefits.

With Democrats retaining the Senate after the 2022 midterms and Republicans controlling the House, major tax changes are unlikely. That means for the next few years at least, a tool pioneered by a few of the world’s richest people may soon be adopted by a broader array of wealthy families, Fei said. 

“Once it’s out there, other people can follow the model,” she said. “There isn’t one vehicle that has everything, and from a public policy perspective, there shouldn’t be. But for donors, that’s the holy grail.”

--With assistance from Noah Buhayar.

To contact the author of this story:
Ben Steverman in New York at [email protected]

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