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As announced last week, the multi-billionaire dollar outdoor apparel company Patagonia has a new owner. In August, founder Yvon Chouinard and his family transferred 100% ownership of the company to two new entities.

The family gave all the non-voting stock, comprising 98% of the company’s shares, to the Holdfast Collective, a new Internal Revenue Code Section 501(c)(4) social welfare organization dedicated to fighting climate change. They gave all the voting stock, comprising the remaining 2% of the company’s shares, to the Patagonia Purpose Trust, a trust guided by the family to protect the company’s mission and values.

What the Gift Means to The Company

Patagonia remains a for-profit company, albeit one with a unique culture and mission of environmental activism. It will continue to give 1% of profits to grassroots environmental organizations and reinvest back into the company. The new process occurs after that, when the company distributes all remaining annual profits as a dividend to support solving for climate change.

Lessons for Wealth Managers

In the preface to the second edition of Chouinard’s book, Let My People Go Surfing, he writes, “We have always considered Patagonia an experiment in doing business in unconventional ways.” (Yvon Chouinard, Let My People Go Surfing: The Education of a Reluctant Businessman (Including 10 More Years of Business Unusual) (New York: Penguin Books, 2016), xii.)

Always the craftsman, Chouinard has continued the experiment in his business succession plan with perhaps even greater ambition and creativity. As he told the New York Times, “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.”

For wealth managers, the Chouinards’ planning serves as a reminder for how we should understand our clients’ goals and develop tools to achieve them.

Classic problems always have unique dimensions. In some ways, the Chouinards’ situation represents a classic case study of business succession planning. The family had built a successful business over decades of effort. Capable leadership was in place. The next generation was involved in the business. Yet there wasn’t a clear path forward to continue to achieve the family’s goals.

What makes the situation compelling is the family’s goals didn’t center on monetary reward. The focus instead was on protecting and fulfilling Patagonia’s mission “to save our home planet.” Rather than maximizing financial value, this involved a more challenging mix of family, business and societal values.

For wealth managers, it’s instructive to recognize how it’s the unique dimensions that give direction to classic situations. In discerning a client’s goals, we should seek out the quirky, non-traditional, below-the-surface yet foundational concerns. Ultimately, those goals are most likely to give shape to a client’s plan.

Multi-pronged solutions are possible. Of course, the challenge of deep goals discernment is it limits your ready-made solutions. But solutions remain possible. 

With the creation of the Holdfast Collective, Patagonia Purpose Trust, division of stock classes, transfers and new entities, the Chouinard family crafted a structure with promise to address business, family, environmental and societal goals all at once. As Chouinard describes in his essay posted on Patagonia’s website, they considered options of selling the company or taking it public. But both involved sacrifices of the family’s underlying goals. “Truth be told, there were no good options available,” he writes. “So, we created our own.”

For wealth managers, this is a reminder of the power of patience and creativity. The Chouinard family’s solution took time and open-mindedness. For multi-pronged problems, advisors must resist solving the situation by ignoring certain goals or aspects of the overall picture. Instead, they should embrace the different prongs as guides in developing something new.

Taxes are social. For many, tax avoidance is the focus of their business succession planning. Advisors often reinforce this by making tax strategy their central value proposition. 

In speaking with The New York Times, however, Dan Mosley, a partner with BDT & Co. a merchant bank that helped structure the Chouinard transfers, makes an opposite point. His key message is, “There was no tax benefit whatsoever.”  The transfer to the Patagonia Purpose Trust will result in $17.5 million in gift tax. Meanwhile, the transfer to the Holdfast Collective as a Section 501(c)(4) organization, rather than a Section 501(c)(3) organization, won’t result in an income tax deduction for the Chouinards. As a result, they won’t receive the “tax windfall” large charitable donors typically receive for their gifts. 

For wealth managers, this is a reminder that taxes are complicated, only partly because the laws can be difficult to understand. Some may wish to capture tax benefits, some like the Chouinards may wish to avoid those benefits. Clients typically want to minimize taxes, but how they view the taxes they pay will vary based on what they believe those taxes represent. Advisors are wise to appreciate those complex relationships, as well as how their own view on taxes interact with those of their clients. 

Timeliness of political engagement is a consideration.  The Holdfast Collective, which now stands to receive Patagonia’s profits, isn’t a typical nonprofit. As a Section 501(c)(4) social welfare organization, it may engage in lobbying and certain other political activities tied to its exempt purpose.  

This choice reflects the increasingly common view that political action is essential to achieving societal impact, particularly in relation to time-sensitive concerns like climate change.

From a planning perspective, the political dimension of the Chouinards’ gift also ties to a different timing concern. The Chouinards’ plan wouldn’t have been able to work in the same way if they waited to implement it through their estate plan. While gifts to a Section 501(c)(4) organization during your client’s lifetime aren’t subject to gift tax, such a gift at death wouldn’t be deductible for estate taxes.  (See IRC sections 2501(a)(4) and 2055.)

To avoid a massive estate tax bill, the Chouinards would have needed to leave their shares to a Section 501(c)(3) organization, which would face restrictions the Holdfast Collective won’t.

Wealth managers may be hesitant to bring up politics with their clients, but if political action is part of a client’s goals, you need to be aware and plan accordingly. If we can talk death, taxes and family dynamics with them, we can go the next step and discuss politics as well.

Broader Understanding of Clients’ Goals

The Chouinards’ transfers reflect thoughtful, sophisticated planning. For sake of the planet, we hope others follow their lead. For wealth managers, we can learn from the family’s example to embrace a broader understanding of client goals and accept the challenge to develop innovative plans to achieve them.

Abby Axelrod-Wunderman is Philanthropic Director at Fiduciary Trust International, and

Bryan D. Kirk is Director of Estate and Financial Planning at Fiduciary Trust International

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