Is The Billionaire Charity Pledge A Good Idea?

By Stephen D. Simpson, CFA | August 12, 2010 AAA
Is The Billionaire Charity Pledge A Good Idea?

It would seem that no good deed can ever go entirely unpunished, or at least pass without comment. No sooner did Bill Gates launch The Giving Pledge, a challenge to wealthy individuals to commit to pass their wealth on to charity upon their death, than discussion began as to the whether this was the best way to handle charitable giving. (For related reading, check out The Christmas Saints Of Wall Street.)

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The Story So Far
Bill Gates, formerly of Microsoft (Nasdaq:MSFT), has made a new name for himself in recent years as a major participant in charitable giving. Not only has Gates been active in his own "Bill and Melinda Gates Foundation", but he has taken on a prominent role in attempting to encourage other very wealthy individuals to make similar charitable commitments.

While there were anecdotal reports of Gates' success (reportedly he encouraged Warren Buffett to accelerate some of his charitable plans), he was apparently not satisfied with operating exclusively behind the scenes. In launching The Giving Pledge, Gates has publicly called upon wealthy individuals to publicly commit to sizable charitable donations, and at least 40 individuals and couples have responded.

Enter the Cynics
While critics are careful not to be seen attacking the idea of billions of dollars going towards foundations and charities, there has been an undercurrent of grumbling. Some of this grumbling seems to surround the fact that many of these donations are going to foundations created by (and presumably still influenced by) the donors themselves.

What If It's A Scam?
On one hand, there is a reason for some modest concern - there are plenty of stories of wealthy individuals using "charitable" foundations and organizations as a means of sidestepping taxes and paying fat salaries to friends and family members. Generally speaking, though, there has been a pretty substantial improvement in external oversight of these organizations, not the least of which by the IRS. Consequently, this concern is largely moot - or a true cynic can simply resolve that a sufficiently motivated and wealthy individual will find a way to contravene any system. (You may not have billions, but giving can still ease your tax bill. Check out Deducting Your Donations.)

Will the Money Be Effectively Managed?
There is also some debate as to whether charities can responsibly manage and distribute the billions of dollars that these individuals can bestow upon them. This is a fair point – managing money is not easy. While having a large pool to distribute can allow for more impact, it can also be frittered away much more easily before anybody notices. Is it efficient, then, to have multiple foundations all hiring staffs to review proposals and projects, losing some of every endowment to administrative costs?

Who Should Control The Money?
The other issue seems far less legitimate – that of allowing these so-called "plutocrats" to call the shots with their charitable giving. Apparently there is something wrong about wealthy people deciding where their money should go upon their death. This line of reasoning (and I use that term loosely) goes something like this – the "public" was ultimately the source of this wealth, so the public should have a say in the distribution of it. In other words, these wealthy individuals should hand over their money to, presumably, the government and let "the people" decide where it should go.

Is Self-Directed the Best Path?
There are numerous strong arguments for why foundations and self-directed giving make sense for these people. By and large, the people involved in The Giving Pledge are businessmen who made their fortunes in some part because of their vision, their judgment and their ability to allocate capital effectively. It should stand to reason, then, that if someone like Oracle's (Nasdaq:ORCL) Larry Ellison, eBay's (Nasdaq:EBAY) Omidyar or Berkshire Hathaway's (NYSE:BRK.A) Warren Buffett is smart enough to make the money, they are smart enough to decide how and where to spend it.

Moreover, successful individuals like these often tend to have a rather well-earned distrust for governmental organizations and an impatience for bureaucracy and politics. With a foundation, then, they can put the money to work quickly and with a minimum of "horse trading". If Bill Gates thinks malaria in Africa is a major problem, he can address it without having to compromise with those who want to fund their own pet projects. (Don't have the money, but want to give anyway? See Charitable Giving Without Spending A Dime.)

Better a Foundation than Junior
In terms of pure social good, it is difficult to argue with the fact that putting billions of dollars into charitable foundations is going to do more good than putting that wealth into the hands of the next generation.

Moreover, if people see well-known names standing up and committing money to charitable causes, perhaps they will be influenced to donate money as well. The U.S. is already an extremely generous nation, but perhaps people can give more, or be influenced to establish wills that earmark charitable giving as a priority. (For more on how you can do this, see Using Life Insurance To Make Charitable Donations.)

Whatever the case may be, people are stepping up to make sure their fortunes do some good after their death, and they are to be applauded for it. (For more, check out Millionaires Who Gave It All Away.)

Catch up on your financial news; read Water Cooler Finance: Who Is The Next Buffett?

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