The Gates divorce and the impact on The Bill and Melinda Gates Foundation have highlighted the fact that when a high visibility couple divorces, it is not only their personal finances that are potentially impacted. Most wealthy couples are involved in charitable giving, serve on boards, or are very active with philanthropic pursuits. As a result, this type of divorce has an impact on millions of people.
Marital vs. Separate Funds as Gifts
If donations are made during the marriage, a critical lookback is consideration of the types of funds donated. Donation of separate funds will have little impact on the divorce. However, donation of marital funds can lead to the question of whether both spouses consented to the gift. One spouse donating large amounts of marital assets without mutual agreement could be considered wasteful dissipation of marital assets, defined as action taken purposely to reduce the amount of marital assets left to divide in the divorce.
Marital Funds in Charities
If marital funds were jointly donated, the question then becomes when are funds owned by the couple and when are they owned by a charity? Assets that are under the ownership and direct control of the couple are marital funds, even if the couple has earmarked them to be used for charitable giving.
If assets have already been donated to a charity, even if the charity is run by the couple or their family, those are likely not marital assets. This is true even if the spouses actually retain control over the funds and their use by the charity. The charity cannot be required to return funds that have been donated, even if one spouse donated without the other’s knowledge. Each type of charitable vehicle must be considered individually to understand the effect divorce will have upon it:
- Charitable Remainder Trusts A charitable remainder trust is a common way to set up a philanthropic gift, but the divorce can impact this. In this situation, the donors place marital property into a trust for their lifetimes or for a set number of years. The asset creates an income stream that the donors continue to receive. Upon the death of the donors, the asset itself is transferred to the charity. If the trust contains the right to amend the remainder gift, the asset itself is considered marital property and can be considered in the equitable distribution of marital assets in the divorce.
- Private Foundations and Supporting Organizations When a couple funds a 501(c)(3) charitable foundation, the assets belong to the charity and are no longer considered marital assets. Spouses normally hold officer positions in private foundations and remain in control of how the funds are distributed, although they no longer qualify as marital assets.
- Donor-Advised Fund Funds placed in this type of charity are no longer marital assets, but spouses generally work as advisors together and may find they are unable to continue in those roles after a divorce.
- Charitable Pledges A pledge to donate future marital funds or marital assets to a charity is an instance in which a donation could possibly be rescinded to include the assets into the divorce. A pledge is not legally considered a debt unless there is consideration for the promise, such as naming rights for a building or if the charity takes action based on the pledge, such as breaking ground. If there is no consideration, the promise of the gift could be rescinded and the couple would not have to donate the funds, making them part of the marital estate that is divided in the divorce.
- LLCs Both Gateses, as well as Mark Zuckerberg and Steve Jobs’s widow, operate some of their philanthropic work through LLCs. This allows the organization to make political donations and does not require the kind of full disclosure about staff and funding required of 501(c)(3) organizations. The drawback, of course, is that an LLC does not provide the same tax deduction. When it comes to divorce, a charitable LLC is a marital asset if it was created during the marriage and must be included in the distribution of assets.
Separation of Marital Charitable Organizations
When marital funds have been jointly donated to foundations or supporting organizations, such as those discussed above, and the couple has controlling roles within the organization or over the funds, the best option may be to split the charity into two separate organizations so that each spouse can move forward with their own charity, running it as each chooses.
If funds are held in a donor-advised fund, the best action may be to separate the fund into separate funds run by each spouse. The charity that is the donee would need to agree to this separation. A charitable remainder trust can also be split into two trusts, or the couple can terminate the trust by donating the asset directly and immediately to the charity.
If the spouses reach a settlement that requires a new donation (for example, Bill and Melinda Gates have reportedly agreed that, if they cannot run the Gates Foundation together, Bill Gates will donate funds for Melinda French Gates to begin her own separate foundation), it is important that such an agreement not appear in a divorce settlement agreement. If it does, the donation will not be tax-deductible, since it is technically part of the marital property distribution. Additionally, a settlement agreement cannot require a charity to give funds to another charity as a way of balancing the parties’ interests.
If you and your spouse are donors to charitable organizations, it is essential that you speak with an attorney knowledgeable about the interrelation between philanthropic gifts and divorce.