Those are the two difficult decisions that every entrepreneur has to do but many of them invariably fail to do, at the right time. In recent days some events have been astounding. Bill Gates relinquishing control at Microsoft and Warren Buffet giving almost all of his wealth have got people's attention mainly because they accomplished the most dreaded decisions that anyone can face in their lifetime, to seperate from their creation and to donate their lifetime earnings.
I salute these two gentlemen for their contributions to this world and their philanthropic accomplishments and wish them best for the future.
This post though is dedicated to Warren's actions. Giving away $31B of ur earnings is, to put it mildly, not an easy thing to do. And here we are talking about Mr.Buffet. You cannot find an hardcore and hardnosed entrepreneur like him. So definitely something is cooking here. We'll see what it is.
The Philosophy of Philanthropy:
Whether it is Bill Gates or Warren Buffet, if you notice carefully, they usually donate stocks. A typical Indian philanthropist usually donates cash and so does an ordinary American who forks out $50 or $100 and is happy with a receipt for that year's tax return benefits.
But we are talking about Mr.Buffett. This man probably knows tax laws better than the guy who wrote it. He knows how tax inefficient a cash donation is. Let us delve in to this subject a little more deeply, about 5ft depth or so, so we don't drown.
Let us say you buy Microsoft's share for $1000. And over years $1000 becomes $10000. Now if u wanted to donate these earnings, typically, we'll sell the shares, pay the government tax on $9000 earning and then we'll be left with just about $8600 for our philanthropic needs. But what happens if u just donate the stock ? Voila, you don't pay government any tax and best of all you just increased ur philanthropic tax contributions write off for the year by $1400, that is you will be able to claim tax deductions for the entire value of stock on the day of donations.
I will not go about the tax implications of the trust/NGO that gets the stock. This is where Buffett's brilliance comes in. He just signed away his wealth, not in dead presidents but, in stocks. Isn't this brilliant ?
The working of the trust: The B & M Gates trust enjoys a no-tax status in USA. So whatever it earns it pays no income tax. No wonder the trust churns about $250 million every 3 months. The trust earned about $1.6 billion last year and paid a paltry sum of $14 million as some sort of levy (no income tax). That's why wealthy Americans usually go the trust route. They create the trust, donate all their wealth and become trustees and enjoy their wealth.
And so why not Buffett and his own trust ?: Only Buffett knows. There could be myriads of reasons. Buffettologists in Morningstar have put forward many a theory on this one and I have listed a couple of them.
Buffett is weak in technology areas. He stayed away from the Nasdaq bubble much to the chagrin of many Buffettologists, who saw their neightbors becoming millionaires playing Nasdaq but their own portfolio still mired in the dull and boring world of Insurance and consumables. But we all know who had the last laugh and who is called the Oracle of Omaha. Buffett also knows that the computer technology is here to stay. This donation on Buffett's part could be a way of attracting, I wouldn't say recruiting as these guys are way past that stage, Bill Gates in to Berkshire's empire and launch it's foray in to technology areas.
Another reason, some Buffettologists opine but I disagree, is the question of who would succeed Buffett in Berkshire when he steps down. Could it be Bill Gates ? As I said I disagree that Buffett will have this in mind but if such a thing does happen then it will not be the first time I'm proven wrong. Hey atleast I'm honest.
Buffett has set up trusts in his wife's name and his children's name. It's just that Bill and Melinda Gates are the largest beneficiary. So Buffett is not above the family politics but he just doesn't practise it so brazenly as some of our ilk do.
So here's to the gentlemen who have shaped countless lives by just doing their duty, Bill Gates and Warren Buffet. The modern day Arjunas. Cheers !!!
Some Berkshire trivia:
Berkshire Hathaway was originally a spinning company. Mr.Buffett bought it but transformed in to a holding company of sorts.
Berkshire has 2 classes of shares, A and B. Wondering what their prices are.
BRK-A is just $95,000 and
BRK-B is just around $3000. So don't expect a big dip on these two stocks to buy and trade.
Bill Gates usually buys BRK-A. The last time he bought, he bought a whole 7, that's right SEVEN, shares of BRK-A.
So why is the share price so high ? Berkshire never pays any dividend. It used to be that dividends were taxed differently and at a higher rate than, say, stock sale. Berkshire wanted to avoid paying out money and taxing it's shareholders. Therefore all that Berkshire earned is built in to the stock.
This high stock price also helps to keep traders and speculators away. Even though Buffett is so tax conscious, he loves to pay taxes. According to him if we pay more taxes that means we are earning more which is a good thing. What he is against is paying unnecessary taxes when there are better ways around.
BTW, if you are still wondering who Buffettologists are then go
here. Buffettologists are those who track Buffett's every investing move and analyze them to shreds and second guess his next move. They are also usually investors in Berkshire.
Till next post adios..
