Warren Buffett Gift Mechanism: $2 Billion This Year

In 2006 Warren Buffett set up a plan to donate large sums of his fortune to the Bill and Melinda Gates Foundation.  He set this up in such a way that his donations would essentially double the amount of money the charity would spend every year.  Essentially, every dollar he donates gets spent and does not go to increasing the endowment. The initial pledge, based off of 10,000,000 shares of Berkshire Hathaway Class B Shares, at the time valued at $31 Billion, would double the spending of the Bill and Melinda Gates Foundation.

The Stipulations:

1. Bill and Melinda Gates must be alive and in charge of the foundation.

2. The Foundation must continue to qualify as a charity.

3. In the previous year, the Foundation must spend an amount equal to the Berkshire gift plus 5% of the foundations net assets.

Warren Buffett including these stipulations for obvious reasons.  He wanted Bill and Melinda Gates to be in charge because he knows and trusts them, and how they manage the money. You wouldn’t want to give a couple billion a year to someone you don’t know and trust would you?  He insists that the foundation qualify as a charity.  If it did not qualify as a charity, there would be large tax consequences, and the money would not stretch as far.  The final stipulations ensures that the money he donates is used now, rather than later. He did not want to grow a large endowment, he wanted the money to be spent on current world needs.

The Buffet Gift Mechanism:

This is my favorite part of the Buffett gift. In 2006 10 million shares were earmarked for this donation.  In 2006 5% of the shares were awarded to the Bill and Melinda Gates Foundation, and each year the foundation will receive a gift of 5% of the remaining shares.  Following this mechanism, the gift could go on forever, because he is only giving away 5% of the remaining shares, not 5% of the total. The same mechanism is also being used to donate shares to 4 other family foundations, just on a smaller scale.

Why not donate it all at once and have a massive spending spree on reducing poverty? After all 31 billion could go a long way in a year.  There are multiple problems with this. First of all even selling the 5% of his remaining shares can cause distortions in the market, selling off ALL of them at once would certainly cause the price to drop substantially, as there would likely not be enough buyers for the shares.

Secondly, the foundation is not set up to utilize that much funding.  There is only so much you can do to efficiently utilize large increases in revenue overnight.  the 5% donation effectively doubled the spending of the foundation in perpetuity, from about 1.5 Billion a year to $3 Billion a year.  There is no way that in the existing framework of the foundation they could spend $30 Billion in one year, they would have to quickly scale up their work, and then, most likely by the time they figured out how to manage such a behemoth, adjust back down to 1/20 of the amount of spending.

A lot of thought went into setting up this mechanism and I think that this concept could well be imitated by other philanthropists in the future.  Of the 99% of his wealth that Warren Buffet has pledged to donate, it must all be spent within 10 years of the settling of his estate.

Donations thus far:

Note: Class B Shares Split 50:1 in 2010, this doesn’t affect the value of the shares donated, just the total number of shares, for anyone who chooses to delve deeper into the numbers.

• August 24 2006: $1.6 Billion
• July 11 2007: $1.76 Billion
• July 1 2008: $1.8 Billion
• July 1 2009: $1.25 Billion
• July 1 2010: $1.6 Billion
• July 5 2011: $1.5 Billion
• July 6 2012: $1.5 Billion
• July 8 2013: $2.0 Billion

This years donation:

17,458,431 shares were donated on July 8 2013, which means that the total before the donation would have been 349,168,620 shares. After the donation 331,710,189 shares would be remaining. At today’s price of $129.30 per share, this would equal a donation of 16,585,509 shares valued at $2.14 Billion.

Not including the donation about to be made, thus far a total of over $13 billion has been given to the foundation.  The current remaining shares are worth $42,525,246,229  at $128.20 per share.  After making 8 years of donations, using the remaining 5% mechanism, the total value of his remaining shares is greater than when the donations started!

Impact on the World

Bill Gates, the richest man in the world today, and Warren Buffett, donate more money every day than most of us will earn in a lifetime.  These are immense fortunes. Had they not given this money away both men would have fortunes in excess of $100 Billion, but what would that money bring them? At a certain point it doesn’t matter how much wealth you have because you couldn’t increase your happiness or standard of living after a certain point. Both Gates and Buffett feel that since their marginal utility of the money for personal and business ventures is relatively low, they are spending that money in areas with high marginal utility.

No matter how much money a Bill Gates or a Warren Buffett can give, it still doesn’t replace all of us 99.99999999999 percenters doing something.  The US has a population of around 300 million people. If we each donate $3, that is $1 billion a year.  $30 makes it $10 Billion, which is far more than these guys donate in a year, or could do on a sustainable basis.  As awesome as it is that these guys are doing good in the world with their fortunes, it isn’t just Billionaires who can make a difference.

The Bill and Melinda Gates Foundation works on many projects, which the basis being improving world health and reducing poverty.  The Foundation has built a demand for immunizations and a network to distribute them.  Bill Gates once said “There was nobody you could write a check to,” referring to a time about 15 years ago when he was ready to spend billions on vaccines,but couldn’t get them produced.  The established framework they have developed for immunization distribution makes future projects much easier.

Polio has been a major target of the Bill and Melinda Gates Foundation.   Polio is on the brink of eradication and once it is gone, it is gone forever.  Smallpox was the first human disease eradicated, which was complete in 1979.  Hundreds of millions of people died from small pox, now no one will ever again, the same is the hope for Polio. In 2013 under 400 contracted the disease.

Credit: Bill and Melinda Gates Foundation

To read more on the fight against Polio and the work the Bill and Melinda Gates Foundation does click here.

What do you think of the Warren Buffet gift mechanism for distributing wealth? What are your favorite philanthropic measures, past or present?