Giving away wealth normally makes someone less wealthy. But what if the gift reduces the donor’s taxes while helping preserve the value of the assets the donor keeps?
Treasury’s new rules for Trump Accounts create an opportunity to examine that possibility. Eligible philanthropic donors can contribute individual company shares through Treasury to children’s accounts. Those shares generally cannot be sold for five years or until the end of the calendar year the child turns 17, whichever comes first. (So, if the goal is to keep shares off the market, donate to younger children.) By postponing potential sales, the arrangement could reduce selling pressure when employees and other insiders begin cashing out.
SpaceX president Gwynne Shotwell and her husband reportedly pledged roughly one share for each of more than two million children, with the announcement valuing the gift at approximately $325 million. Musk and leaders of other firms about to come on the market could follow.
SpaceX uses a staggered schedule for releasing insider shares. Some shareholders can begin selling after the first post-IPO quarterly earnings report, subject to specified conditions, with additional shares released over subsequent months. Ordinary restrictions generally expire after six months, while Musk and certain other major investors face approximately one-year restrictions.
What if shareholders could postpone some of those sales through charitable gifts, gain tax savings, and potentially increase the value of the shares they keep?
Research suggests that IPO lockup expirations can produce more than a brief dip in prices. Field and Hanka’s 2001 study found an average three-day abnormal return of approximately −1.5%, but that average conceals differences among companies.
Bradley, Jordan, Roten, and Yi found the largest losses among venture-backed technology companies, particularly those with substantial post-IPO price increases and unusually heavy trading around expiration.
Persistence matters too. Ofek and Richardson’s study of IPO lockups found declines of approximately 1%–3%, with evidence favoring a lasting price adjustment rather than temporary selling pressure followed by recovery.
Their subsequent study, DotCom Mania, reported average longer-run excess returns as low as −33% for Internet stocks after lockup expiration, linking insider selling and the relaxation of short-sale constraints to the collapse of inflated valuations.
The release of a large share of stocks can put downward pressures on stock prices. Mandatory retention of donated shares inside of Trump accounts might postpone stock price declines until the earnings grows and valuations are reasonable.
The possible stock-price effect is only one part of the calculation. Donating appreciated shares through a qualifying charity can provide a deduction generally based on their market value, subject to applicable limits, while avoiding realization of the embedded capital gain.
The deduction reduces taxable income; it is not a dollar-for-dollar tax credit. The tax savings could be especially valuable to high-income California residents, who may benefit from both federal and state charitable deductions.
These benefits generally already exist for qualifying charitable gifts. The new benefit from the rule allowing contributions to Trump accounts is the provision that shares be kept off the market for five years.
Could the donors come out ahead?
A hypothetical donation of 10% of Musk’s SpaceX holdings would be worth approximately $100 billion at recent prices with remaining stake worth $900 billion. A gift that generates $30 billion in tax savings and props up stock prices by 7.78 percent would increase Musk’s wealth.
The potential benefits to owners extend beyond taxes and delayed sales.
Distributing company shares to children could cultivate brand loyalty and a constituency of families with a financial interest in the company’s success.
Established public companies would have access to a channel of goodwill unavailable to private competitors.
Treasury’s stamp of approval can enhance a company’s reputation and confer a valuable competitive advantage, raising questions about corporate favoritism and whether other firms deserve the same treatment.
Donors choose which eligible shares to contribute, subject to Treasury approval, while recipient families generally cannot sell during the required holding period. This exposes children to concentrated investment risk while potentially supporting the value of donors’ remaining holdings.
One possible fix would be to pool donated shares in a diversified fund and distribute fund shares to children’s accounts. The fund could gradually sell and rebalance its holdings, preserving charitable giving while reducing dependence on any one company.
The irony is worth examining. Giving away stock might, under certain conditions, will make a billionaire richer.
The proposal is clever: it combines charitable giving and tax savings with restrictions that could support the value of donors’ remaining shares. Benefits to donors do not negate the value of the gift. But the children would bear the risk of holding shares in the company the donor selected. A program intended to build children’s wealth should be judged primarily by how well it serves them, including whether it provides adequate diversification.
Author’s note: Wealth advisers considering whether charitable giving could make their billionaire clients richer might consider spending $30 on an annual subscription. A modest investment in the scheme of things.
50 percent off coupon leading to $30 annual price.