Take Bill Gates as a hypothetical example. He wants to avoid estate tax, bankruptcy or anything else taking his assets.

He created a charity and his children can run it and collect a salary. If the Gates' estate is insolvent does the charity still function? Does it effectively provide an asset shield and allows his children to collect a salary?



Charity law

A charity must only allocate its resources in pursuance of its charitable objects. Providing a "bankrupcty shield" to a donor is not capable of being a charitable purpose nor does it meet the public benefit requirement pursuant to sections 1 and 2 of the Charities Act 2011.

Bill Gates as a trustee

While a charity can pay a salary to its employees, it cannot usually pay its trustees a salary, and its trustees must avoid conflicts of interest. Where a trustee is related to an employee, there is a clear conflict of interest if that trustee takes part in any decision making process which sets the employee's salary. The standard procedure is that any conflicted trustees should sit out of such decisions. If the charity pays a salary far in excess of the market rate for the role, the trustees will open themselves up to being sued by the Attorney General (representing the public / beneficiary) for misallocation of charitable funds.

Bill Gates cannot therefore lawfully use his position as trustee of a charity in E&W to ensure that money which he donated is received by his family members via artificially inflated salaries.

Bill Gates as a donor

If a charity intends to claim Gift Aid on donations then the donation must be non-refundable, pursuant to sections 414(1), 416(1), and 416(3) of the Income Tax Act 2007.

In any case, a donor will have no power to compel a charity to return a donation unless the parties entered into a contract to that effect. If no such contract is in effect, then any money Bill Gates has given to the charity is unrecoverable and must be used to further the charity's objects. If such a contract exists, then the adminstrators of Bill Gates' bankruptcy will be able to recover the funds under the contract and use it to pay his creditors, so such an arrangement is useless.

Insolvency Act 1986

Under Sections 339 and 441 of the Insolvency Act 1986, the courts can make an order to reverse any transactions at an undervalue (including a gift) which have taken place in the 5 years prior to a bankrupcty (in the case of insolvency) or in the 2 years prior (regardless of insolvency). There is a rebuttable presumption of insolvency under the 5 year rule in cases where the transaction involved an associate of the person. See section 435 for the definition of "associate" which can include relatives, beneficiaries of a trust, and [charitable] companies.

This serves to prevent individuals from taking deliberate steps to distribute their assets in advance of a predicted bankruptcy.

If the Gates' estate is insolvent does the charity still function?

Pursuant to section 34(1) of the Charities Act 2011, a charity will continue to function so long as it remains charitable and hasn't ceased to exist or operate.

A charity could cease to exist if the underlying structure no longer exists. In the case of a charitable trust this could happen if all the trustees die without replacement or in the case of a charitable company if it is struck off the register (e.g. if all the directors die and are not replaced).

It is unlikely that Bill Gates' estate being insolvent will cause the charity to cease to exist or operate as it will almost certainly have or acquire independent trustees / directors to keep it operating.


The main issue is whether the transfer to the charity was a fraudulent transfer. If he is insolvent at the time of the transfer to the charity, becomes insolvent as a result of the transfer to the charity, or places himself in imminent and foreseeable risk of becoming insolvent due to a liability he predicts is coming up as a result of the transfer to the charity, his creditors can unwind the charitable gift. Otherwise, the gift is final.

In the U.S., the statute of limitations for unwinding a publicly disclosed gift to a charity as a fraudulent transfer is generally four years from the date of the transfer (due to a uniform state law adopted in most states that establishes the statute of limitations).

As a way to assure one's income in the future in the form of a salary for yourself and your children, it is stupid. For asset protection purposes, setting up a retirement plan for yourself is a much more efficient way to provide a salary for yourself during your life, and setting up an irrevocable inter vivos (i.e. created while you are alive) trust for your descendants is the way to go to provide them with income support during their lives.

But, if you want to make sure that you leave a legacy of your greatness behind, and worry that some time in the unforeseeable and indefinite future, circumstances might change and you might lose everything to a creditor or shift in the IT market, for example, setting aside money for charity while you are flush can achieve this goal.

Giving the gift to charity in the face of estate taxation means the charity gets 100% of the gift (and the gift is free of accrued capital gains taxation or income in respect of a decedent owed on distributions form pre-tax retirement accounts), while gifting the same assets to a non-charity would result in a tax that for a billionaire is basically 45% plus accrued income in respect of a decedent under current law.


Legally he could create a charity, even one that employee’s him and pays him a large salary. As others have said, there could be issues with timing, if he created the charity the day before a lawsuit was settled that took all of his assets, it would most likely be deemed fraudulent, but if done on a “just in case” basis and something happened years or decades later, then yes.

But in order to have a large salary, the charity would have to have assets 2 or three order of magnitude more than his salary. No, setting up a charity with 20 million and then having a million dollar salary for 20 years.

Likewise, he could create a trust, but again timing is an issue, if he had created one 20 years ago, and then was involved in DUI and lost everything in a wrongful death suit, his trust would most likely shield his assets, but if he created it just before the verdict it would be useless.

Basically, a really rich and really risk averse person might be able to do so, but for everyone else, it’s too much money for no gain.


Why would he do that?

He has always had a bankruptcy shield - Microsoft has always been a limited liability company. If Microsoft goes broke, Microsoft loses its assets, the shareholders lose nothing beyond what they have already paid for the shares.

  • 4
    The question is referring to Bill Gates going bankrupt. That is a very different thing to Microsoft going bankrupt. If Bill Gates goes bankrupt, any shares he owns will be sold and the proceeds used to pay his creditors.
    – JBentley
    Aug 12 at 10:30
  • @JBentley why would he go bankrupt? He, personally, is not doing anything risky.
    – Dale M
    Aug 12 at 12:34
  • 3
    I'm not sure it matters why he would or wouldn't go bankrupt - "take Bill Gates as a hypothetical example". The root of the question is about the viability of the proposed scheme.
    – JBentley
    Aug 12 at 13:27
  • 1
    Yes, what is the point of an answer like this? I'm always puzzled by the instinct to "answer" a question when one has no useful information to share. I know lots of people who do this to look smart, but I can't remember it ever working.
    – bdb484
    Aug 12 at 18:41

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