Sometimes the planning of the rich and famous helps us better understand what mere mortals can accomplish through proper planning. Such is the case with the recent planning of Facebook co-founders Mark Zuckerberg and Dustin Moskovitz, and CEO Sheryl Sandberg. The footnotes to Facebook’s recent public stock offering reflect that these executives apparently used a tried-and-true estate planning technique known as a Grantor Retained Annuity Trust (GRAT) to transfer upwards of $200 million free of gift and estate tax.
How did they do this? They took advantage of a perfectly legal structure that is expressly authorized by the tax code. In short, their GRATs work like this; before an IPO and thus when Facebook’s stock value was low, the executives transferred shares of Facebook stock to their respective GRATs. In return, the executives will each receive an annual income stream, known as an annuity, for a predetermined number of years. If they survive this term, any property left in the trust at the conclusion of the annuity payments passes to the remainder beneficiaries (typically family members or a trust for their benefit).
The transfer is subject to gift tax only to the extent that the value of the assets transferred, plus an assumed growth rate (published by the IRS monthly and currently at historic lows), exceeds the amount of the annuity payments back to the trust maker (aka grantor).
Thus, one can structure this transaction as a “zeroed-out GRAT” such that the value to the remainder beneficiaries is calculated at zero and the transfer is not subject to gift tax (this is true whether we transfer $100 or $100 million to the trust). However, even though there is no gift tax, any actual growth beyond the IRS’s assumed rate, or increases in value in trust assets, or (as in this case) both, inure to the remainder beneficiaries free of gift and estate tax.
As was the case here, GRATs are perfect for highly appreciating assets and those assets that will return more than the IRS’s assumed growth rate, currently only 1.4%. Thus, any client with pre-IPO stock or other highly appreciating assets should at least consider this strategy. This is especially true since recent proposals would require a minimum annuity term of 10 years for all GRATs, thereby limiting their effectiveness for clients close in age to life expectancy.
A recent Forbes article discusses this transaction in detail and estimates that, combined, Zuckerberg, Moskovitz and Sandberg transferred more than $200 million free of gift or estate tax. The complete article is available online at http://www.forbes.com/sites/deborahljacobs/2012/03/07/facebook-billionaires-shifted-more-than-200-million-gift-tax-free/.