Mark Zuckerberg and Dustin Moskovitz have come a long way since 2004, when they started Facebook in their Harvard dorm room. Zuckerberg is currently CEO of Facebook, while Moskovitz left the company in 2008. Both hold substantial shares of Facebook stock, and are among the wealthiest people in the world.
By all indications, Zuckerberg and Moskovitz have carefully planned for the coming increase in their already substantial net worth. According to Forbes magazine, back in 2008 they made an extraordinarily smart move – particularly for a couple of unmarried twenty-something guys with no kids. They each transferred a sizable portion of their Facebook stock into a Grantor Retained Annuity Trust (GRAT).
A GRAT is an irrevocable trust that, when well-planned, can be a valuable gift tax savings tool.
The grantor transfers assets – in this case stock that is anticipated to appreciate quickly and significantly – into the trust for a predetermined term of years. Normally, the term of the GRAT is between two and fifteen years. During this term, the grantor receives an income stream, or annuity, from the trust. At the end of the trust term, any assets remaining in the trust go to named beneficiaries. If the value of the retained annuity is sufficiently high, the value of the remainder interest can be zero. The remainder assets are transferred at the end of the term free of gift tax. Often, these remainder beneficiaries are the grantor’s children. Since the Facebook founders are childless, it’s more likely that each of them named a trust as the beneficiary of his GRAT.
The twofold trick to successful GRAT planning is:
- Choosing the right trust term. If the grantor dies before the trust expires, the trust fails and the assets are included in the grantor’s estate for estate tax purposes. Mark Zuckerberg and Dustin Moskovitz are both 27 years old, so chances are this is not much of a concern.
- Using the right assets. With a “zeroed-out” GRAT, the grantor’s annuity is equal to the value of the assets transferred to the trust, plus an interest rate assigned by the IRS, known as the Section 7520 rate. When the grantor is projected to regain his initial transfer plus interest, there is no gift tax on the transaction. This is known as a “zeroed-out GRAT”, and it’s what the Facebook founders did. The key to this strategy is funding the trust with assets whose growth is anticipated to outpace the Section 7520 rate during the term of the trust. This way, there are (hopefully significant) assets left over for the remainder beneficiaries, allowing the grantor to transfer wealth and take advantage of the gift tax savings.
According to Forbes magazine’s estimates, the Facebook founders’ GRAT assets are not just poised to appreciate, they’re set to explode. Forbes had its expert crunch the numbers and he came up with these conservative estimates:
|Transfer to GRAT||$3,023,128
If you have clients who could benefit from a GRAT, now might be the time to get them into your office for a discussion. Not only are section 7520 rates favorably low, but the opportunity to use zeroed-out GRATs might be short-lived. President Obama’s proposed 2013 budget would do away with this planning strategy altogether.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
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