02 Jun

Facebook Founders Use Estate Planning Technique for $200 Million Tax-Free Transfer

Manya Deva Natan
Manya Deva Natan is a California Bar Certified attorney with the law firm of SSS Legal & Consultancy Services located in Calabasas, CA. Her practice focuses on International Estates, Trusts and Estates, Asset Protection, Trust Administration, and more. Manya received her law degree from Stanford University, as well as a Master's in International Affairs from Columbia University. She has completed extensive course-work and training in the areas of mental, physical, and emotional health, including being a published author. She is the founder of two publishing-based companies related to health and wellness and has particular interest in the legal and financial components of health and their importance in integrated health. She has appeared multiple times on Good Morning America and is regularly contacted by national media outlets for commentary.
Manya Deva Natan

Two women having a discussion and sharing information during a business meeting.  Shallow depth of field.

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/.

Share this