23 May 2012

Excitement ran rampant through the financial community with the recent initial public offering (IPO) of Facebook stock where it was offered at $38 a share. Although the biggest IPO in technology stock history is now the subject of several lawsuits with claims that sensitive financial information about Facebook was not properly disclosed to the public, it is still a significant IPO and it added tremendous amounts of wealth to the coffers of two of its founders, Mark Zuckerberg and Dustin Moskovitz, who are now touted as two of the world’s youngest billionaires.

Through SEC disclosures made by Zuckerberg and Moskovitz, the public was given a glimpse of some sophisticated estate planning employed by the two Facebook founders. Before the Facebook stock was offered to the public (i.e., before the price of the stock significantly increased to $38 a share), both Zuckerberg and Moskovitz reportedly transferred Facebook stock to their Grantor Retained Annuity Trusts (GRATs). Zuckerberg transferred $3,023,128 worth of stock (3,642,323 shares) to his GRAT; Moskovitz transferred $11,955,748 worth of stock (14,404,516 shares) to his GRAT. By making these transfers to the GRATs, Zuckerberg and Moskovitz were able to transfer a significant amount of wealth to the remainder beneficiaries named in the GRATs at a limited gift tax cost.

For a summary of how GRATs work, see our recent blog article on GRATs.  Essentially, the person who creates the GRAT (the grantor) transfers assets to the GRAT (an irrevocable trust) and retains a right to receive an income stream known as an annuity for a term of years (e.g., 5 to 15 years) based on an interest rate determined by the IRS (known as the 7520 rate). The value of the grantor’s annuity interest in the GRAT is based on the length of the grantor’s retained annuity interest and the 7520 rate. The value of the  taxable gift made to the the remainder beneficiaries in the GRAT (i.e., the people who receive the GRAT assets after the grantor’s retained annuity interest ends) equals the fair market value of the assets transferred to the GRAT less the value of the grantor’s retained annuity interest in the GRAT. If the 7520 rate is low (as it is right now) and the assets transferred to the GRAT have the potentially to appreciate significantly, the appreciation in the assets in excess of the IRS’ projected appreciation using the 7520 rate will pass to the remainder beneficiaries with minimal to no gift taxes.

Although the SEC disclosures state that Zuckerberg and Moskovitz transferred certain amounts of their Facebook stock to their GRATs, we do not know the details of the terms of their GRATs. However, based on assumptions and projections made in a recent Forbes article, it can be reasonably assumed that Moskovitz was able to pass approximately $147,573,190 in assets to his beneficiaries free of gift tax and Zuckerberg was able to pass approximately $37,315,513 free of gift tax. A GRAT is a great vehicle for transferring substantial amounts of wealth at a low gift tax cost.  It is especially important to consider using a GRAT to transfer an interest in a family business to younger family members before expanding a business (or before an IPO) where the value of the business may be transferred at a low price before its value significantly appreciates. President Obama and Congress are in favor of limiting the use of GRATs so that assets transferred to GRATs cannot pass to beneficiaries gift tax free. However, the law has not been changed yet.  Don’t miss the opportunity at this time while interest rates are low to set-up one or more GRATs for your family to take advantage of the same estate planning techniques as the founders of Facebook.

Reference, Forbes, Zuckerberg, Moskovitz Give Big Bucks to Unborn Kids by Deborah L. Jacobs, March 2012

If you would like to discuss this or other trusts and estates issues, please contact the attorneys at Drucker Law Offices, 468 North Camden Drive, 2nd Floor, Beverly Hills, CA 90210, 310.285.5375 Tel, 310.444.9754 Fax, www.druckerlaw.com

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