We all know that Facebook’s founding team and early investors will make millions off the initial public offering. But, most of us probably aren’t aware that many of them will owe little to no taxes as result of setting up a certain trust. Those of us that are millionaires or soon to be may want to learn how Facebook’s elite has avoided taxes as it may be a useful legal maneuver for you too.
The grantor-retained annuity trust or GRAT
This trust is used to avoid estate and gift taxes by transferring asset appreciation tax-free from the grantor to beneficiaries. In Facebook’s case, Mark Zuckerberg setup a GRAT to hold 3.4 million shares of the company stock. During the term, Mark will receive annual payments equivalent to the assets original value plus a fixed interest rate as determined by the IRS Section 7520 which is currently 1.6%. Once the term ends, the beneficiaries will receive the asset appreciation tax-free whether it is $10 million or $100 million. It could be well above the current gift tax exemption of $5.12.
Any restrictions and/or costs?
The term of the trust must be two years or more and there will be certain costs just to set one up. You will need to have an independent appraisal which may cost several thousand dollars and you’ll also need a lawyer to draft the necessary documents to open the trust. In addition, this may sound obvious, but, you need to have an asset that is undervalued and expected to substantially rise in value in the future.
If the grantor dies during the GRAT term, the value of the remainder interest in the trust is included in the grantor’s taxable estate. A GRAT is also not recommended when the beneficiaries are grandchildren since the generation skipping tax is applied when the GRAT terminates and the ability to leverage the exemption is lost.
Is a GRAT right for you?
Probably not unless you are worth millions or potentially will one day and would like to avoid estate and gift taxes. Low interest rates are also recommended which works out perfectly for Facebook’s elite today.
More Questions? Browse Answers or ask your estate tax questions online.
Related Articles
->The Wealthy Should Prepare For The Expiring Gift Tax Exemption
->When Should I Start Taking Social Security Benefits?
->Tax Planning For Catch up Contributions to IRA and 401(K)
->What Happens If I Contribute Too Much To My Roth IRA?
->When is the Actual Deadline to Contribute to My 401(K)?
->Who is Liable for Your Credit Card Debt When You Die?
->How The Bush Tax Cut Extension Impacts Your Wallet
->No Estate Tax for 2010 But Returns in 2011
