It is being reported that in 2008 Mark Zuckerberg and Dustin Moskovitz transferred a significant portion of their Facebook stock into a Grantor Retained Annuity Trust (GRAT).
Facebook had not yet “gone public” and therefore the value of the stock was far below what it would be following the initial public offering (IPO). The Facebook creators and their Estate Planners knew that the stock value would increase significantly as a result of the IPO.
The GRAT, generally speaking, is a trust created by a person known as the grantor. He or she transfers assets expected to appreciate significantly to the irrevocable trust. The trust will be set to run for a period of years. At the end of the term of years, named beneficiaries, likely a child or children, receive the trust remainder. The key to the planning revolves around the fact that the grantor retains the right to an annuity payment. The annuity for simplicity of description is set to be an amount equal to the initial trust contribution plus interest. The interest rate is usually pegged to and IRS federal funds rate.
Because the grantor is set to receive his initial investment plus interest, there is likely no gift made for federal gift tax purposes. Therefore, nearly all of the appreciation of the assets placed in the GRAT will remain in the trust at the end of the GRAT term without any gift tax implications. Where the “remainder interest”, for gift tax purposes, has no value we have what is referred to as a zeroed out GRAT. So, we want assets placed into the GRAT that will far exceed the IRS rate to maximize the tax free gift passes to the beneficiary.
As you may have gleaned, the GRAT plan provided a tremendous opportunity to the Facebook creators. According to Forbes magazine, Zuckerberg transferred $3,023,128 worth of stock (3,642,323 shares) to his GRAT; Moskovitz put $11,955,748 worth (14,404,516 shares) into his. Forbes went on to estimate the tax free gift remaining in the respective GRATS:
Moskovitz GRAT: $147,573,190
Zuckerberg GRAT: $37,315,513
That is a total gift tax free transfer estimated at over $184 million. Based on today’s federal estate and gift tax rates (35%), that resulted in an estate tax savings of over $64 million. This might be over simplifying the related issues, but you get the idea.
As demonstrated by the extraordinary Facebook example, the GRAT can provide amazing opportunities to those who hold assets expected to appreciate rapidly. You can safely transfer the vast majority of that appreciation in trust to your beneficiaries without estate or gift tax consequence. The resulting savings could be anywhere from tens of thousands of dollars to millions of dollars. Business owners and owners of stock or real estate expected to increase in value are some of those who might consider a GRAT as a planning option.
Keep in mind the GRAT concept is under scrutiny so the planning should be executed before option is lost or the benefits are diminished. Read my earlier article here.