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Irvine, CA Estate Planning Blog

Monday, November 2, 2015

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

Just in case some may not have heard about this case involving the planning of the rich and famous in 2008, take a minute to better understand what mere mortals can accomplish through proper planning. Facebook co-founders Mark Zuckerberg and Dustin Moskovitz, and CEO Sheryl Sandberg 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 worked 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 each received 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 which is still very low. Thus, any client with pre-IPO stock or other highly appreciating assets should at least consider this strategy.

It is prudent to consider this technique now since the Obama Administration’s 2016 budget proposals, known as the Greenbook, proposes doing away with zeroed-out and decreasing GRATs. It suggests imposing a requirement that the value of the remainder interest in a GRAT be equal to at least25 percent of the value of the property transferred to the GRAT or, if greater, $500,000 (but not more than the value of the GRAT in any case). In addition, the budget proposal seeks to impose a minimum 10-year term for GRATs and a maximum term of the life expectancy of the annuitant plus 10 years (to combat “100-year GRATs”). 


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Law Offices Of Michael J. Wittick, A Professional Law Corporation is located in Irvine, CA and serves clients with estate and wealth preservation matters throughout Irvine, Lake Forest, Laguna Woods, Laguna Hills, Foothill Ranch, Tustin, Aliso Viejo and the surrounding areas.



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