Facebook Co-Founders Using GRATs Effectively

Mark Zuckerberg and Dustin Moskovitz co-founded Facebook and are now two of the world’s youngest billionaires. The two have been advised to set up grantor retained annuity trusts (GRATs) to transfer approximately $185 million to trust beneficiaries without paying gift tax.

GRATs  allow the person setting the trust up to put company shares into a short-term revocable trust and he/she can retain the right to receive an annual income stream for a preset time. The grantor has to survive that period for this type of trust to work and if he/she does, then property left in the trust when the annual payments cease will pass to family members or a trust to their benefit.

Zuckerberg transferred $3,023,128 worth of stock to his GRAT and Moskovitz put $11,955,748 worth into his. Using the Tiger Tables Actuarial Software, one lawyer was able to determine that if the GRAT lasts five years and grows at 3.6% for the first four years, and in the fifth year of the GRAT, Facebook goes public at $40 per share, and the GRAT ends at that price, the total tally for tax-free transfers through the GRATs is: Moskovitz – $147,573,190; Zuckerberg – $37,315,513.

Zuckerberg and Moskovitz do not have children yet, so it makes sense that they would make trusts the beneficiaries of the GRATs. That way, they can create flexible instructions that could provide for children if they have some in the future, or extended family members. They could also put provisions into the trusts to benefit charities as well.

Wealthy individuals can use GRATs to shift assets that you expect to suddenly increase in value or if it is difficult to value an asset. GRATs are not ideal for transfers to grandchildren or other remote descendants because of the generation-skipping transfer tax. Now is a good time to set up GRATs because the March 7520 rate is historically low at 1.4%.

See Deborah L. Jacobs, Facebook Billionaires Shifted More Than $200 Million Gift-Tax Free, Forbes, Mar. 7, 2012.