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    Category Archives: GRATS

    Facebook Founders Find Estate Planning Fix

    Mark Zuckerberg and Dustin Moskovitz, the co-founders of Facebook and two of the world’s youngest billionaires, may seem too young to be thinking about estate planning. But in 2008, when they were both 24, they used an estate planning tool that is more familiar to people two or three times their age.

    Not too long ago, the taxation and accounting world found a new star in Mark Zuckerberg, the wonderkid behind Facebook. Why? Because his unparalleled control over the company was about to create the biggest tax bill ever when the company went public and his stock became publically known.

    Certainly, the taxation and accounting world can be rather morbid in that regard, but at least for Zuckerberg there is good news coming out of the woodwork. With or without taxes, he has saved a great deal of money through forethought and proper estate planning.

    It is unique to meet anyone who begins their estate planning at age 25 but Mark Zuckerberg and his partner in business, Dustin Moskovitz, did just that. As reported in a recent article from Deborah Jacobs at Forbes, the pair had the foresight to set up their private stock with a certain kind of trust before the true boom in value. As a result, they locked in that lower value and locked out those incredible taxes. As Jacobs estimates in her article, the pair shifted more than $185 million into what’s often known as a zeroed-out GRAT. In somewhat more plain English, this Grantor Retained Annuity Trust in which the rate of appreciation exceeds the rate of interest, secures the excess amount (like all that created from going public) from taxation for the beneficiaries of the GRAT.

    Sometimes the young do have something to teach their elders, and in this case the crew over at Facebook serves as an incredible example of what has been an incredible technique.

    For more information on Zuckerberg and his partners check out the original article. Also, if you’re interested in learning more about GRATs, there’s no time like the present to investigate whether you should create your own.

    Note: Not only is the GRAT most advantageous when an economy is set to rebound, but the process itself is in the sights of many new budget and taxation plans by the current administration. (Translation: This opportunity might not be around much longer!)

    Reference: Forbes (March 7, 2012) “Facebook Billionaires Shifted More Than $200 Million Gift-Tax Free


    Fiscal Green Book Fidgets with IDGTs

    IDGTs and GRATs (along with many other income, gift and estate planning strategies) came under attack in the Obama Administration’s Fiscal Year 2013 Revenue Proposals (the “Green Book”) which, if enacted into law, could essentially eliminate the use of IDGTs and greatly
    reduce the effectiveness and flexibility of GRATs. This latest, although not totally unexpected, development prompts me to continue to passionately stress that there may never be a better time to engage in sophisticated estate and gift planning than now.

    The calm before the storm. That would be an accurate characterization of how 2012 is shaping up, especially when it comes to estate planning. Our regular readers will likely remember why.

    Nevertheless, along with the estate and gift taxes, there are a few more laws to watch as they worm through Capitol Hill. As a result, 2012 may be the last truly advantageous year for certain trusts like Grantor Retained Annuity Trusts (GRATs) and a somewhat lesser known vehicle, the Intentionally Defective Grantor Trust (IDGT).

    A recent Forbes article cast the spotlight on the IDGT, so I thought I’d do the same here.

    An IDGT lives up to the name, or at least it does when formed properly. In essence, the trust is set up by a Grantor (i.e., the Trustmaker) who then sells assets to the trust in exchange for a note at a very low interest rate. This is not uncommon with many trusts, but since it’s defective it also places the interest rate burden back on the grantor. Result: The Grantor gets an initial market value on their sale, which is likely to be low, and then continues to pay for those assets. Sounds a little weird, but stick with me.

    Here’s what the Grantor is betting: The asset sold is presently, legitimately “undervalued,” but
    is expected to greatly increase in value if the economy returns to full swing. As a consequence, the undervalued asset appreciates at a greater rate than the very low interest rate and thereby locks that value into the trust for beneficiaries, and keeps that added value from ballooning the size of an estate instead. Moreover, since the assets were sold in the first place, the use of such a trust wouldn’t waste the valuable lifetime gift tax exemption.

    Not everyone likes this strategy, however. The threat, at the moment, to GRATs and IDGTs is the most recent budget proposal put forward by President Obama. Accordingly, the seeds are thereby sown and we can only expect much more (negative) attention to be drawn to these estate planning tools in the future.

    For more information take a look at the original article or you can learn more about the budget challenge to IDGTs and GRATs here.

    Reference: Forbes (February 22, 2012) “Estate and Gift Tax Considerations for 2012: IDGTs – And you Must Act Now!

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