Californians recently witnessed one of the largest initial public offerings of stock in Silicon Valley history when California-based Facebook, Inc. went public. For some, like Facebook's co-founder Mark Zuckerberg and other insiders, the IPO will only add to their already considerable financial assets. These 20 and 30-year-old millionaires prove that estate planning is not only the concern of the elderly; indeed, minimizing estate taxes and maximizing asset protection are very much on their relatively young minds.
One tool that they are using to preserve wealth is a grantor-retained annuity trust. A GRAT is a specialized type of trust, created for a set period of time of at least two years. An asset, such as Facebook stock, is placed in the trust before its value goes up. There may be some small initial tax when the trust is established, but the subsequent growth in the asset's value is outside of the taxable value of the estate.
Over the life of the trust, the person who established it will receive annuity payments equaling the asset's initial value in addition to interest. When the term of the GRAT ends, the asset goes to its beneficiaries, tax-free. Beneficiaries can include current friends and relatives as well as future spouses and children. The asset will usually be deposited into another trust established for that purpose.
Although the time period and structure of the Facebook insiders' GRATs and the future value of the assets in them are not known, it is estimated that these savvy young entrepreneurs may save more than $200 million dollars in estate and gift taxes by taking advantage of this estate planning tool.
Source: The Wall Street Journal, "How Facebook's Elite Skirt Estate Tax," Laura Saunders, May 11, 2012.