Observers have long awaited an initial public offering for the wildly popular social networking website Facebook. The founders, Mark Zuckerberg and Dustin Moskovitz, have been in possession of the proverbial gold mine for quite some time, and they have already taken steps to take advantage of the tax efficiency strategy known as the zeroed out grantor retained annuity trust.
Zeroing out a GRAT for tax efficiency purposes involves funding the trust with volatile securities, and naming a beneficiary who would assume ownership of any funds that may remain in the trust after its term has expired.
When you create the trust, you arrange for annuity payments to be made to you on an annual basis throughout the duration of the term. The IRS considers the act of funding the trust to be a taxable gift, and it adds an estimate of appreciation using 120% of the federal midterm rate (Section 7520) that was in place when you executed the trust agreement.
This percentage is added to the value of the assets to determine the taxable value of the trust. To zero out the trust, you do the math and take annuity payments that equal the entirety of this taxable value over the duration of the trust term.
However, if the assets earn more than the percentage applied by the IRS using the Section 7520 rate, there will be a remainder in the trust after you’ve taken all of your annuity payments. This will be transferred to your beneficiary free of taxation.
Placing highly valued stock in such a trust before an initial public offering like the Facebook founders did (according to Forbes) is an ideal use of the strategy.
If you are interested in the possibility of creating a grantor retained annuity trust, or if you would simply like to discuss your options with a professional, right now is a good time to pick up the phone to arrange for a consultation with an experienced Campbell CA estate planning lawyer.