If you thought that estate planning was only for the middle aged or elderly, think again. Estate planning can often be most effective when started young — before you actually have a fortune to distribute. Case in point — Mark Zuckerburg and Doug Moskovitz, the founders of social media giant Facebook. According to recent news reports, the two have used estate planning strategies that will effectively allow them to shift over $185 million dollars to trust beneficiaries without having to pay gift taxes. That figure, by the way, is a conservative estimate. So how did they pull this off? By using an estate planning tool known as a Grantor Retained Annuity trust, or GRAT.
Back in 2008, when both Zuckerburg and Moskovitz were both just 24 years old, they created a GRAT and used pre-IPO stock to fund the trust. A GRAT allows the grantor to fund the trust with assets of his choosing, in this case pre-IPO stock. The trust has a definite termination date, typically 5 to 15 years. During the lifetime of the trust, the grantor receives a yearly annuity. Upon termination of the trust term, the assets remaining in the trust are passed down to the beneficiaries of the trust. The key to a GRAT is to make the total annuity payments equal to the value of the assets used to fund the trust at the time of funding, plus an assumed interest rate. If the assets appreciate more than the assumed interest rate, the remainder is passed to beneficiaries with little or no gift tax obligation.
Considering the current value of Facebook stock, it is no surprise that millions stand to be shifted free from gift taxes.
It just goes to show you that it is never to early to start estate planning. However, it is not a do-it-youself project. The best way to start the journey is to consult with an experienced and qualified estate planning attorney.