GRATs For the Facebook Insiders

Facebook may go public as early as next week, and several of the company’s insiders have used Grantor Retained Annuity Trusts (GRATs) to avoid what would be large amounts of estate and gift taxes. There are eight known “annuity trusts” that eight separate insiders have set up – each with about 22 million shares that will be worth more than $690 million if Facebook ends up going public at $31.50 per share.

If the Facebook crew did not use GRATs for their shares, the gift or estate tax owed on the shares would be over $200 million at the current 35% estate-tax rate. GRATS enable the transfer of assets practically tax-free when a wealthy person is wiling to part with assets while they rise in value during the time they are in the trust. The taxpayer sets up a GRAT with a set term of at least two years before the assets gains its value. Over the life of the trust, the taxpayer who set it up will get annual payments plus a return based on a fixed interest rate that the IRS sets. All the while, the assets are growing in value outside of the grantor’s estate. When the GRAT term ends, the beneficiaries get the assets. The beneficiary can just be another trust the taxpayer set up for his or her own benefit. The Facebook insiders could even name future children and future spouses as their beneficiaries.

Even if Facebook stock goes down drastically in value, the stock is just returned to the original owner and the taxpayer who set up the GRAT is no worse off because he or she hardly paid any tax to begin with. There is not really a way for Mark to lose in this deal – he will either be better off, or in the same position that he started.

See Laura Saunders, How Facebook’s Elite Skirt Estate Tax, The Wall Street Journal, May 11, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.