October 22, 2014 How Sam Walton Taught Zuckerberg a Trick To Save His Kids $250M in Taxes
The Facebook, Twitter, LinkedIn founders saved their children about $1B in taxes. Zuckerberg, alone, saved about $250M in taxes. Long before their companies went public, they put a very small percentage of their stock in a Grantor Retained Annuity Trust (“GRAT”). A GRAT is a trust that works magnificently when the assets placed in it appreciate over the term of the GRAT (usually about 3 to 15 years).
The key rule with a GRAT is that you need to distribute to yourself about 102% of the initial value of the assets placed in the GRAT. Assume that you place 1M shares of stock in a 5 year GRAT when the price per share is $1 ($1M of stock) and the stock price increases by $50 per year. You will need to distribute to yourself annually about $204K ($1M initial value divided by 5 year term plus about 2% interest per year). So, at the end of the first year, you will distribute about 4,000 shares of stock, as those shares at that time would be worth about $204K. At the end of the 5 year term, there will be about 990K shares of stock remaining in the GRAT.
So, when you die, these asset pass to the beneficiaries of the GRAT (usually your children or future, yet-to-be-born children) tax free. So, if you die immediately after the term of the GRAT, the beneficiaries would receive about $198M of stock tax-free. Huge savings. If the stock was not in a GRAT, the Federal estate tax would be about $67M.
In Zuckerberg’s case, he initially set up his GRAT with 3 million+ shares in 2008, 4 years before Facebook’s IPO. This was when a share of Facebook was worth less than a dollar. After the IPO, the value of each share (which Zuckerberg will get to pass on gift/estate tax-free) in the GRAT grew at least one hundred fold, which will save the eventual beneficiaries hundreds of millions of dollars when it’s transferred to them.
This example is very simplified, as there are many other “moving parts” and there are professional fees to set up and maintain the GRAT that need to be considered. Bottom line, though, if the GRAT assets appreciate, this can save your children tons of money in taxes.
Interestingly, these GRATs are often called “Walton” GRATs. The Wal-Mart family won a 2000 Tax Court case that opened this door and made these trusts legal.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.