Financial success is supposed to be a purely positive thing that we are all encouraged to strive for throughout our lives. But the fact is that you have to pay the price for your success in the form of some rather harsh Federal taxes.
This is one of the first things to keep in mind if you should find yourself in possession of a significant amount of money, and it certainly crossed the minds of Facebook founders Mark Zuckerberg and Dustin Moskovitz.
According to Forbes magazine the Facebook founders planned ahead wisely and placed a significant amount of their Facebook shares into grantor retained annuity trusts a few years ago knowing that the shares would skyrocket in value eventually when an IPO took place.
The strategy that they utilized is called “zeroing out” a GRAT. When you place resources into the trust you are removing them from your estate for estate tax purposes. However, from the perspective of the IRS you are engaging in an act of taxable gift giving because you name a beneficiary who would inherit any remainder that may exist after the term expires.
The IRS assesses the taxable value of the gift by adding anticipated interest to the principal that you placed into the trust. They use 120% of the federal midterm rate that is in place at the time of the trust’s creation.
You zero out the trust, taking annuity payments equal to the entirety of the taxable value. But if the assets that you used to fund the trust appreciate beyond the rate that the IRS imposed, there will be something left. The beneficiary inherits this free of taxation.
If you would like to explore the possibility of creating one of these trusts, the first step is to sit down and discuss the matter with a licensed, experienced Central New Jersey financial planning lawyer.