Boston, MA (PRWEB) April 23, 2013
Estate Street Partners, founders of the UltraTrust irrevocable trust, recently analyzed Mark Zuckerberg’s acquisition of 60 million Facebook shares costing him over $1 billion in taxes and compares his financial strategy of 2008 in which, according to Forbes.com, he used a type of irrevocable trust, called a Grantor Retained Annuity Trust(GRAT). Estate Street Partners did some further digging and has come to some interesting conclusions as to what he may be planning to do with his giant pile of assets.
Zuckerberg paid over $1.1 billion in taxes in 2012 most likely making him, the largest taxpayer in the history of the United States Estate Street Partners estimates.
Why did Mr. Zuckerberg have to pay so much in taxes? When Facebook went public, Mr. Zuckerberg acquired options to buy stocks from the company as compensation. As stated by its IPO filing (4) in 2012, he exercised his stock options to buy Facebook stock for $0.06 cents (2) a share when it is worth well over $29.73 a share.
As CBS News reports, this triggered the $1.1 billion dollar tax bill. Mr. Zuckerberg was prepared, however, because he had purchased 60 million shares on the day of the IPO and then sold more than 30 million shares to pay the subsequent taxes. (6)
“There are various ways to mitigate income tax, although $1.1 billion is a lot to mitigate,” explains Mr. Beatrice, “Mr. Zuckerberg’s advisors may have run out of ways to do so.”
“Certainly he has given to charity (5). He may also have purchased tax reducing investments created by the I.R.S. such as gas, oil, and geothermal exploration as well as other sustainable energy investments,” continues Mr. Beatrice.
Mr. Zuckerberg donated large chunks of wealth to charities. So far, we know he gave 18 million shares of Facebook stock to the Silicon Valley Foundation and $100 million to the public schools in Newark, New Jersey (5). All of these donations have likely helped his tax bill.
“Making a donation to charity, either by giving directly to the charity, starting a foundation or funding a charitable irrevocable trust to facilitate giving long after one is gone can both help others as well as lower one’s tax bill,” explains Mr. Beatrice.
Interestingly, Mr. Zuckerberg didn’t appear to attempt to avoid estate taxes by any amount using another irrevocable trust like he did in 2008 (10). “If he wanted to give to his heirs, the way he is holding the assets, wouldn’t avoid any estate tax or gift tax. Giving that amount of wealth away would trigger another round of taxation and I’m sure he was made aware of that when he acquired the stock options.”
According to Estate Street Partners, if he wanted to pass his fortune on to his heirs, he should have placed his $.06 stock options within several irrevocable trusts for the sake of passing his fortune virtually free of taxes.
An irrevocable trust holds assets until the time comes to pass them on to someone else. The assets are managed by the trustee, but are only owned by the trust. The trust can grow the assets outside of the reach of estate and gift taxes. The assets in an irrevocable trust are also, after a period of time, safe from lawsuits and bankruptcy.
If Mr. Zuckerberg would have placed his $0.06 stock options in an irrevocable trust when they were worth only that much knowing they would likely grow exponentially, he would have paid gift taxes on the value that they were at that time.
The gift would have been “completed” and any increase in value, say from $0.06 to $27.00 per share would not have been subjected to gift tax and estate tax at Mr. Zuckerberg’s death.
“You see, the gift was already made, so Mr. Zuckerberg would not have owned those options anymore. If the gift is already made, the government can’t re-tax it just because it grew. The tax code doesn’t work that way, which benefits anyone who wants to think ahead,” explains Mr. Beatrice.
“Anyone starting a new business or an investment may want to think about putting them in an irrevocable trust before they grow significantly.”
Regardless of what Mr. Zuckerberg is going to do with his fortune, the amount of taxes that he paid in 2012 is record-breaking.
“Mr. Zuckerberg’s enormous tax bill has sparked all kinds of debates from people who believe he putting a dent in the deficit, to those who believe he didn’t pay a percentage high enough. The interesting part will be to wait and see how he spends what’s left,” exclaims Mr. Beatrice.
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