Pre-IPO Estate Planning

After scanning Twitter's IPO documents, WSJ tax reporter Laura Saunders concludes that Jack Dorsey,Twitter's chairman, Evan Williams, largest shareholder, and CEO Richard Costolo did some serious gifting in trust while Twitter's share value was low. The eventual estate-tax savings, the WSJ guesstimates, could exceed $100 million.

Dorsey and Williams set up GRATS.  "In essence," Saunders explains, "GRATs are used to transfer asset appreciation from one taxpayer to another, virtually tax-free. The owner of the assets—in this case, pre-IPO Twitter shares—contributes them to the GRAT before the asset surges in value."

While the trust exists, the owner receives annual payments adding up to the value of the original contribution plus a return based on an interest rate set by the Internal Revenue Service. In the past few years, the rate has been low, around 2%. 

At the end of the trust's term—which the owner must outlive for the GRAT to work—the owner has an amount equal to the value of what he put into the trust, but most of the asset's growth is out of his possession.

Williams and Costolo apparently used family trusts to take advantage of 2012's $5 million gift-tax exemption. The exemption was widely, but wrongly, expected to decline in 2013.

Moral: the best time to do tax planning for great wealth is before it becomes still greater.