The Financial Juggernaut that is Facebook…

While reading about Facebook’s heavily anticipated IPO, I was surprised to find that it brings up the occasion to discuss a number of estate planning issues.  For one thing, the estate tax planning issues brought up in large estates may apply to more people beginning next year.  For another, the IPO may produce a windfall for the state of California, which could affect the vast majority of Californians who have…smaller estates.

For an IPO that is economically the size of a small country, the potential for a whole slew of new, young millionaires is largely unknown.  Reportedly, people who have completed small tasks for the company occasionally accepted stock instead of payment.  For the founders, we are looking at billionaires.  The estate tax exemption in 2012 is $5.12 million with a top marginal tax rate of 35%.  Accordingly, the estate tax on a $20 million estate approaches $5.2 million.  Next year, the estate tax exemption is scheduled to drop back down to $1 million with a top marginal tax rate of 55%.  This means the estate tax on the same $20 million could approach over $10 million.  With much larger estates, the incentive to avoid the estate tax is huge. The strategies employed by billionaires, however, are often similarly useful for those of you who have estates large enough to be subject to the estate tax.

The basic benefits of an A-B Trust or an A-B-C Trust can decrease the overall estate tax that will be due by doubling the exemption amount and deferring the estate tax until the second spouse’s death.  However, the role of charitable giving, life insurance, and more advanced estate planning techniques is pronounced in large estates.  For example, charitable gifts are free from estate tax, but certain planning techniques such as charitable remainder trusts, can allow you to retain some of the benefit of the assets transferred during your life.  The more you are willing to give away to charity on your death, the more effective this type of plan will be.

Additionally, grantor retained annuity trusts (“GRATs”) allow estate tax savings, while retaining some interest in the assets and being able to transfer the assets to family members.  According to the Wall Street Journal, it is suspected that many of Facebook’s heavy hitters have used GRATs because they are especially valuable if you have assets you believe will appreciate in value over time.  The value of the gift(s) within the GRAT is determined when the asset is first transferred rather than at date of death.  If the estate tax exemption decreases to $1 million at the end of this year, these two types of trusts (A-B Trust and Grats) may be extremely useful to anyone with more than a few million dollars in their estate.

For most Californians, these estate planning techniques are not needed, at least while the estate tax exemption is so high.  So why should you care about Facebook’s IPO?  Facebook is located in the state of California and the state expects approximately $2 billion in tax revenue to be directly related to the IPO.  Given that the proposed budget just released by Governor Jerry Brown is $91 billion, this large amount of money could protect some state benefits.  Although the budget is currently assuming $1.5 billion in tax revenue, higher than anticipated earnings could cover some of the Governor’s proposed cuts, such as $1.2 billion in Medi-Cal spending.  At a time when the courts seem to be on Medi-Cal beneficiaries’ side, it would make sense to avoid excess cuts.

Advanced estate planning techniques may be used for Medi-Cal purposes as well; a QMap trust could reduce the income tax implications of selling a house while receiving Medi-Cal payments.  Additionally, proper planning could help avoid claims by Medi-Cal for reimbursement from your estate.

No matter the size of your estate, it is important to plan ahead.  Who knows?  You could be the next Zuckerberg.

Estate Planning: The Price of Organization, Rewards, Gifts, and Wondrous Tax Things…
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