Twitter's elite aren't just planning the firm's initial public offering. They are protecting their estates.
The social-networking company's chairman, Jack Dorsey, is 36 years old, while Evan Williams, the largest individual shareholder, is 41, and Chief Executive Richard Costolo is 49. All three men have been making canny estate-planning moves, according to information from the IPO documents.
The moves could save Messrs. Dorsey, Williams and Costolo a total of at least $115 million, and perhaps far more, in federal estate tax at current rates, assuming a Twitter offering price of at least $28 a share. The current top federal estate-tax rate is 40%, and Twitter's home state of California has no state estate tax.
Those projected savings are less than the estimated $200 million skirted by six Facebook insiders who made estate-tax moves before last year's stock sale. Still, they help show how careful planning can benefit the truly wealthy—people with assets far in excess of the estate- and gift-tax exemption of $5.25 million per individual, or $10.5 million per couple.
"The trick is to transfer assets when they aren't worth a lot, so that when they are, you don't have to pay a tax of 40% or more for the privilege of leaving it to heirs," says Andrew Katzenstein, an estate-planning expert at law firm Proskauer Rose in Los Angeles who has advised Internet entrepreneurs.
Messrs. Dorsey, Williams and Costolo didn't respond to requests for comment. Estate planners say they feel comfortable interpreting the insiders' moves based on the language in the offering documents and their knowledge of the terrain. Here are the techniques—and how each one works.
Grantor-retained annuity trusts.
According to the IPO filing, Mr. Dorsey holds 2.4 million of his 23.4 million Twitter shares in an "annuity trust." Mr. Williams and his spouse hold 8.9 million of their total 56.9 million shares in five separate annuity trusts.
John Ramsbacher, a lawyer at Ramsbacher Prokey, a San Jose, Calif., firm specializing in pre-IPO planning, believes the trusts are grantor-retained annuity trusts. Other experts agree.
In essence, 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. Often, it then goes into a trust for relatives, which can include unborn children.
All of the Twitter annuity trusts bear a date of 2010, when Twitter's stock value was less than $2, according to Christopher Austin, a securities lawyer at Goodwin Procter in New York. Assuming an offering price of at least $28 a share and a GRAT term of five years, the estate-tax savings from the GRATs listed in the Twitter filings could come to at least $113 million, Mr. Ramsbacher says, and possibly much more.
Gift trusts.
According to the filing, 564,000 of Mr. Williams's Twitter shares are in something called the Green Monster Trust, dated November 2012. (That might mean he is a Boston Red Sox fan.)
Options for another 273,000 Twitter shares are in the Lorin Costolo 2012 Gift Trust; Ms. Costolo is the wife of the Twitter CEO.
The experts say these trusts probably were set up to take advantage of 2012's estate- and gift-tax regime, because it was feared that the 2013 regime would be far less generous. Last year the gift-tax exemption was $5.12 million, and the value of Mr. Williams's shares at the time he funded the Green Monster Trust was about $10 million, or the value of his and his wife's combined exemptions.
Ms. Costolo's trust was funded with about $5 million of stock that Mr. Costolo gave her, according to the filing. "His gift enabled her to use her exemption to move the appreciation on that stock out of their estate," Mr. Katzenstein says. A carefully drawn trust sited in a state such as Delaware or Nevada can be exempt from transfer taxes on all descendants as well, he adds.
It is hard to estimate the total estate-tax savings from these trusts, but a conservative estimate is more than $3 million, Mr. Katzenstein says.
Single-member limited liability companies.
Among the interesting disclosures in the Twitter filing is a footnote saying that Mr. Williams holds 44.3 million Twitter shares in a single-member limited liability company called Obvious LLC.
The LLC's existence enables valuable discounts on transfers of Twitter shares, experts say.
For example, says Mr. Ramsbacher, if Mr. Williams simply gave $1 million worth of Twitter shares to his children, the transfer could incur gift taxes of $400,000.
But if the shares are in his LLC and he gives them an interest in that, the gift might be worth only $650,000, with taxes of $260,000. That is because the LLC shares aren't easily traded and the recipient doesn't control the LLC.
In addition, Mr. Ramsbacher says, the Green Monster Trust could use a promissory note to buy discounted interests in the LLC. That would put even more Twitter stock into the trust at less than market value, further minimizing gift taxes. In some cases, the only cash payment required for years is the annual interest on the note, he adds.
However, all these tax-saving moves come at a price—besides hefty professional fees. Asset owners who minimize gift or estate taxes often lose out on capital-gains-tax forgiveness at death. (Experts call this the "step-up.") That's a bigger consideration now that the combined top federal and state tax rate on long-term gains is 37% or more in California, although people as young as Twitter's elite won't find the decision difficult.
Saving gift and estate taxes often means giving up some control or use of an asset, even if it will benefit heirs. That is why Mr. Ramsbacher advises using these techniques with a small percentage of total assets, "the ones people know they won't need."
rest at http://online.wsj.com/article/SB10001424052702304500404579127283687636364.html
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