It’s no secret that Twitter is planning to IPO soon. This article, which appeared in the Saturday, October 12 issue of the Wall Street Journal, profiles three of Twitter’s top executives: Chairman Jack Dorsey, Chief Executive Officer Richard Costolo, and Evan Williams- the company’s largest individual shareholder. Each of the three live in California (where there is no estate tax) and have been making strategic estate-planning moves in preparation of the initial public offering. Three different methods of tax planning were utilized: grantor-retained annuity trusts, gift trusts, and single-member limited liability companies.
Grantor-retained Annuity Trusts
Grantor retained annuity trusts can be utilized to transfer the gains on an asset from one person to another with little to no tax liability. Mr. Dorsey and Mr. Williams both set up their trusts back in 2010 when Twitter’s stock was worth less than $2 per share. Mr. Dorsey placed 2.4 million of his shares in the trust while Mr. Williams contributed 8.9 million shares to his trust. Nowadays, the stock is estimated to IPO at $28 per share. Since the appreciation of these shares is virtually tax-free, the two could have avoided over $113 million in taxes.
Last year Mr. Costello set up the Lorin Costolo 2012 Gift Trust for his wife, which took advantage of favorable gift-tax laws. The shares were given to his wife when they were valued around $18, so 273,000 shares were given to maximize the gift-tax exemption of $5.12 million.
Single-member Limited Liability Companies
Mr. Williams holds 44.3 million shares in a single-member limited liability company called Obvious LLC. Instead of simply giving his children shares of Twitter, he has transferred the shares to this LLC and given them an interest in the company. Using $1 million worth of shares as an example, Mr. Williams will save his children approximately $140,000 in taxes by giving them an interest in Obvious LLC.
These are just a few examples of ways in which executives plan to avoid a large tax liability when their company is set to IPO.