�鶹��ý

Section 1202 of the Internal Revenue Code provides one of the most valuable tax benefits available to entrepreneurs and investors who own qualified small business stock (QSBS). Subject to certain limitations, Section 1202 excludes gains from the sale of QSBS from federal income taxation.

The gain exclusion under Section 1202 applies on a per-taxpayer, per-issuer basis. Each taxpayer who owns QSBS is entitled to exclude the greater of $10 million (or, in the case of QSBS issued after July 4, 2025, $15 million) or 10 times the adjusted basis of the taxpayer’s shares. As each taxpayer is entitled to the gain exclusion, there is a planning opportunity for the QSBS shareholder: when a taxpayer’s anticipated gain exceeds the per-issuer limitation, multiple exclusions can be obtained by gifting shares to different taxpayers.

Section 1202 specifically contemplates gifting QSBS and generally allows for the recipient of the gifted QSBS to qualify for the gain exclusion. There are several different gifting methods a taxpayer could consider to maximize gain exclusion and minimize income tax on sale.

Outright Gifts

The simplest approach is to gift shares directly to another individual, such as a family member. Each gift recipient is entitled to their own $10 million exclusion (or $15 million depending on the date of issuance).

However, there are important considerations with outright gifts:

Spousal exclusions: For spouses filing jointly, the statute does not clearly state whether both spouses are entitled to separate $10 million exclusions for QSBS shares (or $15 million in the case of QSBS issued after July 4, 2025). The QSBS statute does state that spouses who file separate income tax returns are each entitled to a $5 million exclusion (or a $7.5 million exclusion in the case of QSBS issued after July 4, 2025), but the QSBS statute is silent as to the treatment of spouses who file their returns married filing jointly. Some advisors are wary of having spouses who are married filing jointly claim two exclusions; others express a high degree of certainty that each spouse is entitled to a separate exclusion.

Loss of control: Once shares are gifted outright, the shareholder loses all control over the shares, including control over the proceeds. Further, the recipient may spend the proceeds irresponsibly, which is a particular concern with younger recipients.

No retained benefit: With an outright gift, the shareholder does not retain any benefit from or access to the eventual sale proceeds.

Trusts

Under federal income tax law, certain trusts are treated as separate taxpayers, distinct from their grantors and beneficiaries. If a shareholder gifts their QSBS to one or more qualifying trusts, each such trust can claim its own $10 million exclusion (or its own $15 million exclusion in the case of QSBS issued after July 4, 2025).

Example: A shareholder owns QSBS (issued before July 4, 2025) with $50 million of built-in gain. By transferring portions of the stock to four separate trusts, each trust could claim its own $10 million exclusion (in addition to the shareholder) — potentially allowing the full $50 million gain to be excluded from taxation.

There are several trust structures that may qualify for separate taxpayer treatment:

Trusts for Family Members or Other Individuals (Excluding the Donor and the Donor’s Spouse)

Rather than making an outright gift, a shareholder can gift the shares to a trust for the benefit of a child or other recipient. This approach offers greater control because the recipient receives distributions only at the trustee’s discretion or subject to other limiting conditions specified in the trust document. The shareholder who created the trust may retain the power to remove and replace the trustee (or serve as trustee himself or herself).

Charitable variation: If the shareholder has charitable goals, a non-grantor charitable lead trust can be used. This trust makes payments to charity for a term of years, with the remainder passing to individual beneficiaries. The charitable portion reduces the value of the gift for gift tax purposes, allowing the shareholder to transfer more shares within their lifetime gift tax exemption amount (explained further below).

Spousal Lifetime Access Non-Grantor Trusts (SLANTs)

A SLANT allows the shareholder’s spouse to be a trust beneficiary, providing the shareholder with “indirect” access to the trust assets through distributions to the spouse.

To qualify as a non-grantor trust (and thus a separate taxpayer), any distribution to the spouse must be approved by another beneficiary who qualifies as an “adverse party” to the distribution. This means the beneficiary who approves the distribution must have a substantial interest in the trust assets — such as a power of appointment exercisable in their own favor.

INGs – WINGs, DINGs, and NINGs (Wyoming/Delaware/Nevada Incomplete Non-Grantor Trusts)

These trust structures allow the QSBS shareholder who settles the trust (the “settlor”) to be both the settlor and a beneficiary of the trust (and for the trust to qualify for a separate Section 1202 gain exclusion). This trust structure has several different requirements:

The trust must be established under the laws of a state that allows for asset protection for “self-settled” trusts — a self-settled or “asset protection trust” is a trust in which the settlor is also a beneficiary. Wyoming, Delaware, and Nevada are the most commonly used jurisdictions, but other jurisdictions, such as Utah, are starting to allow these trusts as well. These trusts typically require engaging a trustee (usually a trust company) in one of these states to serve as trustee (with a couple of exceptions, the locations of the settlor or the beneficiaries of the trust are generally not important). 

Any distribution to the settlor (or a spouse) must be approved by a person who qualifies as an “adverse party.” This is often accomplished by establishing a committee, composed of other trust beneficiaries, who have the power to appoint trust assets to themselves. This requirement takes some control away from the person forming the trust.

The IRS has ruled positively on a number of these types of trusts in the past (including as recently as 2018) but has since stated that it will not rule on these types of trusts. This indicates that the IRS may be reconsidering these rulings, but there has been no additional indication of active IRS attention in this area.

Charitable Remainder Trusts

A charitable remainder trust (CRT) may qualify as a separate taxpayer for QSBS purposes, although this treatment is uncertain because the IRS has not issued definitive guidance on the issue.

How CRTs work: After the settlor transfers shares to the trust, the trustee distributes a fixed percentage (unitrust amount) to one or more non-charitable beneficiaries for a specified period, with the remainder passing to charity at the end of the trust term. The value of the charitable remainder must be at least 10% of the initial funding amount (determined by a specific IRS calculation method). Most CRTs used for this purpose have shorter terms (3-5 years), during which a significant amount of the trust value is paid to the beneficiary. 

CRTs are exempt entities and do not pay income tax, although beneficiaries are taxable on the trust’s income when the beneficiaries receive distributions from the CRT. If a CRT qualifies for the Section 1202 exclusion and the QSBS is sold while owned by the CRT, then, in theory, distributions to the beneficiaries post-sale could be considered exempt from income tax. However, the IRS has not ruled on this treatment, and advisors have differing opinions of the risk.

Timing Considerations 

The timing of QSBS transfers to trusts is critical. At a minimum, transfers must be completed before the sale of the stock becomes a practical certainty. If a sale is imminent when the transfer occurs, the IRS may disregard the trust structure under various anti-abuse doctrines, such as the step transaction doctrine or the assignment of income doctrine.

Whether a contribution prior to a sale should be disregarded is a facts-and-circumstances determination. Court rulings have focused on whether there are substantial deal terms left to be negotiated and whether pre-sale activities (such as the pre-sale distributions of working capital) have been completed. A letter of intent or other indications of interest is not disqualifying but should be considered in determining the value of the shares for gift tax purposes.

Timing considerations should also be considered for federal gift tax implications.

Gift Tax Implications

A shareholder may need to consider federal gift tax implications when planning with a QSBS stacking strategy. A completed gift to a non-spouse may be subject to a 40% gift tax, if the taxpayer has made lifetime gifts exceeding the taxpayer’s lifetime gift tax exemption amount — currently $15 million. 

Gifts to trusts for children and to spousal lifetime access non-grantor trusts (SLANTs) are typically completed gifts, which use the taxpayer’s $15 million lifetime exemption. Gifts to INGs are generally considered incomplete gifts and do not use any lifetime exemption. Gifts to CRTs in which the QSBS shareholder (or spouse) is the beneficiary do not require using gift tax exemption; if the beneficiary is another party, then the value of the stock contributed to the CRT will use the taxpayer’s lifetime exemption. 

The value of a gift is determined as of the date of the transfer, so there is impetus to make transfers before a liquidity event is on the horizon when the value of the stock is low. For start-ups, the easiest way to stretch the lifetime exemption amount is to fund multiple trusts when the company has a lower valuation (which means that this planning must be completed in anticipation of a higher valuation if the taxpayer wants to fund multiple trusts).

Multiple Trusts

QSBS stacking strategy may require a number of different trusts. However, an anti-tax avoidance rule allows the IRS to treat multiple trusts as a single trust if the trusts have substantially the same beneficiaries, and there is no independent non-tax reason for creating separate trusts. QSBS stacking strategy should consider this issue. For example, if a shareholder creates two trusts, with the shareholder’s child as the sole beneficiary of both trusts, the IRS may consider those two trusts as a single taxpayer for QSBS purposes.

Administrative Burden

Each trust requires ongoing administration, including filing annual fiduciary income tax returns (Form 1041), maintaining separate books and records, and potentially retaining a trust company. These costs and burdens should be weighed against the potential tax benefits.

Conclusion

A QSBS exclusion allows a donor to avoid the 20% federal capital gains tax on the sale of corporate stock, and in many cases, state income tax as well. For those entrepreneurs and investors who have either qualified small business stock exceeding their current exclusions or anticipate exiting at a valuation that would exceed their exclusion, QSBS stacking with trusts can result in significant current tax savings.