The One Big Beautiful Bill Act, enacted July 4, substantially enhanced the income tax exclusion available to holders of qualified small-business stock, or QSBS.
When certain holding period requirements are satisfied, taxpayers are permitted to exclude a percentage of the gain from the sale of QSBS. The expanded OBBBA rules may create enhanced opportunities for high-net-worth clients to maximize the value of the gain exclusion through lifetime gifting strategies.
However, those clients should pay particularly close attention when transferring QSBS to and from trust structures. The complex rules governing trust taxation, coupled with the relevant income and gift tax considerations, require close analysis in order to maximize the value of the QSBS exclusion when transferring among family.
Understanding the QSBS Exclusion
Under the OBBBA, a new tiered exclusion structure exists for QSBS acquired after July 4, 2025, as follows:
- a 50% exclusion for QSBS held for three years
- a 75% exclusion for QSBS held for four years
- a 100% exclusion for QSBS held for five years or more.
Generally speaking, the taxpayer must acquire the QSBS at “original issuance” to qualify for the income tax exclusion.
An exception exists for taxpayers who acquire the stock by gift. If the taxpayer is “gifted” the stock, they essentially inherit the status of the taxpayer making the gift. The donee is also treated as though they owned the stock for the time that the donor owned the stock.
The amount of eligible gain from the disposition of QSBS issued by one corporation that may be taken into account in a tax year is also limited. It may not exceed the greater of:
- $15 million (for stock acquired after July 4, 2025; the amount was $10 million prior to the OBBB) reduced by the aggregate amount of such gain taken into account in prior years, or
- 10 times the aggregate bases of qualified stock of the issuer disposed of during the tax year.
Importantly, the per-issuer exclusion applies on a per-taxpayer basis. When gifting strategies are employed, they can permit a family to multiply the overall amount of gain that is excludable.
Potential Transfer-in-Trust Strategies
First, it’s important to understand the different tax treatment that may apply to a trust depending on how it is structured for gifting purposes. A grantor trust is not treated as a separate taxpayer for tax purposes. When a taxpayer transfers property to a grantor trust, the transaction is generally ignored for tax purposes. The grantor and the trust are one and the same taxpayer.
Non-grantor trusts, on the other hand, are treated as separate taxpayers. When the trust’s owner gifts property to a non-grantor trust, it is treated as a gift to a different taxpayer.
The difference is important in the context of transfers of QSBS. A gift of QSBS to a grantor trust is essentially not treated as a gift at all — because the owner gave the QSBS to an entity that is not a separate taxpayer. That means the transaction will result in a situation where the QSBS will be treated as though it is still owned by the “donor” and subject to their $15 million per-issuer exclusion. That’s true even if the grantor trust is irrevocable.
For example, grantor retained annuity trusts (GRATs) are a popular structure to receive assets that are expected to appreciate in value, in order to minimize gain recognition. Because GRATs are structured as grantor trusts, the structure would not allow for multiplication of the per-issuer exclusion amount. However, when the QSBS is eventually transferred out of the GRAT (whether to beneficiaries or to separate trusts established for their benefit), those subsequent transfers should qualify as gifts to separate taxpayers that each qualify for their own per-issuer limitation.
When a trust is structured as a non-grantor trust, the trust will obtain its own per-issuer exclusion amount and the owner will be able to “tack” their initial stock holding period onto the trust’s holding period for purposes of determining the amount of gain that is excludable.
Taxpayers should, however, be wary of the multiple trust rule. The multiple trust rule applies in situations where multiple trusts have substantially the same beneficiary and grantor, where a principal purpose of creating the trust is tax avoidance.
When a taxpayer establishes multiple trusts, each for the benefit of separate beneficiaries, their separate nature should be respected. However, if multiple trusts have overlapping beneficiaries, the IRS may not respect the separate structure and could treat the trusts as a single entity with one per-issuer limitation.
Taxpayers should also be mindful of the rules that apply when property subject to debt is gifted. When the debt-encumbered QSBS is gifted, the amount of the debt is treated as though realized on sale of the asset.
Conclusion
The OBBB’s enhancement of the QSBS gain exclusion has created a number of opportunities for high-net-worth clients looking to transfer wealth to future generations and maximize the overall amount of gain excluded. However, when a trust structure is desirable, these clients should pay close attention to the structure and potential benefits that could be gained — or lost — depending on the chosen structure. Of course, taxpayers must also watch for the annual gift tax exclusion limits that apply in any given year.
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