Tax Planning with Qualified Small Business Stock
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Younger individuals (who may not yet be married or have children) are quite likely understandably less interested in the use of trusts for traditional estate tax planning purposes than older individuals with families. That is so even if those younger individuals have estates well over the estate tax-exemption amount. The potential to save income taxes through trusts, however, should be of great interest to such individuals.
The use of trusts to “multiply” or “stack” the exclusion from capital gain on the sale of “qualified small business stock” is but one available income tax savings opportunity through the use of trusts. Section 1202 of the Internal Revenue Code provides for an exclusion of up to $10,000,000 of capital gains (or, if greater, an exclusion of up to 10 times one’s basis) in connection with the sale of qualified small business stock (QSBS), as such term is defined under Section 1202(d). While notionally this exclusion is quite substantial, founders or early investors in many companies may have significantly greater gain in their shares (and/or they may anticipate significant future gain in such shares) than might otherwise be covered by this exclusion.
In general, to be QSBS, a stock must be in a C corporation with less than $50,000,000 of aggregate gross assets at the time of acquisition that was acquired by the taxpayer at its original issuance, either in exchange for money or other property (not including stock), or as compensation for services provided to the corporation. Importantly for planning purposes, however, section 1202(h) provides for an exception to the general rule if the stock is acquired by gift, stating that “…the transferee shall be treated as having acquired such stock in the same manner as the transferor.” A further requirement to qualify under section 1202 is that the stock must have been held by the taxpayer for more than five years as of the time at which it is sold or exchanged. This is also covered by section 1202(h), which further provides that “…the transferee shall be treated as having held such stock during any continuous period immediately preceding the transfer during which it was held (or treated as held…) by the transferor.”