- OBBBA significantly enhances the QSBS exclusion rules.
- Using irrevocable nongrantor trusts to ‘stack’ QSBS exclusions can greatly multiply tax-free gains.
- Begin planning now to satisfy holding periods and avoid technical pitfalls.
The One Big Beautiful Bill Act (OBBBA) expanded the benefits and broadened the types of stock qualifying for the section 1202 exclusion of gain on the sale of Qualified Small Business Stock (QSBS). These expanded benefits have made investments in QSBS issued after July 4, 2025 more compelling. Along with the expanded benefits come additional opportunities and challenges that should be considered in the estate planning process.
Yes. Certain transfers of QSBS can cause qualified stock to lose its status. Particular transfers to be wary of include transfers to a partnership, or sales to related or unrelated parties. Other transfers, such as gifts, allow the stock to retain its qualified status; while inheriting stock from a deceased taxpayer causes it to lose its status, though you will likely still get a step up in basis at the date of death.
Generally, yes, with some conditions. As long as a trust is not considered a grantor trust for income tax purposes, it will likely be treated as a separate taxpayer and receive its own $10 million ($15 million for stock issued after July 4, 2025) exemption. A grantor trust is not treated as separate from its grantor for income tax purposes and, therefore, does not qualify for an additional exemption.
It depends. If you personally hold all your QSBS, you only get one exclusion, even if you are married. However, if you already have estate planning intentions, there is a possibility to utilize the gifting rules to either transfer some stock to your loved ones, other than your spouse or to a nongrantor trust for their benefit. Since these trusts are treated as separate taxpayers, each trust can claim its own exclusion in addition to your own. This can be a powerful way to multiply the tax-free portion of the gain. Additionally, transferring assets out of your estate before they appreciate significantly can help reduce future estate tax exposure.
Planning early in the investment lifecycle, when the value is low, is likely to provide the most combined estate and income tax benefit. The downside is that, at this point, you are unlikely to be able to accurately predict future gains to ensure that the planning is efficient. Ultimately, this decision depends on your priorities and individual facts and circumstances.
- If multiple trusts look too similar, the IRS may aggregate them and limit your benefit.
o Trusts need real differences and proper administration.
o Substance over form and a nontax business reason for this planning is the key to success.
- In some cases, such as younger investors with longer time horizons, multiple QSBS exclusions may not outweigh other planning mechanisms.
Is estate planning with QSBS right for you?
Nongrantor trusts are a powerful tool for expanding the section 1202 QSBS exclusion. However, success depends on careful attention to technical requirements, preserving QSBS status throughout all transfers and ensuring that the planning fits with your overall goals. To help determine if this strategy is right for you, consider the following framework:
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