Question 1

What is QSBS (Qualified Small Business Stock) and how does Section 1202 work?

Accepted Answer

Qualified Small Business Stock (QSBS) under IRC Section 1202 allows founders, employees, and investors to exclude up to $10 million in capital gains from federal taxes when selling qualifying startup stock (for QSBS issued after July 4, 2025, exclusion is up to $15 million). This exclusion from capital gains applies to C-Corporation shares from companies with gross assets under $50 million when the stock was issued ($75 million for QSBS issued after July 4, 2025). QSBS can save millions in taxes on startup exits, IPOs, and acquisitions.

Question 2

How does QSBS trust stacking work to multiply tax benefits?

Accepted Answer

QSBS trust stacking involves creating multiple non-grantor trusts and gifting qualifying shares to each trust. Since each trust can claim its own $10 million (or $15 million for QSBS issued after July 4, 2025) QSBS exemption under Section 1202, you can potentially shelter $40 million or more in capital gains (with 4 trusts) instead of just $10 million (or $15 million for QSBS issued after July 4, 2025) with individual ownership. This QSBS multiplication strategy is completely legal and passes IRS scrutiny.

Question 3

What are the complete QSBS qualification requirements under Section 1202?

Accepted Answer

To qualify for QSBS tax benefits, your stock must meet these criteria: (1) Original issuance - shares must be acquired directly from the corporation, (2) C-Corporation status - LLCs and S-Corps don't qualify, (3) Gross assets test - company must have had under $50M in assets when shares were issued (or $75 million for QSBS issued after July 4, 2025), (4) Holding period - must hold shares for at least 5 years (for QSBS issued after July 4, 2025, (a) 50% of the exclusion can be claimed after 3 years holding, (b) 75% after 4 years holding, and (c) 100% after 5 years holding), (5) Active business requirement - 80% of assets must be used in qualifying business activities, and (6) Qualified trade or business - most technology, manufacturing, and retail businesses qualify.

Question 4

When should I set up QSBS trusts for maximum tax savings?

Accepted Answer

Set up QSBS trusts as early as possible, ideally within 1-2 years of receiving your startup equity and before any major valuation increases. Early setup allows you to gift shares at lower valuations, maximizing the tax benefits. Each individual is granted ~$14 million (in 2024) lifetime gift tax exemption, so the tax optimal strategy is to place highly appreciating asset into a trust when that asset is at its infancy when the value is very low.  Any appreciation will be exempt from the estate tax (commonly known as “death tax” when you pass.  The optimal timing is after your company's Series Seed but before Series A, when valuations are very low for gifting purposes. But if you missed this window, it’s still worthwhile to set up the trusts after Series A because the valuation will still be relatively low.  Don't wait until exit discussions begin.

Question 5

Can I maintain voting control after transferring shares to QSBS trusts?

Accepted Answer

Yes, you can maintain voting control over your shares after transferring them to QSBS trusts by naming yourself as the investment advisor. Our QSBS trust is a “directed” trust where the investment decisions are made by an investment advisor, and the investment advisor exercises the  voting rights while still receiving the tax benefits. This control retention doesn't affect QSBS qualification.

Question 6

What happens if my startup doesn't qualify for QSBS tax benefits?

Accepted Answer

If your company doesn't qualify for QSBS, the trusts still provide valuable benefits including estate planning advantages, potential state tax savings, asset protection, and privacy benefits. The trust structure isn't wasted - it just serves different tax optimization purposes. Many clients also use these trusts for real estate investments, other securities, and general wealth transfer planning.

Question 7

How much does QSBS trust setup cost compared to potential tax savings?

Accepted Answer

Our QSBS trust package starts at $1,000 and includes everything you need: 4 QSBS trusts, guidance on gifting shares, annual compliance support, and ongoing trust administration. This cost is minimal compared to potential tax savings - for example, on a $40M exit, QSBS trust stacking could save over $15 million in federal and state taxes.  In addition, using traditional services would typically cost $80,000 or more to set up, and $12,000 or more annual ongoing maintenance costs.

Question 8

Does the QSBS holding period reset when I transfer shares to trusts?

Accepted Answer

No, the holding period does not reset when you gift shares to our QSBS trusts. The holding period starts from when you originally received the shares from the company, not when you transfer them to the trust. So if you've held shares for 3 years personally, you only need to hold them 2 more years in the trust to satisfy the 5-year QSBS requirement for 100% exclusion.

Question 9

What types of startups and businesses qualify for QSBS tax benefits?

Accepted Answer

Most technology startups, SaaS companies, biotech firms, manufacturing businesses, and retail companies qualify for QSBS. Qualifying businesses must conduct an active trade or business with at least 80% of assets used in qualifying activities. Non-qualifying businesses include hotels, restaurants, financial services, consulting, law firms, medical practices, and businesses involving natural resources extraction.

Question 10

How do QSBS trusts work with different types of startup exits?

Accepted Answer

QSBS trusts work with all types of startup exits including IPOs, acquisitions, mergers, and secondary sales. QSBS exemption applies to the gain on shares sold whether through IPO, sale via acquisition, or participation in a tender offer. The key is ensuring shares qualify under Section 1202 and have been held for 5+ years (or less for partial exclusions for QSBS issued after July 4, 2025).

Question 11

Can I use QSBS trusts if I live in high-tax states like California?

Accepted Answer

Yes, QSBS trusts are especially valuable for residents of high-tax states like California, New York, and New Jersey. While QSBS provides federal tax exemption, some states don't conform to the federal QSBS rules. However, proper trust structuring can help minimize state tax exposure. California residents can save over 37% in combined federal and state taxes using QSBS trust strategies (mainly, by ensuring no fiduciary (such as a trustee) is a California resident.

Question 12

What's the difference between QSBS trusts and other estate planning trusts?

Accepted Answer

QSBS trusts are specifically designed non-grantor trusts optimized for Section 1202 tax benefits and minimizing “death” taxes. Unlike traditional estate planning trusts, QSBS trusts focus on multiplying the $10 million capital gains exemption through trust stacking and capturing maximum appreciation within the trust to avoid the “death” tax. They're irrevocable, but give you control, and are structured primarily for tax optimization.

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