The transfer of QSBS through a gift or estate is considered a tax-free transfer for QSBS and maintains the tax exclusion upon transfer (Section 1202 (h)).
Given the differing tax treatment of various types of gifts, it can become important to understand various differences in ways “gifts” are made when planning, for example:
- If any QSBS is received as a transfer by gift (or at death) the transferee is treated as having acquired the QSBS in the same manner as the transferor and having held the QSBS for the same holding period. (IRC Section 1202(h)(1) and IRC 1202(h)(2)(A)).
- Although Section 1202 does not explicitly address transfers to a grantor trust, tax attorneys note that QSBS could be transferred to a grantor trust. If that transfer is a donative transfer the grantor trust should be treated as having acquired the QSBS in the same manner as the transferor, such that the trust should be able to tack onto the transferor’s prior holding period.
- Regarding “Non-Grantor Trusts”, tax attorneys note that a QSBS holder can set up multiple non-grantor trusts for others (i.e. for their children). The investor can then transfer, by lifetime gift, QSBS to each of those non-grantor trusts. Each of those non-grantor trusts can claim its own $10 million QSBS gain exclusion, separate from any QSBS that the investor decided to retain. Therefore, it may be possible to stack several QSBS exclusions through the use of multiple non-grantor trusts beyond the dollar limits for an individual QSBS exclusion.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.