QSBS Stacking & Timing for Family Trusts - Optimal Strategy Before Liquidation?

Hey there! I'm a tax attorney who's worked with several founders on QSBS planning. The timing question is critical with QSBS stacking. Here's what you need to know: First, the recipient of your gifted shares will inherit your holding period. So if you've already held the shares for 5+ years (the QSBS requirement), the trust will immediately satisfy the holding period requirement. However, if you haven't hit 5 years yet, the trust will need to wait until that 5-year mark from your original acquisition date. The bigger issue is the "step transaction doctrine." The IRS can collapse what appear to be separate transactions if they determine they were really just steps in a single transaction. If you gift shares to trusts right before a liquidation event that was already in progress (like with an LOI signed), the IRS might view this as a step transaction and disallow the multiple QSBS exclusions. Generally, I recommend clients complete their QSBS gifting strategies well before any specific acquisition talks begin - ideally a year or more before any sale discussions.

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Be extremely careful with QSBS stacking. I did this in 2020 with 11 separate trusts for family members, and we're currently under audit specifically focused on this issue. The IRS is aggressively challenging these arrangements, especially when done close to a liquidity event. If your company has a clear exit path already (like active acquisition discussions), the IRS might apply step transaction doctrine. In our case, we did the gifting 4 months before the acquisition closed, but they're arguing we had already started discussions when we made the gifts. Make sure you're working with an attorney who specializes in this area and keep meticulous documentation of your intent and timeline. And definitely do it sooner rather than later if you believe an exit is coming.

Don't overlook the basis adjustment issues with QSBS when gifting. If you gift shares to a trust, the trust takes your basis (carryover basis), but if you wait and the shares pass at death, the basis gets stepped up to fair market value. This means that if your primary goal is QSBS stacking, gifting during life makes sense. But if you expect the value to grow beyond the $10M QSBS exclusion per trust, you might be better off keeping some shares to pass at death to get the basis step-up. Also, make sure you're monitoring the "active business" requirement - if your company starts accumulating too many investments or has too much passive income, you could jeopardize the QSBS qualification altogether.

This is such a timely discussion! I'm dealing with similar QSBS planning questions for my SaaS company. One thing I haven't seen mentioned yet is the importance of getting a qualified appraisal done before making any gifts to trusts. The IRS pays close attention to valuation discounts when gifting private company shares. Since you're gifting minority interests in a closely-held company, you can often apply discounts for lack of control and marketability - sometimes 20-40% depending on your company's specifics. This means you can gift more shares while using less of your lifetime exemption. Also, consider the timing around any board resolutions or major company decisions. If you're planning to authorize a new stock option pool or make other decisions that could affect valuation, coordinate the timing of your gifts accordingly. The other thing to watch out for is making sure your company doesn't inadvertently lose QSBS status. I've seen companies lose qualification because they acquired too many assets that weren't used in the active business, or because they started holding too much cash without a clear business purpose. Keep detailed records of how any excess cash is being used for business operations.