Since 1993, the IRC §1202 Qualified Small Business Stock (QSBS) gain exclusion provisions have been among the more robust tax incentives the Internal Revenue Code offers to individual taxpayers. The One Big Beautiful Bill significantly expanded these benefits in the summer of 2025. As a result, QSBS has become an even more powerful tax-saving tool for owners and investors in small businesses. However, the QSBS’s true power may lie within the use of multiple non-grantor trusts in a strategy called “stacking.”
Understanding QSBS Gain Exclusions
As a brief introduction, for QSBS issued after July 4, 2025, IRC §1202 currently allows for the exclusion of a portion to potentially all of the capital gains from the sale of originally issued domestic C corporation stock (whose gross assets do not exceed $75 million before or immediately after stock issuance) held for a certain period by non-corporate taxpayers. The gain exclusion is based on the number of years the stock is held and the per-issuer, per-taxpayer limitation, which limits the gain exclusion to the greater of $15 million or 10x the basis, with annual inflation adjustments.
How QSBS Stacking Works
For taxpayers with QSBS stock that has significant potential appreciation and where the limitations may be exceeded, the use of QSBS stacking through gifting to non-grantor trusts can allow for additional exclusions to be utilized. When QSBS stock is gifted, the donee (non-grantor trust) is treated as having acquired the stock in the same manner, and with the same cost basis and holding period, as the donor (taxpayer). Therefore, the trust now has its own exclusion equal to $15 million or 10x basis.
Complete vs. Incomplete Gift Transfers
Depending on the structure, the transfer of stock to the non-grantor trusts can either be considered a complete gift or an incomplete gift, both of which qualify for gain exclusion. If the transfers are complete gift transfers (all control has been relinquished by the donor), then a gift tax return is filed by the donor, the fair market value of the stock at date of gift reduces the donor’s basic exclusion amount, and the stock is effectively removed from the donor’s estate. If the transfers are incomplete gift transfers, a gift tax return is not required to be filed and the basic exclusion amount of the donor is not reduced. However, the stock transferred to the trust will still be considered part of the donor’s estate. Although the federal income tax on the gain upon the sale of the stock will be reduced or entirely eliminated, estate taxes have not been mitigated due to the QSBS value remaining in the donor’s estate.
State Income Tax Considerations
State income tax implications should also be taken into account in the planning for §1202 QSBS. There are some states that do not recognize the QSBS exclusions so the non-grantor trusts could be taxed at the state level on the QSBS gain. Currently, New York and New Jersey both follow the federal treatment of QSBS capital gains. Establishing the trust in an income tax friendly state, (ex: Delaware, Nevada, South Dakota, Alaska, Wyoming) can achieve avoiding state income taxation of the income in the trust(s).
One state income tax planning technique to be considered is an “incomplete-gift non-grantor” (ING) trust. This planning could help avoid state income taxes (but not estate taxes due to the incomplete nature of the transfer). It is important to consider the grantor’s resident state treatment of an ING trust when considering the use of this technique to ensure that it will be an effective state income tax planning option. For example, New York and California do not recognize ING trusts as nongrantor trusts. A completed gift variation of the ING trust would need to be used for a New York or California resident grantor to have the trust respected as a nongrantor trust. It is also important to consider whether or not the grantor’s resident state has an estate tax in determining if complete or incomplete gifts make more sense.
Potential Pitfalls to Avoid
During the planning process, it is important to be mindful of potential trip wires that can render the QSBS stacking strategy null and void. Last-minute transfers that occur close to the ultimate sale of the QSBS stock should be avoided as this can trigger the “assignment of income” argument by the IRS. You also don’t want to run afoul of the anti-abuse rules which could come into play if the multiple trusts have substantially the same grantor and same primary beneficiary(s) and have a principal purpose of avoiding federal income taxes as this will invite a potential collapsing of the multiple trusts into one. To achieve the benefit of multiple exclusions, the trusts need to be respected as taxable entities separate from the grantor.
Final Thoughts
For those holding small business stock with significant appreciation potential that qualifies for QSBS treatment, QSBS stacking is a great opportunity to get some “extra bang for the buck” out of the QSBS gain exclusion provisions. When considering §1202 Qualified Small Business Stock stacking strategies, it is best to talk to your CPA and estate planning attorney to assure that you qualify, that the construction of the trusts is done properly to avoid any potential pitfalls, and that any planning done works well with your overall estate planning landscape.
If you have questions or need additional information, please contact your WG advisor.
