Tax Planning with Qualified Small Business Stock

March 14, 2022

Younger individuals (who may not yet be married or have children) are quite likely understandably less interested in the use of trusts for traditional estate tax planning purposes than older individuals with families. That is so even if those younger individuals have estates well over the estate tax-exemption amount. The potential to save income taxes through trusts, however, should be of great interest to such individuals.

The use of trusts to “multiply” or “stack” the exclusion from capital gain on the sale of “qualified small business stock” is but one available income tax savings opportunity through the use of trusts. Section 1202 of the Internal Revenue Code provides for an exclusion of up to $10,000,000 of capital gains (or, if greater, an exclusion of up to 10 times one’s basis) in connection with the sale of qualified small business stock (QSBS), as such term is defined under Section 1202(d). While notionally this exclusion is quite substantial, founders or early investors in many companies may have significantly greater gain in their shares (and/or they may anticipate significant future gain in such shares) than might otherwise be covered by this exclusion.

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