Article highlights:
- Unlock the potential of Spousal Lifetime Access Non-Grantor Trusts (SLANTs) for stacking Qualified Small Business Stock (QSBS) benefits, multiplying tax savings and maximizing your financial gains.
- Uncover the trade-offs and benefits of using SLANTs for QSBS stacking and how both the grantor and the SLANT can independently utilize QSBS benefits, enabling you to exclude an additional $10 million in capital gains taxes.
Spousal Lifetime Access Non-Grantor Trusts are versatile estate planning tools that can offer significant tax and estate savings and asset protection. While primarily used for these purposes, SLANTs can also be utilized for stacking Qualified Small Business Stock benefits. This article will explore the potential benefits and trade-offs of using a SLANT for QSBS stacking and provide a case study to illustrate the financial advantages of this strategy.
Overview of Qualified Small Business Stock
What is QSBS?
Qualified Small Business Stock refers to shares in a C-corporation that meet specific requirements under Section 1202 of the Internal Revenue Code. Key requirements include:
- The corporation must be a domestic C-corporation.
- The corporation must be a small business at the time the stock is issued. Specifically, its gross assets must not exceed $50 million at the relevant time.
- The corporation must use at least 80% of its assets in the active conduct of a qualified trade or business.
What are QSBS Tax Benefits?
Shareholders who hold QSBS assets for more than five years may be eligible for significant tax benefits, including:
- Exclusion of 100% of the gain on the sale of QSBS, up to the greater of $10 million or 10 times the shareholder’s tax basis in the stock.
- Deferral of tax on the sale of QSBS if the proceeds are reinvested in another QSBS within 60 days.
Using SLANTs for Stacking QSBS Benefits
Creating a Separate Shareholder with a SLANT
QSBS stacking aims to maximize the benefits by transferring QSBS to multiple legal entities, such as trusts, which are treated as separate taxpayers. Each separate taxpayer may then be eligible for its own exemption, effectively multiplying the tax savings.
In particular, by transferring QSBS to a SLANT, the grantor effectively creates a separate legal entity, which may be considered an additional shareholder for QSBS purposes.
Trade-Offs and Benefits of Using a SLANT for QSBS Stacking
- Both the grantor and the SLANT can utilize the QSBS benefits independently, effectively “stacking” the exemptions.
- This strategy would enable the grantor and the SLANT each to exclude up to $10 million (or 10 times their respective tax basis) in gains on the sale of QSBS.
- In addition ,since the assets in the SLANT are outside of your estate, any appreciation that happens after you move the shares to the trust will not be subject to estate tax.
Case Study: Stacking QSBS Benefits with a SLANT
In this case study, we will explore the potential financial benefits of using a SLANT for QSBS stacking. We’ll use the following assumptions:
- Jane, the grantor, has $15 million in QSBS gains, with a tax basis of $1 million.
- Jane’s husband, John, is the beneficiary of the SLANT.
- Jane transfers $7.5 million of her QSBS gains to the SLANT.
Chart 1: QSBS Stacking
Benefits Comparison – SLANT vs. No Trust
| Scenario | QSBS Gains | QSBS Exclusion Limit | Taxable Gains | Potential Tax Savings |
|---|---|---|---|---|
| Jane (No SLANT) | $15M | $10M | $5M | |
| Jane (with SLANT) | $7.5M | $10M | $0 | |
| SLANT (with QSBS) | $7.5M | $10M | $0 | $1.85M |
| Combined (Jane + SLANT) | $15M | $20M (Stacked) | $0 | $1.85M |
Jane can potentially benefit from QSBS stacking as shown in the chart above. By transferring $7.5 million of her QSBS gains to the SLANT, both Jane and the SLANT can exclude their respective gains from taxation, leading to $1.85 million in tax savings.
Conclusion
It is important to understand the trade-offs and potential benefits of using SLANTs for QSBS stacking and to make informed decisions that align with your financial and estate planning goals.
Related Readings
- SLATs vs. SLANTs: Choosing the Right Trust
- The Advantages and Limitations of Spousal Lifetime Access Non-Grantor Trusts (SLANTs)
- What Is A Spousal Lifetime Access Trust?
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