Trusts Aren’t the (Best) QSBS Expansion Answer

For a very long time (26+ years to be exact), we really only had trust-stacking as a primary tool for expanding the exclusion potential of QSBS gains. It’s a great tool, but unfortunately there are some core problems with stacking in planning with the desire for liquidity.

You might want to put money in trusts for your kids - that's fine – but if you want any real access to the capital you just retained via QSBS, then I suggest considering the following:

Here are some of the (high level) steps that you would have to take to access liquidity from a trust while respecting the trust's purpose and avoiding tax complications:

•  Trust Loan: The trust could lend you money, with terms set at a fair market interest rate. However, this approach needs careful planning to avoid any potential issues, like creating imputed interest or challenges to the transaction's validity for tax purposes.

•  Distributions: Trusts often allow the trustee to make distributions for the "health, education, maintenance, and support" (HEMS) of beneficiaries. If structured as a “Sprinkle Trust” or with discretionary terms, a trustee could make distributions to you or other family members for these approved expenses.

• Family Partnership or LLC: If the trust holds interests in a family partnership or LLC, there may be ways to distribute partnership income to you, especially if you have a managing or general partner role. However, this strategy requires careful tax and legal planning to avoid IRS scrutiny.

• Trust Reinvestment or Sale: If the trust sells its QSBS, it could reinvest in other income-producing assets. Some income generated may be accessible for your child's or family's benefit, depending on the trust’s terms.

•  Trust Termination or Modification: Depending on the type of trust and local laws, it might be possible to modify or terminate the trust if the original intent no longer applies. This is a complex and state-specific strategy, often requiring court approval.

Pretty cumbersome, and extremely limiting with regard to liquidity in the future.

So, bottom line - trusts are not great tools for those who want capital back in their hand. If you exit for $40M, and have $30M to trust stack, do you really want to put $10M in each of your 3 kid's trusts with no real liquidity?

Our thesis is that getting money in your pocket tax free as soon as possible, with full discretion and flexibility is best. Structured, downside-protected rollovers can achieve just that, and at much larger scale than trusts ever reasonably could.

Here are a few planning examples (extremely simplified, but tell the story).

$40M exit at year 8, QSBS exclusion eligible on first $10M, 2 close family members for stacking:

Plan 1:

$40M gain

$10M tax free via original QSBS

$10M to trust 1

$10M to trust 2

$10M in taxes owed ($2.38M+)

Liquidity available at year 2 from the sale: $17.62M (or less)

Plan 2:

$40M gain

$10M tax free via original QSBS

$10M to rollover 1

$10M to rollover 2

$10M to rollover 3

Liquidity available at year 2 from the sale: $40M

Schedule a call if you want to learn about our reliable rollover partnership program.