Treasury Signals Increased Scrutiny on QSBS Trust “Stacking” Strategies

Treasury Department officials are discussing their concerns with Qualified Small Business Stock (QSBS) “stacking” strategies. Concerns were raised about stacking at two recent conferences; one official brought it up at the May meeting of the American Bar Association’s Tax Section, and another at a law firm-sponsored conference.

Under the QSBS rules, each “taxpayer” is entitled to an exclusion amount (the per-issuer limitation) equal to the greater of $10 million or $15 million, depending on the date the stock was acquired, or 10 times the taxpayer’s initial basis in the stock. Because most founders start their companies with minimal capital, the $10 million or $15 million exclusion amount is most often applicable. The $10 million cap applies to taxpayers who acquired their stock on or before July 4, 2025, and the $15 million cap applies to taxpayers who acquired their stock on or after July 5, 2025.

Breaking Down the QSBS Stacking Strategy

Taxpayers engage in stacking strategies to multiply the per-issuer limitation amount by stacking one exclusion amount on top of another. Usually, this involves gifting strategies where a shareholder transfers stock to one or more of their children in trust so that each taxpayer, i.e., the shareholder and each trust, can take advantage of a separate exclusion amount.

For example, if a founder has held zero-basis QSBS for many years and the stock has appreciated to $30 million, they can then transfer $10 million of stock to nongrantor trusts for the benefit of each of their two children. Then, when all $30 million of QSBS is sold, no federal (and likely state) income tax would be due because the shareholder and each trust is entitled to a $10 million exclusion amount.

Although the strategy often involves the use of trusts, trusts are not required for stacking. A taxpayer can engage in stacking by transferring stock outright to an adult family member, such as a sibling or parent.

Why Treasury Is Scrutinizing Stacking Strategies

Treasury officials have been unclear about which aspects of stacking are troubling, but it seems they are most concerned with strategies that involve creating more trusts than a shareholder has children. For example, a founder with two children might transfer QSBS to three nongrantor trusts — one for the benefit of each child and a third for the benefit of both children.

This strategy may invoke the multiple-trust rule in §643(f), enacted in 1984. Future regulations could provide clarity, perhaps with specific rules and possibly a broader anti-abuse rule, but for now, the landscape remains uncertain. Treasury sometimes creates ambiguous rules with broad reach to prevent a “race to the bottom.”

The Treasury officials who spoke about stacking were noncommittal about the scope and timing of the regulations. The department is expected to begin with proposed regulations so the public can provide comments before final regulations are issued. It could also work with the IRS to issue sub-regulatory guidance, which takes less time to get out the door.

Planning Considerations in an Uncertain Regulatory Environment

Whatever guidance is issued, it is likely to be prospective in nature, meaning taxpayers considering stacking strategies might want to implement them sooner rather than later. Taxpayers engaging in stacking transactions might also want to contemporaneously document their non-tax motivations, ensure operational independence among different trusts and confirm that trustees and beneficiaries are not effectively acting as a single unit.

Keep in mind that these comments from Treasury officials at conferences are not binding and do not create new rules; they merely signal the direction of the law. QSBS and planning strategies around QSBS remain viable, and we are actively working with clients to maximize their exclusion amounts.