Looking for other trusts? Click here.

Back to Course Curriculum

Chapter 4 of 8

Tax Mechanics: Gift, Income, and State Layers in One View

Chapter Summary

Explore the three tax arenas (transfer, federal income, and state income) that affect Dynasty QSBS Trusts, including new OBBBA rules and strategic planning cues.

Proper tax choreography turns a Dynasty QSBS Trust from clever idea into measurable dollars saved. This chapter walks through the three tax arenas you must plan for: transfer, federal income, and state income, and shows where the new One Big Beautiful Bill Act (OBBBA) rules slot in.

1. Funding the Trust: Gift & Estate Considerations

TopicKey Rule (2025)Planning Cue
Annual ExclusionFirst $18 k per donee ($36 k with spousal split) ignores lifetime exemption and skips Form 709Use to “seed” trusts with low-value shares early
Lifetime Unified CreditApprox. $13.61 M per person remains after annual giftsEvery QSBS transfer burns exemption but multiplies future § 1202 caps
Qualified AppraisalRequired within 30 days of transfer for closely-held stockLock valuation when 409A is low to conserve exemption

Early-bird insight: A $1.00 share given today can grow to a $100 gain that vanishes under § 1202 five years later, at the cost of just $1 of lifetime exemption.

2. Federal Income Tax: Timeline of QSBS Rules

Holding PeriodStock Issued BEFORE 7 Jul 2025Stock Issued ON/AFTER 7 Jul 2025 (OBBBA)
< 6 monthsNo exclusion; ordinary rulesSame
6 mo – < 3 yrs§ 1045 rollover available within 60 daysSame
3 yrs – < 4 yrsStill need 5-year clock50 % exclusion
4 yrs – < 5 yrsStill need 5-year clock75 % exclusion
≥ 5 yrs100 % exclusion, cap greater of $10 M or 10× basis100 %, cap greater of $15 M or 10× basis
Asset Ceiling at Issue$50 M gross assets$75 M

Planner’s quick check: Each non-grantor trust is a separate taxpayer, so these caps restart for every properly structured trust: $10 M per trust for old stock, $15 M for new.

3. State Income-Tax Overlay

State CategoryTreatment of § 1202 GainAction Item
Full Conformity (e.g., TX, FL)Mirrors federal 100 % exclusionNo extra planning
Partial Conformity (HI, MA)Limited exclusionModel after-tax outcomes before sale
Non-Conformity (CA, PA, NJ, PR)No exclusion; up to 13.3 % (CA) taxKeep trustee, ITA, and records outside the state; limit non-contingent resident beneficiaries
Zero-Tax Situs (NV, WY, SD)No state income taxFavor for trust situs to shelter undistributed gains

Putting It All Together

  • Gift early, document well. A low appraisal today sets the stage for a bigger tax-free harvest tomorrow.
  • Mind the holding-period matrix. Post-OBBBA shares offer earlier (but partial) liquidity; pre-OBBBA shares still demand the full five years.
  • Stack by taxpayer, not by person. Each Nevada non-grantor trust files its own 1041 and claims its own § 1202 cap.
  • Control your state exposure. Situs in a no-tax state, plus out-of-state fiduciaries, keeps gains off high-tax radars.

With the tax footing secure, Chapter 5 turns to governance levers that let founders keep investment authority before and after liquidity events without tripping the tax wires laid out above.