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.
Course Progress
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
| Topic | Key Rule (2025) | Planning Cue |
|---|---|---|
| Annual Exclusion | First $18 k per donee ($36 k with spousal split) ignores lifetime exemption and skips Form 709 | Use to “seed” trusts with low-value shares early |
| Lifetime Unified Credit | Approx. $13.61 M per person remains after annual gifts | Every QSBS transfer burns exemption but multiplies future § 1202 caps |
| Qualified Appraisal | Required within 30 days of transfer for closely-held stock | Lock 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 Period | Stock Issued BEFORE 7 Jul 2025 | Stock Issued ON/AFTER 7 Jul 2025 (OBBBA) |
|---|---|---|
| < 6 months | No exclusion; ordinary rules | Same |
| 6 mo – < 3 yrs | § 1045 rollover available within 60 days | Same |
| 3 yrs – < 4 yrs | Still need 5-year clock | 50 % exclusion |
| 4 yrs – < 5 yrs | Still need 5-year clock | 75 % exclusion |
| ≥ 5 yrs | 100 % exclusion, cap greater of $10 M or 10× basis | 100 %, 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 Category | Treatment of § 1202 Gain | Action Item |
|---|---|---|
| Full Conformity (e.g., TX, FL) | Mirrors federal 100 % exclusion | No extra planning |
| Partial Conformity (HI, MA) | Limited exclusion | Model after-tax outcomes before sale |
| Non-Conformity (CA, PA, NJ, PR) | No exclusion; up to 13.3 % (CA) tax | Keep trustee, ITA, and records outside the state; limit non-contingent resident beneficiaries |
| Zero-Tax Situs (NV, WY, SD) | No state income tax | Favor 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.