Article highlights:

• Unlock the potential of Spousal Lifetime Access Non-Grantor Trusts (SLANTs) for stacking Qualified Small Business Stock (QSBS), 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 from your taxable income.

Spousal Lifetime Access Non-Grantor Trusts are versatile estate planning tools that can offer significant tax savings and asset protection. While primarily used for these purposes, SLANTs can also be utilized for stacking Qualified Small Business Stock benefits. This article explores the potential benefits and trade-offs of using a SLANT for QSBS stacking and provides 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:

1. The corporation must be a domestic C-corporation.
2. 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.
3. The corporation must use at least 80% of its assets in the active conduct of a “qualified trade or business,” a term that excludes most service businesses like law or consulting firms.

What are QSBS Tax Benefits?

Shareholders who hold QSBS assets for more than five years may be eligible for significant tax benefits, including:

1. 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.
2. 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 Taxpayer

QSBS stacking aims to maximize the benefits by transferring QSBS to multiple taxpayers, including non-grantor trusts that are treated as separate taxpayers for income tax purposes. Each separate taxpayer may then be eligible for its own exemption, effectively multiplying the tax savings.

A SLANT is a type of non-grantor trust and has many of the same benefits as other non-grantor trusts — an additional QSBS exemption, moving the assets out of your estate today, control over when and how the beneficiaries access the funds — but also gives you some indirect access to the funds in the trust during your spouse’s lifetime. If you name your spouse as the primary beneficiary, then, barring divorce, your spouse’s death, or other interpersonal complications, you will benefit from the trust’s funds, which your spouse can use for his or her “health, education, maintenance, and support” — including things like buying a house, paying for your kids’ college expenses, and the like.

Benefits of Using a SLANT for QSBS Stacking

1. Both the grantor and the SLANT can utilize the QSBS benefits independently, effectively “stacking” the exemptions.
2. 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.
3. Your spouse can be a beneficiary of the SLANT, which means that you (indirectly, through your spouse) can retain some degree of access to the assets in the SLANT even after you’ve given them away.
4. 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 upon your death.

Tradeoffs of Using a SLANT to QSBS Stack

SLANTs have some downsides and risks. One risk is that your spouse will die. In that case, the special advantage of setting up a SLANT — the fact that your spouse can retain access to the funds in the trust, as a beneficiary — will be lost. If you and your spouse get divorced, you’ll run into the same issue. These trusts are irrevocable and you will not be able to modify them easily in the future.

Another downside of SLANTs compared to vanilla non-grantor trusts is that SLANTs are more complicated to administer. In order to make them work, you’ll need to involve multiple friends and family members, name them as beneficiaries, and then give them a role in administering the trust. These individuals will have at least some degree of access to the trust’s assets.

SLANTs also raise certain tax issues that are beyond the scope of this article. For most people, a more conventional non-grantor trust will make more sense than a SLANT, but SLANTs are an option for those who are comfortable taking on more risk.

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 assume the following facts:

1. Jane, the grantor, has $15 million in QSBS stock, with a tax basis of $0.
2. Jane lives in New York but she’s setting up her SLANT in South Dakota (which has no income tax).
3. Jane’s husband, John, is the beneficiary of the SLANT.
4. Jane transfers $7.5 million of her QSBS stock to the SLANT.

The chart below illustrates the benefits of using the SLANT structure rather than not setting up a SLANT at all.

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 $1.92 million in tax savings.

Conclusion

It is important to understand both the tradeoffs and the potential benefits of using SLANTs for QSBS stacking. You need to make informed decisions that align with your financial and tax-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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