Author: Blank Rome LLP

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Qualified Small Business Stock in Tax and Estate Planning

James R. O’Neill —

Stock qualifying under Section 1202 of the Internal Revenue Code of 1986, as amended (the “Code”), as Qualified Small Business Stock (“QSBS”) allows eligible non-corporate taxpayers to potentially exclude a portion or all of the gain from selling the stock held for a minimum period of time (as explained below), with a 100 percent exclusion available, subject to certain caps, for stock acquired after September 27, 2010. The federal tax legislation enacted on July 4, 2025, (the One Big Beautiful Bill Act or “OBBBA”) also expands the benefits of QSBS as explained below. The exclusion of capital gain on sale is designed to encourage investment in small business. The exclusion can benefit startup founders, early investors, angel investors, and employees who receive stock in a qualifying company. Section 1202 of the Code has many rules and exceptions, and continued compliance with the rules is essential to preserving QSBS status of the stock, including dispositions of the stock at death and tax-free reorganizations.

Key Requirements for Qualifying as QSBS

  • Domestic C Corporation. The business must be incorporated as a U.S. C corporation.
  • Gross Asset Limitation. The corporation’s aggregate gross assets must not have exceeded $50 million at any point from August 10, 1993, until immediately after the stock issuance. This threshold has been increased to $75 million under the OBBBA effective after July 4, 2025, with inflation adjustments starting in 2027.
  • Active Business Requirement. For most of the taxpayer’s holding period, the corporation must use at least 80 percent of its assets in a qualified trade or business.
  • Qualified Trade or Business. The business must be in an active field, excluding specific types of business such as professional services, finance, farming, mineral production, and hospitality.
  • Original Issuance of Stock. The stock must be acquired directly from the corporation when it was originally issued, with exceptions noted below, which are particularly relevant in estate planning.
  • Capital Gain Exclusion. QSBS stockholders can exclude up to $10 million in capital gain (or 10 times the taxpayer’s adjusted basis, whichever is greater) from federal income tax for stock issued on or before July 4, 2025 (the “Exclusion Limit”). For QSBS acquired after July 4, 2025, the Exclusion Limit has been increased to $15 million (or 10 times the taxpayer’s adjusted basis, whichever is greater), with an inflation adjustment commencing in 2027. With respect to exclusion from state income tax, different states have varying rules regarding QSBS, and some may not conform to federal rules.
  • Holding Period. For stock issued on or before July 4, 2025, the taxpayer must hold the stock for at least five years before selling it, and, subject to the Exclusion Limit, 100 percent of capital gain is excluded after the five-year holding period. Under the OBBBA, for stock issued after July 4, 2025, subject, in each case, to the Exclusion Limit, 50 percent of capital gain is excluded for stock held at least three years, 75 percent of capital gain is excluded for stock held at least four years, and 100 percent of capital gain continues to be excluded for stock held at least five years. The tacking of holding periods in the case of deaths and reorganizations is discussed below.
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Accounting Estate Administration Litigation Surrogate’s Court Practice Trust Administration

New York Compulsory Accounting Proceedings—A Valuable Tool to Provide Transparency or a Means to Extort a Settlement

Kyle G. Durante —

Most states provide a mechanism by which a beneficiary or other person interested in a trust or an estate may petition a Court asking the Court to order a fiduciary to account for his, her, or its actions and proceedings. This process is intended to provide the beneficiary with sufficient transparency regarding the fiduciary’s actions typically when the fiduciary has failed to provide such information to the beneficiary upon request. However, this process is often abused by aggrieved individuals (whether or not such grievance is legitimate) in an effort to extort a settlement. Courts must act as gatekeepers to limit the misuse of these types of proceedings.

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Accounting Estate Tax Gift Tax

Updated Reporting Requirements for Foreign Gifts and Foreign Trusts

James R. O’Neill —

Proposed Treasury Regulations (the “Proposed Regulations”) have recently been issued to update and clarify existing reporting obligations for U.S. persons who receive gifts from abroad or who are owners or beneficiaries of foreign trusts.[1] These gifts, ownership interests, and distributions are required to be reported annually to the Internal Revenue Service (“IRS”) using Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. The Proposed Regulations provide guidance under Internal Revenue Code (“IRC”) Sections 643(i), 679, 6039F, 6048, and 6677 with respect to reporting receipt of large foreign gifts, transactions with foreign trusts, and loans from, and uses of, property of foreign trusts.

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Estate Administration Estate Planning Estate Tax State Tax

Making Sense of New York’s Estate Tax “Cliff”

Andrew M. Nerney —

In addition to the federal estate tax, which may be levied upon a decedent’s estate, New York imposes a separate state estate tax regime. Generally a decedent’s estate is subject to the New York State estate tax if such decedent dies a resident of New York, or if the decedent dies a non-resident but leaves behind real or tangible property physically present in the state.

Before legislation was passed in 2014, New York had a one-million-dollar exclusion amount (that is, estates would only be liable for State estate tax if the New York taxable estate was greater than one million dollars). If an estate was subject to the New York estate tax, the tax would only be charged against the portion of the estate exceeding the exclusion amount—meaning that before the new legislation went into effect, the first one million dollars was exempt of any State estate tax.

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Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner Series, Part 5: Estate Planning and the M&A Process

Andrew J. Haas —

Once the business owner is ready to sell the business, there will be considerable time and energy focused on that goal. The client may engage an investment banker or business broker to assist in the sale, along with dedicated legal counsel specializing in mergers and acquisitions (“M&A”) for the transaction. The business’ accountant will play an important role as will the personal financial advisers. It is possible that these roles may change from the individuals currently serving in these roles given the complexity and dollars involved, which is a natural progression during a business sale.

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Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner Series, Part 4: Document the Transfer

Andrew J. Haas —

Once a business owner has an understanding of the value of the business and the tax and cash flow impacts of the transfer, the next step is to document the transfer. This may be done by the client’s separate business legal counsel or, if there isn’t one, the estate planner can usually handle the appropriate documentation. It is important to remember that if the client’s goal is to sell to a third party, all of these documents will be reviewed and scrutinized during due diligence, so it is best practice to have them all complete and organized so there is no question about the ownership of the business and the effectiveness of any transfer.

First, all of the existing documents will need to be reviewed. For example, there may be transfer restrictions in old bylaws that will need to be amended, or there may be an existing operating agreement or shareholder agreement requiring that certain consents be obtained from the manager or board in order to transfer equity. If there are lenders or other third-party agreements in place, those should also be reviewed to ensure there are no other separate consents that need to be obtained. Those agreements may also give guidance as to how the transfer must be structured. For example, a gift to a trust for the benefit of a spouse or family members of a current equity owner may be allowed, but only if the Trustee is an individual that is qualified under the bylaws or operating agreement. The existing agreements may provide guidance as to the ultimate structure of the transfer depending on the relationship between the parties.

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Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner Series, Part 3: Examples of Business Transfers and Valuations

Andrew J. Haas —

The purpose of this post, part three of our “Estate Planning for the Business Owner” series, is to provide a sample using real numbers showing the impact and benefit of using closely held business interests in lifetime gifting. Assume a new business-owner client comes in and says that he or she has never had his or her business valued, but based on the earnings and the industry he or she is in, he or she is confident that a third party would buy 100 percent of the business for $100 million. Let’s further assume that the effective income tax rate on the sale of the business is 30 percent, and the client has $13 million of gift/estate tax exemption available.

Option 1: No planning

Assuming the client is able to sell the business for $100 million, and keeps the net sale proceeds at a constant value until death.

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Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner Series, Part 2: Valuing the Business

Andrew J. Haas —

The value of an asset at the time of a transfer is the key component to the United States’ transfer tax system. Gratuitous transfers during lifetime are considered gifts, while transfers as a result of the death of the owner are included in the value of the decedent’s estate. Some assets are easy to value: marketable securities have a value based on the mean of the high and low on the public exchange on the applicable date where they are listed, while the value of cash is equal to the total amount transferred. Valuing an interest in a closely held business is much more complex. When an estate planner has initial discussions with a client and invariably asks how much their business is worth, the client may give you a number based entirely on speculation, or perhaps they are using “book value,” a multiple of the business’ EBITDA (i.e., earnings before interest, taxes, depreciation, and amortization), a value used in a recent loan application, or even the value used for equity as compensation (a “409A” value). None of these values are “adequate” for purposes of determining the value of the business at the time of a transfer for estate planning purposes, and none of these “values” can be used to substantiate the value of a transfer on a Federal Gift or Estate Tax Return.

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Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner, Part 1: The Business Owner as a New Client

Andrew J. Haas —

For most business owners, the business is the most valuable item on their balance sheet. From an estate planning perspective, the equity in the business is also often the best asset to use for lifetime transfers to pass value (and future appreciation) out of the taxable estate. Before an estate planner can effectively provide guidance on the planning opportunities for the business, he or she will need some background information about the business. This data gathering does not need to be all-encompassing, but a good estate planner will want to know as much information about the business as possible since it is often closely intertwined with the client. Some information can be gathered through the business owner’s other professionals, such as separate business legal counsel, internal executives, accountants, and financial advisers, and it is important to have an open communication among the estate planner and these professionals as early on in the process as possible.

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Estate Planning Estate Tax Income Tax State Tax

Understanding Residency and Domicile in Determining State Income Taxation

James R. O’Neill —

State income taxes play a prominent role in overall tax planning for individuals. A change of residence/domicile from a higher-tax state to a lower- (or no-) tax state is often considered when contemplating retirement or the receipt of significant proceeds from a business or investment transaction, or when a taxpayer realizes the amount of state income tax paid upon filing his or her return. Nine states currently have no income tax—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—and the rate of state income taxation varies considerably among the states.[*] A change of residence/domicile can be a practical way to decrease state personal income tax liability and preserve wealth.

Residency/domicile is a critical issue in determining state taxation. The general rule is that a state may tax the worldwide income of a person domiciled in that state. Nonresidents of a state generally only pay income tax with respect to income actually sourced from that particular state. In addition, an individual who meets the statutory test of residency in a state, typically based on presence in the state for a designated number of days, commonly 183 days, may be classified as a statutory resident and subject to tax on all of his or her income, regardless of its source. A “day” in this context typically means any part of a calendar day, except when presence in the state is solely to board a plane, ship, train, or bus for a destination outside of the state. States may provide for other exceptions to this “day” rule, including presence in the state for medical care, presence for purposes of military service, and the like.

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