Silicon Valley Is Obsessed With ‘Trust Stacking,’ and the IRS Doesn’t Like It

The Treasury Department, led by officials like Kenneth Kies, Assistant Secretary for Tax Policy, is taking a hard look at a tax strategy known as "stacking" that is popular among Silicon Valley investors and founders. This strategy involves using trusts to expand the Qualified Small Business Stock (QSBS) capital gains exclusion, which allows taxpayers to exclude a significant portion of gain from the sale of eligible startup stock. While the exclusion is a valuable tax benefit, the Treasury believes the stacking strategy, particularly advanced iterations involving multiple trusts per beneficiary, is an abuse of the provision.

Under Section 1202 of the tax code, non-corporate taxpayers can exclude gains of up to $15 million (or 10 times the stock's basis) from the sale of QSBS. Stacking allows early investors to gift QSBS to multiple irrevocable non-grantor trusts, each of which is treated as a separate taxpayer and can claim its own $15 million exclusion. For example, a founder with $50 million in QSBS gains, who would typically only be able to exclude $15 million, could potentially exclude the entire $50 million by distributing the stock across multiple trusts, thereby saving on federal taxes that could amount to approximately $8 million on the $35 million of otherwise taxable gain (at a rate of about 23.8%).

Treasury officials, including Kenneth Kies and Evan Adams, have explicitly stated their disapproval of stacking, signaling that new guidance is forthcoming. They are particularly concerned with aggressive structures that go beyond one trust per family member, such as creating trusts for combinations of beneficiaries (e.g., an "AB trust" for children A and B, in addition to individual trusts). The Treasury may invoke Section 643(f), which allows the IRS to consolidate multiple trusts with similar grantors or beneficiaries if a principal purpose is tax avoidance, or Section 1202(k), which grants authority to issue regulations to prevent avoidance of QSBS purposes. However, the legal basis for such regulatory action is debated, as Section 643(f) is typically applied within a different tax subchapter. The timing and scope of potential regulations remain uncertain, but the message from Treasury is clear: they are targeting what they perceive as an "abusive" strategy that costs the government billions.