QSBS and GRATs: Strange Bedfellows Make for Unique Planning Opportunities

Tax and Private Wealth Services attorney Brian Balduzzi published an article in the New York Law Journal examining how founders can combine Section 1202 qualified small business stock (QSBS) planning with grantor retained annuity trusts (GRATs) to create estate and income tax planning opportunities before a business sale. Transferring eligible stock to irrevocable non-grantor trusts can provide separate capital gains exclusions, but the value of the stock may limit this strategy when a founder has little or no remaining gift tax exemption. Brian explains that founders anticipating a sale can transfer QSBS to a zeroed-out GRAT and ultimately distribute the remaining shares to separate irrevocable non-grantor trusts. If properly structured, each trust can qualify as a separate taxpayer for QSBS exclusion purposes. The article also examines laddered and rolling GRATs, which can offer flexibility when coordinating the required QSBS holding period with the timing of a possible sale. Because these strategies depend on stock appreciation, GRAT term and reliable valuations, Brian encourages founders to begin planning with their advisors early in the business life cycle rather than waiting until a transaction nears.

READ: QSBS and GRATs: Strange Bedfellows Make for Unique Planning Opportunities (Subscription required)