The U.S. Treasury Department has signaled plans to curb a growing tax strategy known as trust stacking, which investors and company founders use to multiply the benefits of the Qualified Small Business Stock (QSBS) tax break. This technique has drawn increasing scrutiny amid concerns it allows individuals to claim capital gains exclusions far beyond the law’s original intent.
QSBS, enacted in 1993 and expanded over the years, permits investors in qualified small businesses to exclude up to $15 million of capital gains from taxable income upon the sale of stock held for at least five years. The tax break enjoys bipartisan support as a means to encourage entrepreneurship and early-stage investment, particularly in technology startups. A recent tax law raised the exclusion cap from $10 million to $15 million and expanded the definition of qualifying small businesses, further enhancing the break’s appeal.
Under the tax code, investors may transfer shares to other taxpayers, including trusts, allowing each entity to claim its own exclusion. This provision has enabled the practice of trust stacking, whereby founders create multiple trusts in the names of relatives—often when the shares have minimal value—to maximize the total exclusion on eventual stock sales. For example, establishing trusts for several children and other combinations thereof can multiply the benefits, potentially lifting the excluded gains into the tens of millions.
Kenneth Kies, the Treasury’s top tax-policy official, expressed frustration with this approach in a recent address, stating, “We don’t like stacking, OK?” He indicated the Department plans to propose regulatory changes targeting aggressive trust stacking arrangements, particularly those involving multiple trusts linked to the same taxpayer. Such measures aim to prevent scenarios where founders set up overlapping trusts—for instance, trusts jointly held by various combinations of children—to expand exclusions well beyond intended limits.
Despite the mounting concerns, some legal and advisory professionals maintain their trust stacking methods comply with current law and anticipate continuing these strategies. Michael Arlein, a trusts and estates attorney based in New York, affirmed confidence in his practice’s adherence to regulations: “I haven’t changed anything that I’m doing.” Complementing this, a new niche of advisory firms offering QSBS trust setups at lower costs has emerged, catering to founders seeking to optimize wealth transfer without incurring significant gift-tax consequences.
The budgetary impact of QSBS exclusions has grown considerably, with federal revenue losses estimated at $4.9 billion for 2026, more than triple the figure reported in 2017. Between 2012 and 2022, taxpayers claimed $140 billion in exclusions, according to a 2025 Treasury study. Notably, trusts and estates accounted for nearly 17.5% of these claims in 2021, highlighting the prominence of trust-based strategies.
Experts caution that the current lack of comprehensive Treasury regulations or detailed IRS reporting requirements on QSBS creates an environment ripe for exploitation. Manoj Viswanathan, a law professor at the University of California, San Francisco, remarked on the absence of effective guardrails, describing the virtually unrestricted stacking practice as “absurd.”
As the Treasury prepares to introduce new rules, stakeholders await clarification on how aggressively the government will limit the use of trust stacking to preserve the integrity of the QSBS tax break.