In a prior installment of Did You Know, I described the benefits of Section 1202 stock. That section of the Internal Revenue Code allows taxpayers to exclude gain on the sale of qualifying stock from their taxable income in an amount equal to the greater of $10 million or 10 times their tax basis in the stock sold. A strategy known as “stacking“ may allow you to multiply the benefits of the $10 million gain exclusion.
Stacking refers to the practice of making a gift of Section 1202 stock either directly or through a non-grantor trust. Since the $10 million exclusion limitation is a per taxpayer limitation, by transferring a portion of the stock to another person, that recipient can effectively stack his or her $10 million exclusion on the exclusion of the transferor. So for example, if an individual holding Section 1202 stock worth $20 million made a gift of half of that stock to a relative, that relative could exclude up to $10 million of gain from income on the sale of that stock. This is in addition to the $10 million of gain that could be excluded by the original owner on the stock that they retained.
Obviously, such a gift could have significant estate and gift tax consequences that need to be taken into account. Ideally, the stock would be gifted at a time when the value was much lower. Navigating the income and estate tax consequences of stacking needs to be carefully considered.
Bottom Line: Gifts of Section 1202 stock may enable a shareholder to multiply the benefits of the $10 million exclusion of gain on the sale of Section 1202 stock
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