This conversation delves into the intricacies of Qualified Small Business Stock (QSBS) and its significant tax benefits for founders. MICHAEL ARLEIN, Partner at Patterson Belknap, explains the eligibility criteria, the importance of strategic planning, and the potential pitfalls that can arise. The discussion also covers the implications of state taxes and the advantages of gifting strategies. We cover innovative approaches like the "GOAT" trust to maximize tax-free gains. Founders are encouraged to engage with legal experts early in their business journey to fully leverage QSBS opportunities.https://youtu.be/lfBt0j7BlW0?si=LufZ8j2YtgdspLMJEditing and post-production work for this episode was provided by The Podcast Consultant (⁠https://thepodcastconsultant.com⁠)Takeaways from "QSBS For Founders"QSBS is a powerful tax benefit for founders.The maximum exclusion amount has increased to $15 million.Careful planning is essential to avoid QSBS pitfalls.Gifting QSBS stock can multiply tax exemptions.State tax implications vary; California does not recognize QSBS.Discounting shares can aid in estate planning.Converting from an S-Corp to a C-Corp can preserve QSBS benefits.Early engagement with legal counsel is crucial for founders.Innovative strategies like the GOAT trust can maximize benefits.Almost all businesses should consider QSBS eligibility.ChaptersTranscript of "QSBS for Founders"Frazer Rice (Michael Arlein (Frazer Rice (For founders, you're going to hear the numbers 1202, which is the section that is quoted here. Take us through a little bit about what happens at QSBS and why it's a powerful feature.Michael Arlein (To your point, the New York Times called QSBS a lavish tax dodge that is easily multiplied. And I happen to. I'm not aware of any other provision of the tax code that can save anyone as much money as QSBS. It's really incredible. I think the policy reasons behind the provisions are that they're designed to encourage entrepreneurship. Everyone on both sides of the political aisle is in favor of. The basic premise of it is that if you create a company.You own the stock for five years. The company's in the form of a C corporation,It's not in one of a series of restricted industries. Mainly service industries, that when you sell the stock, you can exclude from paying tax $10 million, the first $10 million of your gain. That's the old rule, which I'm still dealing with, that that's for stock that was issued before July 4th, 2025. And now QSBS has gotten even better. So if you get stock after that date. You hold it for actually now three years, you can exclude ultimately up to $15 million from tax. So we're now dealing with two different regimes. I'm still stuck in the old regime. Most of the people I'm dealing with got their stock before last July. But I'll try and point out the differences as we go along.Frazer Rice (What are some of the things that you tell your clients? How do you walk them through the process so that they don't trip on themselves and lose this nice tax advantage?Michael Arlein (And then the mechanism for that is the company kind of buys back their stock. You know, there's complicated rules that can, you know, blow up QSBS for the entire company. I think some people start their businesses as LLCs or S-Corps or things like that, and then later convert them. And that has to be done very, very carefully with good tax advice. Otherwise that can also blow things up. When I talk to founders, it's pretty clear their business qualifies. They didn't screw anything up.Frazer Rice (For those people who are walking into your office now. How do you get them when they sit down situated so that they do that planning upfront?Michael Arlein (The benefit of QSBS: it would be incredible if you could just pay no tax on 10 or $15 million. But what's even more incredible is that you can stack or multiply the number of exemptions. You have using a provision of the code. It says that if you gift QSBS stock to some other person or entity. That that person or entity can take their own up to 10 or 15, their own QSBS exemption. I'm just gonna say it's 15. We understand that's for newly stocked. So, classic move for a founder would be to set up trusts for children. There's a special kind of a trust for a spouse. You can do this with sometimes people make trust for their parents, their siblings. There are certain states where you can actually make a trust for yourself. Usually when people come to my office, the conversation is around creating entities. Typically trusts, and then gifting shares to those trusts. thatAs a family, you could go from 15 million tax free to 30 or 45 or 60 million tax free. The record I had one guy who had a very large family. He married, he had kids and was very close not only with his parents. With his siblings, his nieces, his nephews, even his aunts, uncles, and cousins. He created 23 trusts, which on paper at least would save up to $230 million. Wow. Yeah.Frazer Rice (Michael Arlein (Now, those individuals were the beneficiaries of the trusts, which means that they were eligible to receive money from the trust. But those trusts were designed so that when those people passed away, the money would circulate back to his children. So, you we never talked about it, but it's possible that in his head, his plan was that he would maybe provide some benefit to his cousin. Maybe he'd say to his cousin, hey, if there's $5 million in this trust and you need a little money, I'll make some distributions to you, but I'm going to request that the trustee kind of withhold most of the money. And then when you die, it'll come back and benefit my kids. So there are nuances there. But generally speaking, most people aren't willing to do that. They're not close enough with their cousins and their aunts and their uncles. So they end up maybe creating trusts, you know, for their kids, for their parents, sometimes, you know, for their spouse and maybe sometimes they go a little beyond that, but not that far. One thing that's important is that the U.S.Frazer Rice (So it's important to get these assets into these trusts as early as possible and with as low evaluation as possible. That in many ways is where the real leverage is. Does that square with your thinking?Michael Arlein (People are familiar, founders are familiar with common stock valuations because they do that for purpo