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Expatriation Exit·29 citations·Brief · sample·Generated June 2026

Research Result

Question: AI SaaS founder wants to convert SMLLC to C-Corp, transfer shares to irrevocable trusts under the permanent $15M exemption, then eventually expatriate. How do we sequence this to preserve QSBS and minimize the § 877A exit tax?

Practice Brief: QSBS Trust Transfer Before Expatriation

Bottom line (1 sentence): Convert the SMLLC to C-corp, wait 6 months, transfer stock to multiple irrevocable trusts using the $15M permanent exemption, complete the 5-year QSBS hold, then expatriate to shield trust-held appreciation from § 877A exit tax while preserving the § 1202(a) exclusion.

🔴 Action Required

  • Verify the AI SaaS business qualifies as a § 1202(e)(3) eligible trade (software development is qualified; data brokerage, server leasing, or consulting services may disqualify) and that aggregate gross assets will remain below $50M immediately after conversion to preserve QSBS eligibility. — IRC § 1202(d)(1), § 1202(e)(1), § 1202(e)(3)

  • File Form 8832 to elect C-corporation classification effective on the conversion date; this starts the 5-year QSBS holding period fresh (the founder's SMLLC holding period does not tack per PLR 201436001). — Treas. Reg. § 301.7701-3(c), § 1.1202-2(a)(1)

  • Obtain a 409A valuation at conversion to establish basis and at the 6-month mark to support gift tax reporting (Form 709) for the trust transfers; apply lack-of-marketability and minority-interest discounts (30–40% combined is common for illiquid startup stock per Estate of Jones v. Commissioner, T.C. Memo. 2019-101). — Treas. Reg. § 25.2512-1

  • Wait minimum 6 months after conversion before transferring stock to trusts to establish the founder as the "original acquirer" under § 1202(c)(1)(B) and allow trusts to tack the founder's holding period under § 1223(9). — IRC § 1202(h)(2)(A), § 1223(9)

  • Structure transfers to multiple irrevocable grantor trusts (one per beneficiary) to multiply the $10M-per-issuer exclusion cap under § 1202(b)(1); each separate trust is a separate taxpayer eligible for its own $10M exclusion per PLR 201717010. — IRC § 1202(b)(1), PLR 201717010

  • File Form 709 by April 15 of the year following the trust transfers (or October 15 if extended), reporting the FMV of transferred stock and applying the $15M unified credit under § 2010(c)(3) as amended by OBBBA, P.L. 119-21, enacted July 4, 2025 (permanent $15M exclusion for 2026 and beyond, indexed thereafter); allocate GST exemption if trusts skip a generation. — IRC § 2010(c)(3), § 2505, § 2642

  • Ensure trust agreements are irrevocable with no retained § 2036 or § 2038 powers (no retained income interest, no power to alter beneficiaries) to avoid estate inclusion, but include a substitution power under § 675(4)(C) to maintain grantor trust status for income tax purposes during the 5-year QSBS seasoning period. — IRC § 2036, § 2038, § 675(4)(C), Rev. Rul. 2004-64

  • Delay expatriation until the 5-year QSBS holding period matures (conversion date plus 5 years plus 1 day) to preserve § 1202(a) exclusion on any directly held QSBS and avoid § 877A mark-to-market tax on QSBS gain that would otherwise

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