Quick version: Founders and private equity investors have a trick for turning a $15 million tax-free windfall into $60 million or more — just split the shares across several family trusts before selling. Treasury has spent two months publicly warning it doesn't like this, and reporting says real guidance is being drafted. Nothing's changed yet, but the clock might be running out.

What even is this?

Section 1202 of the tax code lets people who invest in a "qualified small business" (a small, active C-corporation, roughly speaking) sell that stock completely tax-free on their gains, up to a cap. Last year's big tax law, the One Big Beautiful Bill Act (OBBBA), made that cap more generous for stock issued after July 4, 2025 — raising the tax-free amount from $10 million to $15 million per person, and raising the size limit on qualifying companies from $50 million to $75 million in assets. That's already a huge deal for anyone selling a stake in a PE-backed startup or portfolio company.

"Stacking" is the workaround that makes it bigger. Instead of one person holding all the stock, a founder or investor gifts shares into several separate trusts — one for each kid, say, or several trusts set up around the same family. Each trust counts as its own taxpayer under the law, so each one gets its own $15 million exclusion. Four trusts, four exclusions, $60 million tax-free instead of $15 million — same shares, same sale, same family.

What happened

Treasury officials have been sounding the alarm on this in public, on the record, for months. Evan Adams, a Treasury attorney-adviser, raised concerns about it on May 9. Then on May 20, Kenneth Kies — at the time Treasury's assistant secretary for tax policy — told a Washington audience flatly: "we don't like stacking." The Wall Street Journal reported on June 29 that Treasury and the IRS are actively preparing guidance to limit the practice, and a July 6 legal industry analysis confirmed the strategy is still fully legal today — no rule has actually changed. Treasury hasn't said exactly which legal tool it would use, though advisers are watching for either a formal regulation or an argument that aggressive stacking never worked in the first place, which would let the IRS challenge deals already done.

There's a wrinkle worth knowing: Kies, the most public face of this warning, announced on July 14 that he's leaving Treasury — the same leadership gap this newsletter flagged last week as a risk to other pending fund-tax guidance. Whether the QSBS stacking crackdown still ships on schedule without him is now an open question.

Why it matters for PE funds

Section 1202 gains are one of the biggest tax wins in a PE-backed exit — a sponsor or founder cashing out of a portfolio company can walk away owing nothing on a huge chunk of the gain. Stacking is popular precisely in these deals, where the dollar amounts are large enough to make setting up multiple trusts worth the legal fees. If Treasury does act, and does it retroactively, deals already closed using this structure could face IRS challenges years later.

Why you should care

This is a case study in the gap between "the law allows it" and "the government is fine with it." A strategy can be completely legal today and still be first in line for a crackdown tomorrow — which is exactly the position anyone using aggressive trust stacking is in right now.

What to watch next

Whether Treasury actually publishes guidance, whether it applies only going forward or reaches back to past deals, and who ends up running Treasury's tax policy shop now that Kies is gone.

Sources — go double-check us

This is plain-English information, not tax advice.