YC Founder: $13.9M QSBS Gift to a SLAT Before Exit

Ravi is a YC W19 founder. His company, Cardinal Metrics, raised a seed in 2019, Series A in 2021, and Series B in 2023. By mid-2025, Series C investors were circling with offers that included a primary round and a secondary opportunity. His personal stake: 4.2M shares representing 22% of the company, with an implied value of $13.9M at the Series C term sheet price. His original cost basis was $4,200 at founding. With a near-exit in view, he engaged us on tax and estate planning. The question: how to use the current gift-tax exemption and QSBS rules to maximize family wealth while minimizing lifetime taxes.

Situation

His position:

4.2M shares of Cardinal Metrics common.
Cost basis: $4,200 (issued at founding).
Current FMV per Series C: $3.31 per share → total $13.9M.
Holding period: 6+ years, satisfies §1202 5-year hold.
Company qualifies as QSBS: C-corp, gross assets under $50M at issuance, active qualified trade or business.

Gift and estate context:

2025 lifetime gift/estate exemption: $13.99M individual, $27.98M couple.
This exemption is scheduled to drop to approximately $7M after 2025 (pre-TCJA, adjusted) unless extended.
Gift of QSBS to a non-grantor trust transfers the QSBS eligibility and a fresh $10M (pre-July 2025) or $15M (post-OBBBA) §1202 cap to the trust.
The trust must be structured as a non-grantor trust to get its own §1202 exclusion cap.

Ravi was married; his wife had her own $13.99M exemption. They had two young children.

What we modeled

Four structures:

Structure A: Do nothing, sell at Series C secondary.

He sells $5M of shares in the secondary at $3.31 = 1.51M shares.
Gain: ~$5M, fully within his $10M §1202 cap.
Tax: $0 federal on the exclusion.
Net proceeds: $5M.
Future sale of remaining shares taxed up to the $10M cap, then ordinary LTCG rates.

Structure B: Gift to a single non-grantor trust before secondary.

He gifts 1.51M shares ($5M FMV) to an irrevocable non-grantor trust (SLAT or DAPT).
Uses $5M of his lifetime exemption.
Trust sells in Series C secondary.
Trust’s gain: ~$5M, excluded under the trust’s own $10M cap.
Family tax on the secondary: $0.
His personal cap is preserved for future sales.
Net: $5M of tax-free gain, plus preserved $10M on his own cap.

Structure C: SLAT structure for him, and a DAPT for her.

He funds a SLAT for her benefit with 1.51M shares.
She funds a SLAT (non-reciprocal) for his benefit with separately-acquired assets.
If SLATs are structured correctly, they avoid the reciprocal trust doctrine.
Each SLAT has its own $10M §1202 cap.
Combined family QSBS exclusion capacity: 3 × $10M = $30M (his, her, and the SLATs).

Structure D: Multi-trust stacking with Nevada situs.

He funds 3 non-grantor trusts: SLAT-1 for spouse, ILIT for children, and a Nevada-situs DAPT.
Each trust receives 500,000 shares ($1.65M).
Combined gift exemption used: $4.95M + his personal $10M cap preserved.
Combined QSBS exclusion capacity: 3 trusts × $10M = $30M plus his $10M = $40M.

We recommended Structure C with elements of D. Ravi and his spouse each contributed to a non-reciprocal SLAT for the other’s benefit, and he funded a separate DAPT domiciled in Nevada for asset-protection and state-tax-sourcing benefits.

What he did

He implemented three trusts in early 2025 (before the Series C secondary closed):

SLAT for his wife: funded with 900,000 shares ($3.0M). Gift exemption used: $3.0M of his $13.99M.
SLAT for him: his wife funded separately with 900,000 shares ($3.0M) from her own shares (she had a 5% stake as a co-founder). Her gift exemption used: $3.0M.
DAPT in Nevada: funded with 600,000 shares ($2.0M). Gift exemption used: $2.0M of his.

Total shares moved into trusts: 2.4M. Gift exemption used combined: $8.0M. FMV of trust holdings: $8.0M at transfer.

At the Series C secondary closing 4 months later, each trust sold 500,000 shares generating approximately $1.65M of proceeds per trust. Combined trust realization: $4.95M. Combined trust gain: approximately $4.95M, all excluded under each trust’s own §1202 cap.

Additionally, Ravi personally sold 300,000 shares in the secondary, generating $1.0M of proceeds. Personal §1202 exclusion used: $1.0M of his $10M cap.

Total 2025 family tax on secondary: $0.

Going forward, the remaining shares in the trusts and personally would be available for QSBS-excluded sale at a future exit (primary sale or acquisition). Combined remaining §1202 exclusion capacity: approximately $35M across Ravi’s personal cap (9M remaining), the two SLATs, and the DAPT.

What he wishes he had done differently

He did not create the trusts until 2025. Cardinal Metrics was worth far less in 2020-2022, and contributions at that valuation would have used far less of his lifetime exemption for the same economic transfer. Specifically, had he contributed 900,000 shares to each SLAT in 2021 when the Series A valued the common at around $0.45, each SLAT would have used only $405k of exemption instead of $3.0M in 2025. The total 2021 exemption usage for three trusts would have been approximately $1.2M, compared to $8.0M in 2025.

The estate planning rule: gift when valuations are low, because future appreciation happens inside the trust and is outside the estate. By waiting until a near-exit, he had to use exemption at near-exit valuations.

Second: he did not consider the implications of the reciprocal trust doctrine carefully enough in the first draft of his structure. The IRS can “uncross” SLATs if they are substantially identical. His first draft had matched terms, corpus amounts, and trustees. The estate attorney revised both trusts to differ in meaningful ways: different trustees, different distribution standards, different remainder-beneficiary arrangements, different funding dates separated by 60+ days. This reduced reciprocal trust risk.

Third: he did not coordinate the timing with the gift-tax exemption sunset. The $13.99M exemption is scheduled to drop after 2025. Any exemption he has not used by December 31, 2025 may revert to a lower level (historically, the IRS has used “use-it-or-lose-it” treatment for some exemptions, though the Bipartisan Tax Act signals stability). He plans to monitor legislation through year-end.

Fourth: he did not fund a grantor-retained annuity trust (GRAT). A GRAT for rapidly-appreciating QSBS could transfer additional value outside his estate with little gift exemption used, by retaining an annuity interest that captures the §7520 rate. For a founder expecting 5-10x appreciation, GRATs are extraordinarily powerful. He did not structure one in time for the Series C run-up.

Frequently asked

What is a SLAT?

Spousal Lifetime Access Trust: an irrevocable trust funded by one spouse for the benefit of the other spouse (and often descendants). Assets are out of the funder’s estate but available to the beneficiary spouse. SLATs are commonly used to use lifetime gift exemption while retaining indirect access to the transferred wealth through the spouse.

What is a DAPT?

Domestic Asset Protection Trust: a self-settled irrevocable trust (funded by the same person who benefits from it) domiciled in one of several states that permit self-settled spendthrift trusts (Nevada, Delaware, South Dakota, Alaska). Offers asset protection and potentially state-tax benefits.

Does a SLAT avoid the reciprocal trust doctrine?

Only if the trusts are sufficiently different. The IRS can “uncross” mirror SLATs, treating each as if the funder retained the beneficial interest. Meaningful differences in terms, corpus, funding dates, trustees, and distribution standards reduce the risk.

Can a trust claim its own §1202 exclusion?

Yes, if it is a non-grantor trust for federal income tax purposes. Grantor trusts are disregarded for income tax; the grantor claims the exclusion on their personal return. Non-grantor trusts pay their own taxes and claim their own §1202 benefits.

What happens to the gift-tax exemption after 2025?

Under current law, the exemption is scheduled to drop approximately 50% starting 2026 (from $13.99M to approximately $7M, indexed for inflation). Congressional action could extend or modify the sunset.

Composite scenario drawn from common patterns in our advisor network's casework. Names, companies, and exact numbers are illustrative. Not tax, legal, or investment advice.