Lake Oswego in Oregon.
Bradleyhebdon | Unissued Stock | Getty Images
A version of this article first appeared in CNBC’s Inside Wealth with Robert Frank, a weekly guide to the high net worth investor and consumer. sign up to receive upcoming programs, straight to your inbox.
A wave of states moving to tax incentives for investors and start-up entrepreneurs could prompt high-net-worth citizens to emigrate, attorneys for the wealthy told Inside Wealth.
The One Big Beautiful Bill Act introduced tax breaks for qualified small business shares, better known as QSBS. However, some states, including Maine and Oregon, have targeted tax incentives in response to federal budget cuts.
“Tax policy has consequences, good and bad, and I think states need to figure out what makes the most sense for them,” said David Blum, partner and chairman of Akerman’s tax practice group. “Someone who wants to go out a lot may already have a lot of homes.”
Blum noted that several billionaires have moved from California as the billionaire tax proposal gains momentum. Google founder Sergey Brin, who bought large estates in Nevada and Florida, is funding two ballot initiatives that aim to balance the wealth tax.
The QSBS exemption, introduced during the Clinton administration, was designed to encourage investment and small business creation. A federal carve-out allows investors and founders to reduce their capital gains tax when they sell stock acquired directly from a C corp.
To get the full exemption, the stock must be held for more than five years. Prior to OBBBA, the maximum exemption from capital gains taxes was $10 million or 10 times the original investment basis, whichever was greater. OBBBA increased the issuance to $15 million. The bill also increased the maximum size of eligible “small businesses” from $50 million to $75 million in gross assets.
Last month, Maine and Oregon passed legislation to repeal the federal QSBS exemption, meaning taxpayers will have to pay state income tax on the first withdrawal. Similar efforts in New York state and Washington failed to pass. The District of Columbia Council voted to repeal several provisions of the OBBBA, but Congress passed a resolution to block the move.
Four states already have a tax advantage in QSBS: Alabama, Mississippi, Pennsylvania and, especially, California, the country’s economic center.
Proponents of QSBS reforms argue that the regime primarily benefits the wealthy. A study by the Treasury Department found that taxpayers earning more than $1 million accounted for nearly 75% of untaxed benefits.
Attorney Steve Oshins told Inside Wealth that QSBS laws and other tax proposals aimed at the wealthy encourage high earners to move to other states.
The tax burden depends on where the shareholder lives when they sell their stock, giving clients time to plan. Oshins said it is possible in some states to use trusts to avoid federal income tax on QSBS. Delaware, Nevada and Wyoming are popular places to establish these prospects.
For example, he said, an Oregon resident can transfer stock to a limited non-distributing trust set up in a state that doesn’t tax the trust’s income, such as Nevada. As long as the trust is not regulated in Oregon and none of the trustees live there, the trust’s capital gains will not be subject to Oregon taxes.
But some states, including Maine, have stricter laws, she said. Noncontributor trusts are subject to state income if they are sponsored by a Maine resident or created by an individual’s will, according to Oshins.
That said, it’s a very straightforward course of action.
“Let’s say a client is about to hire me and says, ‘I have a summer home in Florida, I’m thinking of moving there,'” Oshins said. “I’ll say, ‘Let’s wait a few months. Move over there. Then we’ll put your trust in it.’
But changing your living space is easier said than done, says Blum. To pass federal tax authorities, clients must do more than change their voter registration and spend at least 183 days in another state.
“When it comes to changing your place of residence and the place where you live, you really have to move and uproot your lives,” she said.
