Dean V. Krishna

As part of the One Big Beautiful Bill Act, the sweeping tax and domestic policy bill signed into law last July, the Trump Accounts were established under the Working Families Tax Cuts legislation to create new tax-advantaged savings accounts for children. The accounts can be funded starting July 4, 2026. The U.S. Department of the Treasury and the IRS have issued proposed regulations that provide guidance on general requirements and elections. The proposed regulations are expected to affect 73 million children in 44 million families. Initial Guidance Regarding Trump Accounts Trump Accounts are governed by Sections 530A and 6434 of the Internal Revenue Code (IRC). Trump Accounts are generally treated similarly to individual retirement accounts (IRAs), which are governed by IRC Section 408A, for federal income tax purposes. Trump Account beneficiaries must be under 18 years of age, possess a Social Security number, and elect (either directly or through an authorized individual) to create a Trump Account. Through the Trump Account Contribution Pilot Program, children born after December 31, 2024, and before January 1, 2029, will be credited $1,000 upon establishing their Trump Accounts. Contributions to Trump Accounts are limited to a maximum of $5,000 per calendar year (which figure will be subject to cost-of-living adjustments for tax years after 2027), though the following contributions are exempt from the $5,000 cap: Qualified rollover contributions (e.g., transferring funds from one Trump Account to a new Trump Account opened with a different custodian for the same beneficiary). Qualified general contributions (e.g., payments from nonprofit organizations or state or local governments to the Treasury Department on behalf of a qualified class). Contributions made under IRC Section 6434 (e.g., the aforementioned $1,000 seeding for eligible beneficiaries). No distributions are allowed prior to the beneficiary reaching 18 years of age (what is known as the “growth period"). Distributions after age 18 are treated similarly to early IRA withdrawals and may be subject to a 10% penalty if made before the beneficiary reaches 59-and-a-half years of age, unless the distribution is for a qualified use (e.g., higher education expenses and health insurance premiums during a period of unemployment).  Trump Accounts may only invest in mutual funds or exchange-traded funds (ETFs) that track a “qualified index” (e.g., the S&P 500), do not use leverage, and do not have annual fees and expenses of more than 0.1% of the balance of the investment in the fund. Eligible investments do not include any industry or sector-specific index but may include an index based on market capitalization. Proposed Regulations Cover Trump Account Requirements, Elections On March 6, the Treasury Department and the IRS issued Proposed Section 1.530A–1, the main points of which are summarized below: General Requirements Trump Accounts would be considered a type of traditional IRA and, as such, be governed by a written instrument meeting the requirements of IRC Sections 408(a)(1) through (6). Trump Accounts could not be a SIMPLE IRA (Savings Incentive Match Plan for Employees) under IRC Section 408(p) and could not accept contributions from an employer’s simplified employee pension (SEP) arrangement under IRC Section 408(k). Trump Accounts must be titled as such, and a beneficiary will be treated as attaining an additional year of age as of their birthday for purposes of IRC Section 530A. Electing to Open a Trump Account Individuals authorized to open a Trump Account would include, in order of priority, a legal guardian, parent, adult sibling or grandparent of the eligible individual. Comments are requested on whether definitions are needed for “legal guardian,” “parent,” “sibling” and “grandparent.” Such authorized individual would represent, under penalty of perjury, that he or she is authorized to open the initial Trump Account for the eligible individual and that there is no other person with a higher priority available to make the election. Elections would be made via a form prescribed by the secretary of the Treasury (i.e., Form 4547) or through an electronic application or website made available by the secretary. The responsible party of the Trump Account would be the individual who makes the election to open such account. What’s Next? The proposed regulations reserve several items for further comment, including employer contributions to Trump Accounts and the proposed applicability date. Written or electronic comments and requests for a public hearing must have been received by May 8, 2026. Stradley Ronon is monitoring for further developments from the Treasury and government.

“Look on every exit as being an entrance somewhere else.” – Sir Tom Stoppard, playwright and screenwriter Particularly since tax rates for C corporations were decreased to 21% starting in 2018, we have seen startups begin their life as C corporations for federal income tax purposes rather than waiting to convert upon future growth. In addition to positioning the startup for an eventual venture capital funding round, C corporation status also starts the five-year holding period for the QSBS (qualified small business stock) tax break. In a prior post, we discussed some of the basics of the QSBS tax break. This post focuses on some considerations as a QSBS investment matures and a liquidity event is in sight. Moving Toward an Exit: Considerations Rollover Under Section 1045. In general, Section 1045 of the Internal Revenue Code allows some or all of the amounts received that are subject to capital gain in a QSBS investment to be invested into a second QSBS investment, thus preserving QSBS benefits via a second investment. Importantly, Section 1045 allows QSBS investments that have not been held for five years (but have been held for at least six months) to maintain their QSBS status through a rollover investment; i.e., if there is an exit event before five years, the QSBS holder can still potentially take advantage of the QSBS tax break, although via a second QSBS investment. Among other limitations, a key practical limitation to utilization of Section 1045 rollovers is that the second QSBS investment needs to be acquired within 60 days of the sale of the first QSBS investment. Oftentimes owners, particularly those busy with closing and post-closing transition issues, don’t have the time or information at hand to line up a second QSBS investment that is worthy of receiving the owners’ hard-earned deal proceeds. Just as with the original QSBS investment, the second “rollover” QSBS investment should be vetted for QSBS qualification. Ideally the second company (the one issuing “rollover” shares) would provide representations on QSBS status, covenants to report consistently therewith and provide necessary documentation, and an indemnification if representations or covenants are breached. We have fielded questions about whether a “rollover” QSBS investment meets the active business requirement for QSBS treatment. Starting in 2024, the IRS stated it will no longer issue private letter rulings on the active business requirement (see Revenue Procedures 2024-3 and 2025-3), indicating the question could be under study by the IRS, with possible guidance forthcoming. We are continuing to monitor for developments. Planning for the five-year holding period. Sometimes sellers who have owned stock for less than five years have a buyer willing to enter into an agreement to acquire the QSBS stock for legal purposes after the five-year holding period has been met. It is certainly possible to agree to a sale before the five-year holding period is met and close on the sale after that holding period is met, but meaningful planning would be needed to avoid having the sale treated as a constructive sale for tax purposes on an earlier date (thus depriving QSBS benefits). SAFEs. While not a focus of this post, there is substantial uncertainty whether a simple agreement for future equity (SAFE), even if the SAFE has language stating equity ownership is intended upon issuance of the SAFE, is equity for QSBS treatment. Gifting pre-sale. The closer to an exit, the less value there would generally be in gifting QSBS stock. However, “stacking” gifts could still be beneficial. (View this article for more.) QSBS attestation letter. Obtaining a QSBS attestation letter from the company that issued QSBS shares helps strengthen the case for the QSBS tax break upon an examination by a taxing authority. Obtaining a letter is a reasonable ask as part of any consent to a sale. Please note that while we view the request as reasonable given that the company has all the requisite information, some companies refuse to issue such a letter. Lack of state conformity. Not all states conform with federal law on QSBS, thus causing state income taxes to be occasionally due when no federal income tax is due. This can surprise unprepared taxpayers. Election on income tax return. Both the QSBS exclusion and the rollover under Section 1045 need to be affirmatively opted into on tax returns. Multiple blocks. The sale documents should specify which blocks of stock are sold — particularly if some blocks qualify for QSBS treatment and others do not. (For example, if those blocks were purchased within five years of the sale or were purchased when the company was no longer a qualified small business under IRC Section 1202.) Finishing the Exercise The QSBS tax break can be lucrative for founders and early investors and help attract investors during the early life of a startup. As the life cycle of the startup moves toward an exit (and a “somewhere else”), finishing the exercise and ensuring the tax break is able to be utilized is an important component of the exit.