With a new year upon us, we here at Reef Point thought this an excellent time to provide you with a comprehensive review of the Deferred Sales Trust (DST) and the benefits it can give you.
DST Basics
The DST is a legal, safe and tested strategy for deferring capital gains taxes. It is also proprietary, offered only by the Estate Planning Team whose core members consist of the following:
- Tax attorney
- Registered investment advisor
- Independent Certified DST Trustee
How it Works
When you sell a highly appreciated asset, you normally face a large capital gains tax bite. By utilizing the DST, however, you trigger no taxable event. How is this possible?
Prior to your sale, you and any advisors you desire to bring with you meet with the Estate Planning Team to discuss your sale, your overall investment objectives, your investment risk tolerance and your income needs and preferences. The tax attorney then drafts your personalized DST.
Rather than selling your asset directly to your intended buyer, you instead sell it to your DST in exchange for a secured installment sale contract. This contract is the key to your capital gains tax deferral, since Section 453 of the IRS Code authorizes such sales and their consequent capital gains tax deferral.
Immediately thereafter, your Independent Certified DST Trustee sells the asset to your designated buyer for the exact same amount. Neither it nor you pays any capital gains taxes.
Your Trustee then begins investing the sale proceeds as you directed in your initial Estate Planning Team meeting. He also begins making installment payments to you, again in accordance with your expressed wishes.
Deferred Sales Trust vs. Delaware Statutory Trust
Do not confuse the Deferred Sales Trust, hereafter referred to as the DST, with a Delaware Statutory Trust. While both allow you to defer capital gains taxes, the DST offers many additional benefits that a Delaware Statutory Trust doesn’t and can’t.
Perhaps the most important distinction between the two types of trusts is that you can only utilize a Delaware Statutory Trust when engaging in a 1031 exchange. The DST, on the other hand, makes an excellent alternative to a 1031 exchange, and can even rescue you from a failed 1031 exchange. In addition, the DST subjects you to none of the limitations or strict time frames of a 1031 exchange.
Qualifying Assets
Since you can only use a Delaware Statutory Trust as part of a 1031 exchange, this limits you to investment real estate. The DST has no such limitations. The highly appreciated assets for which you can utilize the DST are virtually unlimited and include the following:
- Businesses
- Commercial real estate
- Your personal residence
- Art, antiques and other collectibles
Investment Flexibility
Still another distinguishing characteristic of the DST as opposed to a Delaware Statutory Trust is that the latter only allows you to reinvest in like-kind real estate. Conversely, the DST gives you, or more to the point, your Independent Certified DST Trustee, complete flexibility to make any “prudent investment” you wish, including in any of the following:
- Stocks
- Bonds
- Commodities
- Equity funds
- ”Green” investments
- Real estate
- REITs
- Life insurance
Have More Questions?
To discover how the DST can work in your particular situation, contact Reef Point today. We’ll be happy to answer all your questions and start you on your way to effectively utilizing the DST.