Despite the fact that savvy investors have been making use of the Deferred Sales Trust (DST) for over 20 years, you may not have heard about this legal, tested and innovative way to defer capital gains tax liability when you sell a highly appreciated home, business or piece of commercial real estate. If not, we at Reef Point are happy – and proud – to present this Complete Guide to the DST.
In a nutshell, the DST is a special type of installment sale authorized by Section 453 of the IRS Code. Unlike a standard installment sale, however, the DST eliminates the risks you normally face in an installment sale, such as the following:
- Having your relinquished property serve as your only source of collateral
- Possibly needing to foreclose on the property if the buyer fails to keep his or her end of the bargain
- Recognizing immediate capital gains liability on the entire sale if the buyer refinances your note
How the DST Works
Specifically, the DST works as follows:
- You meet with the Estate Planning Team (EPT) and its tax attorney.
- The tax attorney creates your DST.
- You sell your appreciated asset to the DST in exchange for a secured installment note.
- The DST sells the appreciated asset it now owns to your originally intended buyer for the same price as it bought it from you.
- The sale proceeds go into the DST.
- The Trustee places the proceeds into a controlled bank account in the name of the DST Trust; this account must contain the signatures of you, the Trustee and the bank officer in order to open.
- The Trustee invests your sold asset into financial assets of your choice.
- Per the terms of the installment note, the Trustee makes periodic payments to you.
- During the initial term of the installment note, usually 10 years or less, the Trustee, along with a qualified investment advisor manages the money in the DST, making investments as recommended by your registered investment advisor and directed and approved by you.
Keep in mind that you retain control of the installment note’s provisions and the investments the Trustee makes on your behalf, even though you no longer personally own the funds in the DST. You can expect to meet periodically with your investment advisor and the Trustee to review everything and make any changes you wish.
Also keep in mind that the DST does not eliminate your capital gains taxes. It simply defers them. The beauty of which is your ability to use the dollars that would have been lost to taxes immediately to work for your direct benefit. When properly structured, however, it can defer them indefinitely.
In addition to capital gains tax deferral, you can use the DST for numerous other purposes, including the following:
- Possible estate tax “freeze”
- Wealth maintenance and distribution
- Retirement planning
- Probate avoidance
- Investment portfolio diversification
Investment diversification may be one of the DST’s main advantages. You have almost unlimited freedom regarding the types of investments you instruct the DST Trustee to make on your behalf. These include the following:
- Cash instruments
- Mutual funds
- Life insurance
- Real estate
- A New Business acquisition
Find Out More
If all of this seems too good to be true, rest assured that it’s not. The DST really can provide you with all these advantages. Contact Reef Point to learn more.