In past posts, we’ve answered numerous “big” frequently asked questions about the Deferred Sales Trust (DST), such as the following:
- How do you create a DST?
- Why does the DST qualify for capital gains tax deferral?
- What are the key features and benefits of a DST?
- How does the DST eliminate the risks and disadvantages of a 1031 exchange?
Today we thought we’d answer some of the less frequently asked questions people have about the DST. Here are 5 such questions.
1. What is the Timetable for Beginning the DST Process?
Ideally, you should begin the process of establishing a DST as far in advance as possible before selling one of your highly appreciated assets. This gives the Estate Planning Team adequate time to structure a DST specific to your needs, goals and objectives. Having said this, however, it’s almost never too late to begin the DST process. Nevertheless, if you’re selling real estate or participating in a 1031 exchange, keep in mind that the following dates can trigger a capital gains tax event:
- Escrow closing date
- Day 45 of a 1031 exchange
- Day 180 of a 1031 exchange
Mechanically, as long as you give the Estate Planning Team at least two weeks before your closing date or other tax trigger, this should usually be sufficient. Practically speaking however, your DST should be established and ready to go before the end of your due diligence period or prior to the time when all contingencies of sale have been approved and signed off. Further, you may wish early on to request from your DST Trustee, language to insert in your sale and purchase agreement, or as an addendum thereto, that simply allows you to reserve the right to use the Deferred Sales Trust or “similar” estate or tax planning in connection with your end of the sale. If you’re in an emergency situation that makes two or more weeks impossible, request an immediate consultation with a DST professional to discuss possible options.
2. Can I Keep Some of the Sale Proceeds When My DST Trustee Sells My Asset to the Intended Buyer?
Yes. If you choose, you can take part of the sale proceeds immediately. Remember, however, that this will trigger capital gains payment on the amount of cash that represents a gain on your original investment.
3. How Much Flexibility Do I Have to Alter the Terms of My Secured Installment Sale Note?
You have a large amount of flexibility when it comes to altering your installment sale note’s payment stream. You will want to consult with your Reef Point Independent Certified DST Trustee any time you want to do this. As long as you have a valid reason, such as the need for additional retirement income, and the alternation doesn’t affect the integrity of your DST, you should have no problems.
4. What Happens if the Capital Gains Tax Rates Change After I Establish My DST?
No one need tell you that tax laws can – and often do – change. Consequently, there’s a very real possibility that capital gains tax rates may increase after you set up your DST. If so, you will need to pay the new rate on the applicable portion of any installment note payments you receive after the change. In most circumstances, however, you and your Trustee should have ample time to make investment and payout decisions to minimize your capital gains exposure.
5. Can I Cancel My DST and Get My Remaining Money?
Yes. You almost always have the option of canceling your installment note and therefore your DST after consulting with your Trustee. Once again, however, keep in mind that doing so will immediately subject you to capital gains tax exposure of all unpaid capital gains due from the original sale of your asset.
Have Additional Questions?
If you have additional questions, by all means contact Reef Point today. We’ll be happy to answer them.