Decoding Your DST’s Rate of Return and Investment Advisor Fees | Reefpoint LLC

Decoding Your DST’s Rate of Return and Investment Advisor Fees

When you own a substantially appreciated asset you wish to sell, one of your main concerns is the amount of capital gains tax you will be required to pay and when you will be required to pay it. This is where a Deferred Sales Trust, commonly referred to as a DST, can make your life a lot easier.

As its name implies, a DST allows you to defer capital gains tax payments, thereby leaving your trust with significant sale proceeds to reinvest. Per the provisions of the trust, the Trustee will then make installment payments to you.

This, however, undoubtedly raises another question in your mind: Will the rate of return on the trust investments more than offset the trustee’s and investment advisor’s fees?

Rate of Return

Keep in mind that you control the type of investments your DST makes. In other words, you and the Trustee will consult with the registered investment advisor who manages the trust’s assets to discuss the types of investments the Trustee should make to achieve a reasonable rate of return with which you are comfortable. This rate of return will be based on numerous factors, including the following:

  • Your investment goals and objectives
  • Your risk tolerance
  • The asset mix you desire
  • The overall state of the economy
  • The current fiscal policy, i.e., to what extent the government is adjusting spending levels and/or tax rates
  • The current political and regulatory climate

In general, stocks and real estate have historically produced the highest long-term rate of return, around 7-10%, but they’re also considered the most risky investments. Commodities rank second, at around 6.5%, but are likewise considered high-risk. Bonds, on the other hand, generally return a rate of around 4% over time and are considered low-risk investments. Cash-based investments, such as CDs, etc., carry virtually no risk, but generally pay a rate of return of 2% or lower.

Your DST investment advisor will work with you to build an investment portfolio that meets your needs and desires. He or she will also continue to monitor your trust’s investments and make ongoing recommendations. However, it is always up to you to direct or approve any investment the DST Trustee makes.

Fees

All investments entail fees. Investment firms and financial advisors charge one or more of the following types of fees:

  • Percentage of assets under management – usually 1-2% per year
  • Commissions – additional compensation when a trade is made, usually a percentage of the trade’s amount
  • Fixed fees – set dollar amount, usually $1,000-$3,000, for a special service
  • Hourly charges – set hourly amount, usually $100-$400, for consulting, etc.
  • Performance-based fees – additional amount when a benchmark outperforms

Your Deferred Sales Trust will likewise entail fees for the work done by your Trustee and the investment advisor. Together, however, these fees should amount to only about 1.1%-1.5% of value of the assets in the trust. The goal and expectation when you initially meet with your Trustee and your investment advisor to discuss potential investments of DST assets is that the performance of the underlying investments will produce your desired rate of return net of the associated fees.

Want to Learn More?

Before you sell that substantially appreciated asset and incur immediate capital gains taxes, contact Reef Point online or call us at (866) 867-8633. We’ll be happy to answer all your questions and explain the advantages a Deferred Sales Trust.

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