If you invest in real estate property or other high-value holdings, you may owe the federal government and your state capital gains taxes if you sell the property and profit from it. These taxes can significantly reduce how much you benefit from the sale. Furthermore, gains not secured in a trust are subject to probate if you hold them in your estate to pass on to your heirs.
A deferred sales trust allows you to defer tax payments and protects the gains from probate. However, Reef Point partners get many clients asking about how much control they have over a DST, so we wanted to clear up the confusion.
Do You Have Any Control When You Set Up a DST?
You do have some control when you establish a DST. However, you do not have unilateral control. Unilateral control is only given when you own the asset outright and completely. For instance, if you have a mortgage on your home, you do not have unilateral control over what you can do with and to the house. On the other hand, when you put your money in a bank account, you can determine when and how much money you want to pull out of the account.
When you set up a DST, you no longer have ownership over the property. Once you sell the investment, a third-party intermediary stands between you and the cash you receive from selling the property. This third-party involvement protects you from paying your capital gains taxes all at once. You don’t own the trust. Instead, you are a lender. You essentially loan the trust the profits from the sale, and the trust owner agrees to make payments on the loan over time.
What Control Do You Have?
You have some control in establishing the terms of the deferred sales trust. You can determine when you want payments to begin and how much those payments are. After transferring the profits to the trust, control depends on your arrangement with the DST owner, but typically there is some flexibility to modify the desired payment structure along the way.
At Reef Point, we work with you on allocating the proceeds into the investment vehicles you desire to meet your financial goals. While we play a role in identifying potential investments, you decide which ones you want us to follow through with. We also meet with you periodically to review the trust terms and your goals, making any changes necessary and ensuring the trust continues to align with tax deferral rules.
Another option to control access to the trust funds is to form a limited liability corporation and partner with the trust. If you have a legitimate business use for the money held in trust, you can withdraw cash for the business or other outside business interest. However, we ensure that your investments are legal in the eyes of the government to maintain the tax deferral status. In this way, you retain indirect control, gaining access to the funds you wouldn’t usually have while still receiving the DST benefits.
How Do You Get Started With Reef Point?
Reef Point is one of only 13 Trustees qualified to offer a deferred sales trust. We aim to ensure you get the greatest benefits from a capital gains tax deferral. You are one phone call away from getting started with Reef Point. Contact us today to schedule a free consultation.
Sources:
https://www.irs.gov/taxtopics/tc409
https://worldpopulationreview.com/state-rankings/capital-gains-tax-by-state