As a CPA helping high-asset clients create and maintain their wealth, you hold an exceptionally prestigious, albeit challenging, position. You’re the expert to whom they look to help them maximize their profits, minimize their tax liability and shield them, to the greatest extent possible, from IRS audits. But how do you do this, especially in light of the major tax changes likely coming in the near future? The Deferred Sales Trust (DST) may be just the answer you and your clients are looking for.
Tax Changes Affecting Wealthy Americans
As you probably know, President Biden’s American Families Plan, if passed by Congress, will negatively impact your high-asset clients in the following ways:
- Increase the top federal income tax rate from 37% to 39.6%
- Increase the long-term capital gains tax rate from 20% to 39.6% for households earning $1 million or more annually
- Eliminate like-kind exchanges, i.e., 1031 exchanges, for gains greater than $500,000
- Apply the 3.8% Medicare tax to taxpayers earning more than $400,000 annually, raising their overall tax rate to 43.4%
- Eliminate the step-up basis
- Give the IRS $80 billion to investigate partnerships, corporations and high-net-worth individuals earning $400,000 or more annually
In all likelihood, your high-asset clients are even more concerned about these possible changes than you are. After all, they stand to lose millions of dollars, especially if they sell a highly appreciated asset such as a business, investment real estate, their primary residence or personal property like an art or antique collection. How can you most effectively help them?
Enter the DST
The Deferred Sales Trust (DST) is a unique, safe and legal way for your clients to defer their capital gains taxes and therefore reduce their income taxes as well. In a nutshell, this proprietary tax deferral strategy, offered only by the Estate Planning Team and its partners, makes use of the installment sale method authorized by Section 453 of the Internal Revenue Code.
When your clients sell a highly appreciated asset, they sell it to their DST (a qualified third-party trust specific to them) in exchange for the Trust’s contractual promise (a secured installment sale note) to pay them a fixed amount over a specified time period. The Trust’s Independent Certified DST Trustee, in turn, sells the asset to the intended buyer for the exact same amount. Since the sale proceeds come into the Trust rather than going directly to your clients, they have no capital gains, realized or constructive. Consequently, they face no capital gains tax liability at the time of sale and only pay small proportions of tax as they receive periodic distributions from the Trust.
In addition to being an exceptional tax deferral strategy, the DST offers your clients the following advantages:
- Ability to diversify their holdings into “any bonafide investment”
- Ability to oversee the investments the Independent Certified DST Trustee makes
- Ability to change the terms of the installment sale contract
- Peace of mind knowing that the DST is a safe, legal and proven strategy, having undergone 15+ IRS audits, all resulting in “no change” letters
Interested in Learning More?
If you’re intrigued by the DST and want to learn how you can provide this proprietary tax deferral strategy to your CPA clients, contact Reef Point today. We’ll be happy to answer all your questions and put you on the road to better serving your clients while increasing your own business.