Deferred Sales Trust Explained
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A Deferred Sales Trust™ is a smart and legal way to defer capital gains tax and reduce the overall tax burden on the sale of homes, commercial real estate, businesses, and other highly-appreciated assets.
Advantages of a Deferred Sales Trust
There are significant benefits in electing to use the Deferred Sales Trust when selling a property or capital asset. These include:
Retirement Income
Provides a stream of income that can be used as retirement income.
Estate Tax Benefits
May accomplish an “estate tax freeze” for estate tax purposes.
Does Not Compete with Charitable Remainder Trust
Nothing is required to be given away to charity, as happens with the competing strategy known as a Charitable Remainder Trust.
Probate Avoidance
Avoid probate with proper estate planning.
Eliminates Risks Associated with Ownership
By utilizing the DST installment arrangement, you can convert the collateral security for your payments from an asset that is otherwise “exposed” or liability prone (e.g. your old business or property) to a “no-liability” asset (such as diversified financial instruments).
Tax Deferral
When the appreciated property or capital assets are sold, capital gains tax on the sale is generally deferred until the Seller (Taxpayer) actually receives the payments.
Maintain Wealth
When properly structured, the principal inside the subject installment sales note can be preserved with “interest only” or partial principal payments creating the potential to pass on a large portion of the note principal to your legal heirs with proper estate planning.
Portfolio Diversification
The DST Trustee may invest in REIT’s, bonds, annuities, securities or other “prudent investments” that are suitable to help assure the Trustee’s performance in repaying the Seller/Taxpayer pursuant to the held installment sales.
Legal, Tested, Proven Tax Strategy
- Developed over 27 years ago
- Successfully transacted over 4,000 DST transactions totaling hundreds of millions of dollars
- 16 field audits by the IRS all resulting in “No-Change” Letters
- 3 Formal IRS reviews – No adverse findings
- Reviewed by FINRA and SEC with no adverse opinion – Allows broker-dealers to approve their advisors to participate in the DST Strategy for clients.
- Our tax attorneys provide Audit Defense at no additional cost
How does the Deferred Sales Trust work?
- The process starts with an owner wishing to sell his or her appreciated assets which may include Real Estate, a business, high value collectables, crypto currency or highly concentrated stock positions, The Seller will typically follow traditional methods including hiring professional agents or brokers to market the asset to interested buyers.
- During the marketing period or shortly after an offer has been accepted, and provided that the DST Transaction is feasible, our tax attorneys will create a specialized trust whose purpose is to conduct business with the Seller. The DST Tax Attorney will coordinate with the Seller and the parties managing the sales transaction to prepare the way for the Seller to defer the taxes on the sale.
- Just prior to the close of the sale, the Seller may make a binding decision to transfer their rights, title and interest in the asset to the trust.
- During the final closing, the designated buyer will receive the asset, the Seller’s DST Trust will receive the proceeds of sale and the Seller will receive a secured installment contract (or promissory note). In this way, the Seller can report the sale for tax purposes as an installment sale.
The sale is not immediately taxable to the Seller because he or she has not personally received the proceeds, nor is it taxable to the Trust since the Trust “re-sold” the asset to the designated buyer for the same amount it paid to the Seller.
As discussed above, the payment from the Trust to the Seller isn’t in cash, but with a special payment contract called an “installment sales contract”. It is strictly a private arrangement between the Trust and the Seller/Taxpayer. The term of payments is established in advance in discussions between the Seller/Taxpayer and the Trust. Under that contractual agreement, payments may begin immediately or they may be deferred for some period of months or years.
Deferral is strictly an option. It is important to understand that payment of the capital gain tax to the IRS is done with an “easy installment plan” as the Seller/Taxpayer receives the payments. Depending on how you choose to receive payments, the initial part of your payment would be considered interest on your DST Note, and at any time your payment exceeds the interest only part of your payment, part of the payment received is tax free return of basis, part is return of gain which is taxed at capital gain rates, and part may taxed as depreciation recapture (such as on the sale of investment Real Estate). A key benefit of “pay as you go” as opposed to pay all taxes in the year of sale is that when you do pay taxes, it is often possible to engineer payments that place you in lower tax brackets.
On top of that, the tax payments will be made with depreciated dollars. The tax dollars paid later will likely be worth less than they are today due to inflation. If invested properly, the money in the Trust could potentially grow at a greater rate than that of inflation and even the distribution rate and ensures the necessary liquidity to pay back the note due to the Seller/Taxpayer. (The interest rate in the note to you is required by the IRS to be a fair and arm’s length or competitive rate, i.e. 5% to 8%.)
Once the Seller’s payout structure is determined, the Trustee and an experienced, vetted and trained investment advisor will consult with the Seller to determine how the sales proceeds should be invested in order to meet the Seller’s goals and objectives. The Trust will then proceed to invest the proceeds, but only as the Seller shall approve.
Thereafter on a regular periodic basis the Trustee and Investment Advisor will meet or conference with the Seller to review the DST Note, the management and performance of the invested assets and discuss whether there might be any changes in the needs or goals of the Seller. The Trustee and the Investment Advisor, with the support of your DST Tax Attorney will continue to work to maintain the integrity of the Trust to ensure continuation of the tax deferral benefits for the Seller.
Explore the three most common uses for the Deferred Sales Trust
Exit Strategy
Looking to sell appreciated Real Estate, a Business, Collectible, or other high value asset and not repurchase the same asset class?
1031 Exchange Alternative
Looking to “trade up” into more real estate, and want to either park your sales proceeds indefinitely for the right deal? Or looking for better depreciation write-offs from the next purchase?
1031 Exchange Rescue
Looking for a way out from an exchange where no suitable upside is available in time or your exchange is in jeopardy of failing?
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