Frequently Asked Questions
The Deferred Sales Trust is a legal contract between you and a third-party trust in which you sell real property, personal property, or a business to the Deferred Sales Trust created for you. This is in exchange for the Deferred Sales Trust’s contractual promise to pay you a certain amount over a predetermined future period in the form of an installment sale note or promissory note. It is often referred to as a “self-directed note” because you control the note’s terms. The Deferred Sales Trust gives you the ability to control your capital gains tax exposure, reinvestment terms of the sales proceeds, and installment payments made from the Trust.
To learn more about DST, click here.
If you own a business, corporation, or investment real estate, you may face capital gains tax associated with that sale. A Deferred Sales Trust should be considered for the investor who does not want to continue holding investment property or remain in the same business. According to Section 453 of the Internal Revenue Code, the Deferred Sales Trust provides investors a solution whereby they can defer capital gains upon the sale of their assets and redirect the sale proceeds into cash or whatever types of investments suit their needs, income requirements, and objectives.
The process begins when a property or business owner transfers their asset to a trust managed by a third-party company as Trustee on their behalf. The third-party company acts as Trustee for the asset, and the owner is the secured creditor of the Trust that holds the asset. The Trust will sell the asset to the owner’s buyer and manage and distribute the sale proceeds of the Trust according to an agreed-upon installment contract. Proceeds can be held in cash, reinvested, and distributed according to the owner’s installment contract’s direction.
To learn more about how DSTs work, click here.
When considering selling your appreciated asset, if the expected tax liability without any careful planning would cost you $80,000 to $100,000 or more in taxes, then the DST should always be considered. Said another way, if the amount of the gain or profit you will be taxed on is at least $250,000, then YES, you should look into the DST.
Other components to consider include: the Trust Structure, hiring an Independent Trustee, and the owner must not take constructive receipt of any sales proceeds from an asset’s disposition.
To learn more about DST Guidelines, click here.
When using a deferred sales trust to sell your real estate asset, you won’t pay taxes on the sale for any money you haven’t received. This doesn’t mean you’ll never have to pay the taxes, but you can defer the tax payment for as long as you want, as long as and to the extent you don’t personally receive cash from the sale.
Any payments you receive from the Trust on the interest earned will be subject to income tax, just like any other investments’ profits. If you structure your installment payments to also include some amount of principal, that portion of your payment would be subject to capital gains taxes.
While a deferred sales trust allows you to defer capital gains taxes, you can’t postpone depreciation recapture taxes for any amount depreciated beyond what straight-line depreciation would have been. For example if you have claimed $100,000 in depreciation write-offs using the Accelerated Method, but the alternative calculation had you used the Straight Line method would have been $60,000 in write-offs, then in the year of sale you would still need to report $40,000 in depreciation recapture and pay taxes on that amount. The remainder of your sales proceeds would typically be tax deferred.
The Deferred Sales Trust (DST) is only available from the Estate Planning Team, LLC, in partnership with our tax attorneys. The Estate Planning Team, founded by Robert Binkele, partnered with our tax attorneys to develop a broad based approach to promote the DST strategy on a national basis. The Estate Planning Team manages all marketing and compliance related to the offering and execution of the DST.
The Estate Planning Team has successfully implemented thousands of DST’s over the past 27 years. During that time there have been 16 field audits and 3 formal IRS reviews. Our tax attorneys the Estate Planning Team have never had a negative tax audit or adverse result from the IRS. Some of the most prominent tax law firms in the country, as well as hundreds of boutique tax law firms and CPA’s throughout the country have also independently reviewed the DST strategy, techniques and legal basis and have similarly concluded the DST to be sufficiently legal, proven and tested. Said institutions would, and have, recommended it to their own clients.
The Deferred Sales Trust requires the services of at least 3 distinct and independent professionals: The Tax Attorney, a Trustee and a Registered Investment Advisor. Reef Point, LLC is and authorized and approved Trustee for the Deferred Sales Trust and an affiliate member of the Estate Planning Team, LLC. Because of the proprietary nature of the Deferred Sales Trust Strategy and the absolute requirement to create and manage every DST within strict IRS rules and guidelines, each of these independent professionals must be vetted and trained on all aspects of the DST. The Estate Planning Team supervises the vetting, training, marketing and compliance requirements for qualified professionals who wish to become affiliate members of the Estate Planning Team and to be able to offer this strategy to their own clients.
The process of forming a deferred sales trust can be quite complicated. To set up a deferred sales trust, you should contact an authorized and approved Trustee such as Reef Point, LLC or another professional estate planning team associate, or a tax professional experienced and knowledgeable with deferred sales trusts and deferring taxes on capital gains.
It is important to understand that in order for the Deferred Sales Trust to be effective for you, it is vital that consultation with a DST Trustee and Tax Attorney be completed as far in advance of the expected close of sale as possible. As a practical matter, a minimum of 2 weeks in advance of your closing date is recommended. Realistically, however the stage your transaction is in could be too far along to provide you with the opportunity to defer your taxes. (even if you still have two or more weeks to go) Talk to your DST Professional for more information about your specific transaction.
Knowing that your DST Trust must be created and our Tax Attorneys must be in direct contact coordinating with you and other parties managing the closing of your sale (e.g. Escrow, Title, or Transaction Attorney) in advance of the scheduled closing, there are three possible tax-trigger dates we might look at when planning in advance. These are:
• Escrow closing date
• The 45th day of an open 1031 exchange
• The 180th day of an open 1031 exchange
Therefore, one should keep these dates in mind so that there is enough time for us to schedule our timeline backwards from there.
Yes. The DST Trained and Approved Trustee, in his/her discretion and the best interests of the Trust, may allow you to amend your installment sales note in order to extend or shorten the note term or to provide you with increased or decreased payments (including greater or lesser payments of principal.
If the DST Trained and Approved Trustee deems appropriate, He/She may elect to terminate the installment sales contract. However, you would immediately owe all the taxes, including all unpaid capital gains due from the original sale of the property/capital asset.
Yes, in that case you would pay taxes only on the capital gain portion of the money which you kept for yourself outside the trust.
With proper estate planning (i.e., by creating a Living Trust) scheduled installment note payments otherwise due to you can continue to pay to your legal heirs pursuant to the note term that you have chosen.
Politicians, from time to time, discuss changing capital gain rates. If that happens you would pay the new rate on the capital gains portion of your installment note payment. However, there is usually adequate notice to make a sound financial decision prior to any such change in taxation or tax rates.
DSTs are Complex. The Deferred Sales Trust can be more challenging to launch and manage than, say, a 1031 exchange. The set-up fees could be higher, as well.
Potential for Mismanagement. A Deferred Sales Trust must be managed per IRS rules. If the Trust is improperly managed, it can be declared a “sham trust” by the IRS. This will cause any profits from the initial sale to be taxed at your full capital gain tax rate. The Estate Planning team seeks to minimize this risk by requiring Trustees to adhere to compliance, training, oversight and reporting requirements. In addition, special protections are in place to protect the sales proceeds from unauthorized transfers to any party.
Some Qualified Intermediaries Will Not Release Funds. Those looking to complete a 1031 exchange note that some Qualified Intermediaries will not release funds to a Deferred Sales Trust upon the Exchangers request or upon the failure of the exchange itself. With hundreds of 1031 exchange accommodators across the country, not all of them are educated about this legal option available to sellers/taxpayers. Some simply may refuse to cooperate because it limits the amount of money they stand to earn in interest on your money they are holding.
If you are looking to use the Deferred Sales Trust as a back–up strategy in case you are unable to indentify suitable upside property or the exchange itself will fail, make sure you use a 1031 Exchange Accommodator who has already vetted and approved its use, or ask your DST Trustee help your existing Accommodator complete their own vetting.
The Estate Planning Team has partnered with a large US banking institution who acts as an escrow agent for your funds once deposited into your DST Trust account at close. The account is known as a Designated Controlled Account. Transfers of funds from your DST Account require the signatures of both the Seller and the Trustee. The bank takes financial responsibility for verifying the intent of Seller and Trustee through these written instructions. There is also FDIC Insurance in place up to the Federal Levels.
Typically however, the majority of funds do not sit at the bank for any extended period of time as they are usually invested shortly thereafter into investments directed or approved by the Seller. Such funds will often be transferred (with Seller’s written authorization) to a large financial custodian such as TD Ameritrade or Bank of New York-Pershing. From there, funds can be invested and managed by the financial advisor retained by the trust for this purpose, and in accordance with the Seller express written authorization as to the types of investments made. For additional protection, wire and other transfers from the Custodian are typically restricted to transfers directly to the Seller or to the originating DST bank where the Designated Control Account features are in place to protect the funds.
The Deferred Sales Trust (DST) is only available from the Estate Planning Team, LLC, in partnership with our tax attorneys. The Estate Planning Team, founded by Robert Binkele, partnered with our tax attorneys to develop a broad based approach to promote the DST strategy on a national basis. The Estate Planning Team manages all marketing and compliance related to the offering and execution of the DST.
The Estate Planning Team has successfully implemented thousands of DST’s over the past 27 years. During that time there have been 16 field audits and 3 formal IRS reviews. Our tax attorneys the Estate Planning Team have never had a negative tax audit or adverse result from the IRS. Some of the most prominent tax law firms in the country, as well as hundreds of boutique tax law firms and CPA’s throughout the country have also independently reviewed the DST strategy, techniques and legal basis and have similarly concluded the DST to be sufficiently legal, proven and tested and would, and have recommended it to their own clients.
The Deferred Sales Trust requires the services of at least 3 distinct and independent professionals: The Tax Attorney, a Trustee and a Registered Investment Advisor. Reef Point, LLC is and authorized and approved Trustee for the Deferred Sales Trust and an affiliate member of the Estate Planning Team, LLC. Because of the proprietary nature of the Deferred Sales Trust Strategy and the absolute requirement to create and manage every DST within strict IRS rules and guidelines, each of these independent professionals must be vetted and trained on all aspects of the DST. The Estate Planning Team supervises the vetting, training, marketing and compliance requirements for qualified professionals who wish to become affiliate members of the Estate Planning Team and to be able to offer this strategy to their own clients.