If you’ve been reading the various blogs and information pages on our Reef Point website, you already know that when you utilize the Deferred Sales Trust (DST) strategy to sell one of your highly appreciated assets, you pay no immediate capital gains tax because you have not actually or constructively received any capital gains on your sale.
You also know that to do this, you sell your asset to your DST rather than to your intended buyer and receive a secured installment sale note in exchange. Your Independent Certified DST Trustee then sells your asset to your intended buyer for the same price and collects the proceeds tax-free on behalf of your DST.
Did you know, however, that even though Section 453 of the IRS Code, the section authorizing installment sales, requires that your DST be a legitimate third-party trust, you nevertheless retain control over how your installment note is structured in terms of the monthly or other payments you receive? It’s true. Not only do you get to set your note’s term (usually one to 10 years) and when you receive payments, but you can also restructure your note at any time in the future that you have a reasonable and commercially viable reason for doing so.
Installment Note Payback Structure
Your DST payback structure is very flexible. For instance, you could chose any of the following:
- Start receiving monthly, quarterly or other scheduled payments immediately
- Defer receiving any payments for one or two years and then begin receiving them when you retire
- Receive interest-only payments initially, with a balloon payment of principal at a later date
- Receive partial principal and partial interest payments in tandem
If your income needs change during the lifetime of your installment note, no problem. Simply contact your DST Trustee and request the restructuring of your choice.
Remember, you only pay capital gains taxes on the amount of principal payments you receive, in the year you receive them.
Investments and Interest Rate
The interest payments you receive come from the interest earned on the investments your Certified Independent DST Trustee makes on your behalf with the proceeds from your asset’s sale. One of the DST’s greatest advantages is that he can make any “prudent investment” you direct, including in such things as the following:
- Real estate
- Cash accounts
- Life insurance
- and more . . .
When you have your initial meeting with the Estate Planning Team, this circle of legal and tax professionals will ask you to fill out a risk tolerance questionnaire that will guide your Trustee in making the types of investments that are consistent with your tolerance for risk, as well as your overall financial goals and objectives.
Assuming that your asset sells for $2 million and that you have a low investment risk tolerance, even a conservative rate of return of 5% gives you the potential for $100,000 of capital gains tax-free income per year.
Want To Know More?
If all of this sounds good to you, by all means contact Reef Point today. We’ll be happy to answer all your questions as to how the DST can work for your particular situation.