For individuals and families focused on multigenerational wealth planning, selling a highly appreciated asset can create a major challenge: capital gains taxes that immediately reduce what can be passed on to the next generation.
A Deferred Sales Trust (DST) is a smart and legal strategy designed to help sellers defer capital gains taxes, have the pre-tax amount of a sale invested, and receive a structured repayment stream that can be integrated into an estate plan. When properly designed, a DST can make wealth transfer simpler, more predictable, and more flexible for heirs.
What Is a Deferred Sales Trust?
If you are considering the sale of a highly appreciated asset—such as a business, commercial real estate, or investment property you may be facing significant capital gains taxes.
A Deferred Sales Trust (DST) is a legal contract between you and an independent third-party trust. In this structure:
You transfer your asset to the trust, in exchange, the trust provides a contractual promise to pay you a fixed sum over a prearranged period
Payments are documented through a promissory note (also called an installment sale note)
The trust then sells the asset to the end buyer.
This structure allows you to defer the timing of tax recognition, receive strategic repayments per your promissory note, and integrate the strategy into your estate and legacy plan.
A DST is not a do-it-yourself strategy. It must be properly structured, documented, and administered to comply with federal tax law.
Reliable sources:
- IRS Installment Sale Overview (IRC §453): https://www.irs.gov/taxtopics/tc705
- IRS Publication 537 – Installment Sales: https://www.irs.gov/forms-pubs/about-publication-537
Why a Deferred Sales Trust Works for Wealth Transfer
Traditional asset sales often leave heirs with fewer options. A Deferred Sales Trust is different because it transforms an asset into a legacy income stream.
Structured Payments That Align With an Heir’s Timeline
Instead of passing down a property or business that may need to be sold, heirs can receive scheduled repayments over time. These payments can be aligned with:
- Education funding
- Home purchases
- Ongoing income needs
- Unequal distributions among multiple heirs
This structure reduces complexity and minimizes family conflict by clearly defining who receives what and when.
$4M Commercial Property Sale Using a DST
Consider a client selling a $4 million commercial property.
Step 1 — Defer Taxes
Rather than selling directly to a buyer and triggering immediate capital gains tax, the seller transfers the property into a Deferred Sales Trust. The trust then completes the sale.
As a result, the seller:
- Avoids recognizing the full capital gain in the year of sale
- Receivesrepayments over time under the terms of the promissory note
- Gains flexibility to manage annual taxable income
Step 2 — Pass the Promissory Note to Heirs
If the seller passes away while payments are still being made:
- The promissory note becomes part of the estate plan
- One or more heirs step into the role of note recipient
- Heirs receive the remaining payments according to the note terms
Under IRS rules, these future payments are generally treated as Income in Respect of a Decedent (IRD), meaning the income is taxed as it is received rather than all at once at death.
Sources:
IRS Income in Respect of a Decedent (IRC §691): https://www.irs.gov/publications/p559
IRS Estate and Gift Tax Overview: https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
Key Benefits of a Deferred Sales Trust for Multigenerational Planning
1. Predictable and Transferable Income
A DST converts an illiquid asset into a clear, documented income stream that can be passed down seamlessly.
2. Flexibility Without Rushed Decisions
Heirs are not forced to sell inherited property or reinvest under pressure. Payments arrive on a known schedule.
3. Cleaner Administration for Executors and Trustees
The promissory note provides a defined asset with:
- Established payment terms
- Clear reporting requirements
- Reduced valuation disputes
DSTs Must Be Properly Structured
Deferred Sales Trusts rely on contract law and established tax principles. Poor implementation can undermine the intended tax treatment.
Your trust, will, beneficiary designations, and DST documents must work together to ensure your wishes are carried out correctly.
DST strategies should always be reviewed by qualified tax professionals, estate planning attorneys, and DST specialists.
Frequently Asked Questions
FAQ 1 — Is a Deferred Sales Trust legal?
Yes. When properly structured and administered, a Deferred Sales Trust is a legal strategy based on long-standing tax principles and contract law.
FAQ 2 — Can heirs receive DST payments after the seller’s death?
Yes. The promissory note can be passed to heirs, who then receive the remaining payments according to the original terms.
A Deferred Sales Trust does more than defer taxes:it simplifies wealth transfer by turning a single taxable event into a long-term legacy strategy. For families planning across generations, a DST can offer clarity, flexibility, and tax efficiency that traditional sales often cannot.
If you are considering selling a business or property and want to explore how a Deferred Sales Trust can support your multigenerational goals, schedule a strategy consultation to review your options before you sell.
ContactReef Point LLC for a free consultation. Our team specializes in Deferred Sales Trust implementation, helping business owners and investors reduce capital gains exposure.