Although modern trust law traces back to feudal England in the 1100s, citizens of the Roman Republic secretly used an oral agreement called “fideicommissum” (something committed to one’s trust) to work around civil succession laws. This way, they could leave wealth or property to those considered as lower-class, including foreigners, slaves, couples without children or unmarried individuals — an act that was punishable by death.
Presently, Americans employ different kinds of trusts to safeguard assets for their surviving family members without being subject to probate or estate tax. One method, the Deferred Sales Trust, is commonly used to protect the proceeds of a high-value asset sale from capital gains tax. A DST can also protect your assets from estate taxation, preserve their value for legal heirs, and in addition, fund your retirement with a steady interest cash flow.
Retirement Income and Inheritance
As you approach retirement, your risk tolerance deteriorates substantially. The long-term illiquid investments that have built your estate, such as business interests and real estate, now have the potential to devastate your portfolio. If the economy enters a severe downturn or the housing market crashes, you could lose much if you cannot move your assets quickly enough, and you may not have enough time to wait for a bounce-back.
When the market favors you, selling these assets through a DST provides shelter from future negative external influences. It also returns you an installment note that you can now invest at the full face value. This is because you do not realize the capital gain as long as the principal remains in the trust.
Depending on your desired return and risk threshold, a DST investment advisor can help you and your trustee choose from a variety of options such as mutual funds, stocks, bonds, or even REITs. With the proper trust configuration, your principal could yield interest and dividend payments that fund your retirement. Meanwhile, much of the installment note could remain untouched. Through your family estate plan, such as a living trust, the trust distributions could continue to your heirs after your death.
The Tax Cuts and Jobs Act doubled the estate tax exemption for individuals in 2018 to $11.2 million, with annual inflation adjustments until 2025. In 2020, the exemption sits at $11.58 million. While this benefit is not supposed to expire for five more years, experts believe that the federal budgetary aftermath of the pandemic and recession, coupled with a potential administration change in November, could spell the end of dramatic tax cuts.
So, even if your estate totals less than the threshold of an estimated $6.5 million, to which the exemption will return in 2026, that these rules are subject to political winds means that you must always consider regulatory change when making your estate plan. This is a primary reason why using a DST strategy that includes specific proprietary estate planning to remove certain assets from your ownership could benefit your surviving family. You do not have to be ultra-rich for it to make sense.
It is also worth noting that establishing nearly any type of trust can also help your beneficiaries avoid a drawn-out probate process. In simple words, probate is the court-administered handling of your estate after your death. If you have a will, the court generally will transfer your property as directed. However, establishing a DST makes probate unnecessary, as your trustee will continue to administer your trust according to your predetermined agreement.
It comes at a monetary cost. However, unless your estate is very small and simple, it is typically worth the expense. After all, you know that the trustee with whom you have a personal relationship and understands your directives will be the one to manage your estate after your passing rather than a stranger appointed by the court.
How Does a DST Fit With Your Estate Plan?
Your estate, lifestyle and future visions are unique and deserve individual attention from a Reef Point financial planning specialist. Contact us online for more information and see how a Deferred Sales Trust can benefit your estate.