One of the most frequent questions we receive here at Reef Point is how the Deferred Sales Trust (DST) works. Usually, the person asking the question has a highly appreciated asset, such as a business or investment, that he or she wishes to sell, but definitely does not want to pay the substantial capital gains tax inherent in such a sale.
Before diving into the details of how the DST works, it’s important for you to know that this is a legal, safe and tested tax-saving strategy based on Section 453 of the Internal Revenue Code that authorizes installment sales. Unlike a traditional installment sale, however, the DST offers you many additional advantages.
Step 1: Meet With the Estate Planning Team
The first step in the DST process is for you to meet with the Estate Planning Team, the only entity authorized to provide the proprietary DST, before you sell your asset. This circle of professionals includes:
- An experienced tax attorney
- A registered investment advisor
- An Independent Certified DST Trustee
The purpose of this meeting is to establish:
- The type of asset you wish to sell
- Your overall investment goals and objectives
- The amount of investment risk you’re comfortable with
- The amount of payback you wish to receive and when you wish to receive it
Step 2: Conclude Your Sale Negotiations
You and your agents negotiate the terms of the ultimate sale to your intended buyer, but you do not finalize that sale.
Step 3: Sell Your Asset To Your DST
Once the Estate Planning Team is fully cognizant of your investment goals, the tax attorney drafts your DST. You then sell your asset to it in exchange for a secured promissory note, the terms of which you and the Team established during the initial meeting.
Step 4: Begin Receiving Payments
Your Independent Certified DST Trustee then sells the asset to your designated buyer for the same price as you sold it to the DST. He deposits the sale proceeds into a controlled bank account in the name of the DST Trust. Because the DST, rather than you, owned the asset at the time of its ultimate sale, you pay no capital gains tax.
The Trustee then begins investing the sale proceeds per your wishes and, if the terms of your promissory note call for it, immediately begins making payments to you.
Step 6: Continue To Work With Your Trustee
Throughout the life of your DST, usually a period of 10 or fewer years, with an option to renew or even accelerate your payment if you wish, you continue to work closely with your Trustee to monitor the performance of the DST’s investments and the amount and timing of your payouts per the terms of your secured promissory note. You can change either or both any time needed, and you must approve all such transactions.
Ready To Get Started?
If all of the above sounds good to you and you’re eager to discover all the ways in which the DST can benefit you in your desired sale, contact Reef Point today. We’ll be happy to discuss your sale in detail and answer any remaining DST questions that you may have.