The deferred sales trust (DST) is a tax strategy that builds on the installment sale concept explained and regulated by Section 453 of the Internal Revenue Code. For nearly a century, this process has provided sellers with capital gains tax relief if they do not receive full payment for an asset at the time of the sale.
It is commonplace to break the payment for large-scale property transactions into smaller, more manageable installments. IRC§453 allows the seller to defer their capital gains tax obligation to match the buyer’s payment schedule.
Reef Point, LLC, can help you establish a customized DST to meet your financial needs whenever you wish to defer the gains taxes on a profitable asset sale.
The Deferred Sales Trust Team
Setting up a DST is a complex process that involves a group of experienced financial professionals known collectively as the Estate Planning Team (EPT).
- Expert Tax Attorney: The DST is a proprietary strategy developed by a highly experiened Mid-West based tax law firm in collaboration with the Estate Planning Team. An experienced attorney that specializes in tax law and trained in the DST process will work directly with you to establish your DST.
- DST Trustee: a vetted and certified independent trustee that specializes in DSTs
- Investment Advisor: an experienced indepent investment advisor trained and approved to manage DST funds
If you have already sold your asset and the proceeds are awaiting the completion of a 1031 exchange, you may also work with a Qualified Intermediary who operates independently of the EPT. This will most likely be the case if you attempt to save a 1031 exchange by transferring the sale into a DST.
The Deferred Sales Trust Stages
There is a minimum profit threshold to qualify for a DST which is based on the amount of capital gains taxes that can be deferred as opposed to the anticipated sales price of the appreciated asset. However, determining the worth of deferring taxes on a profit involves a matrix of factors. They are most often unique to each situation, but the primary elements often include the applicable capital gains tax rate, income tax bracket, setup fee, annual trust maintenance costs and financial goals. All those considered, if your gain is more than $400,000, you will likely benefit from a DST.
1. Initial Consultation
It is crucial that you confer with your EPT Trustee to initiate the procedure before you complete the transaction. You must also NOT have constructive receipt of the funds. This generally means that there is at least one contingency remaining before the sale transaction can be considered completed.
Next, our tax attorneys will draft the DST Trust that outlines the terms and coordinates with the people and institutions involved in the sale. The Trust in close cooperation with you and your closing agent can then begin the closing process with the ultimate buyer in accordance with the integration of your DST trust in the closing.
2. Asset Transaction
The DST will participate in the actual transaction according to the sale terms, acting as the initial purchaser. In exchange for the title, the DST will give you a secured installment note naming you as the payee.
Concurrently or within a short period of time the DST will sell your asset to the ultimate 3rd party buyer for the same amount as the previously negotiated and established sales price and deposit the proceeds of sale into the trust’s bank account. This is a controlled account, which means that no one can access the money without your signature authorizing the payout and investment schedule per the trust agreement.
3. DST Distribution Schedule
Before the transaction is complete, you will have negotiated the distribution arrangement (the Installment contract) with the trustee. These terms will determine the initial desired term of the installment contract, frequency of payments, the allocation of interest and principal and the interest rate.
4. DST Investment Strategy
Theoretically, you can leave the money in the DST to earn a negligible interest rate. Still, it is usually preferable to put it to work by working with the trustee and the assigned investment advisor to invest all or a portion of the sales proceeds. The EPT’s investment advisor can help devise a portfolio to make the most of your tax deferred sale. The Trustee and the investment advisor will seek to understand your financial goals and ascertain your risk tollerance so that any investment recommendations are suitable both for your particular risk tolerance and to achieve your stipulated financial goals. Remember, even though you do not have possession of the funds, the DST cannot invest or direct any of your money for any purpose consistent with the trust agreement without your express written permission.
Deferred Sales Trusts are not irrevocable. You will meet with your trustee and advisor periodically and evaluate its progress. You can then authorize changes to the trust based on adjustments to your financial goals and counsel from your DST team of professionals.
Start the Process Today
If you believe you could benefit from a deferred sales trust, request a free analysis from our Certified DST Trustee by phone or through our website. We can help you determine if a DST is right for you.