When you utilize the Deferred Sales Trust (DST) to sell one or more of your highly appreciated assets, you pay no capital gains taxes. Instead, they become deferred almost indefinitely. This is because the DST is the legal, safe and tested proprietary form of the installment sale method authorized by Section 453 of the Internal Revenue Code.
You consequently have thousands of dollars more to invest than you otherwise would. But how do you determine your best investment allocation strategy? Several factors come into play.
Estate Planning Team
One of the first things you will do when desiring to establish your personalized, customized DST is to meet with the Estate Planning Team. This is a circle of deeply experienced professionals whose core members consist of the following:
- Tax attorney
- Registered Investment Advisor
- Independent Certified DST Trustee
The main purpose of this meeting is to allow the Team to get to know you so that the tax attorney can structure the DST that works best for you.
Goals and Objectives
The Team will want to know your goals and objectives regarding your upcoming sale. Naturally, saving capital gains taxes undoubtedly will be one of your primary goals. Other goals could include such things as the following:
- Replacing your income after selling your business
- Diversifying your investments
- Reducing your overall debt
- Generating retirement income
- Establishing education funds for your children or grandchildren
You will be asked to complete a risk tolerance assessment to determine the amount of investment risk you’re willing to take. This, in turn, will help determine the investment strategies appropriate for you. While it is good to have professional advisors guide you in this process, no direct investments can be made for your trust without your express written approval, both at inception and along the way.
Installment Note Term
When you sell your asset to your DST, you receive a secured installment sale note, i.e., promissory note, in exchange. You have complete control over the term of this note and its payout structure. While 10 years is standard, you can choose a shorter period or extend your initial term at maturity based on your goals and objectives.
Rate of Return
Once your DST owns your relinquished asset, the Independent Certified DST Trustee sells it to the ultimate buyer for the same price as you sold it to your DST. He then begins investing the sale proceeds on your behalf. The interest rate generatef depends on the results of your risk tolerance assessment. The terms of your promissory note and investment decisions for the trust are determined in advance of the closing of the sale, and of course, only with your approval. In general, when determining the interest rate owed to you on your promissory note, you can expect the following:
- Conservative investor: 2-4%
- Moderate investor: 4-6%
- Aggressive investor: 6% or higher
It goes without saying that economic and market conditions can affect the rate of return for your specific investments. So does the term of your installment note. The shorter the term you choose, the less flexibility your Trustee has.
One of the best features of the DST, however, is your ability to reassess at any time during the term of your note. Working with the Team’s Independent Certified DST Trustee and Registered Investment Advisor, you can change investment strategies and even the term of your note any time such action is needed.
The main thing to keep in mind is that the DST provides you with maximum flexibility when selling one or more of your highly appreciated assets. To begin the process, simply contact Reef Point today.