By Greg Reese
Authorized and Approved Trustee for the Deferred Sales Trust
Sellers of highly appreciated assets including owners of real property and businesses are keenly aware of the tax ramifications of selling their assets. People will choose to sell their businesses or property for many reasons, including health reasons, lifestyle choices, a desire to be free of the time and other commitments required to manage such assets. Many owners are reluctant to sell their appreciated assets because of the tax burdens they may face, even when doing so is at odds with the goals they desire and could achieve by selling.
Former Supreme Court Justice Louis D. Brandeis famously illustrated the difference between tax evasion and tax avoidance with his “bridge tax” story: . . . For my tax evasion, I should be punished. For my tax avoidance I should be commended.
It is therefore not surprising that sellers will seek out the best legal ways to avoid or at least defer taxes. Strategies such as charitable trusts and 1031 exchanges are well known strategies that can legally work to the benefit of many sellers. Yet there is a lesser known strategy that is not new but is new to a lot of people. . . The Deferred Sales Trust, or DST.
The Deferred Sales Trust is a legal, proven and tested strategy that can allow Sellers of highly appreciated assets to sell those assets and defer the capital gains taxes until a time of their own choosing.
Imagine if you could legally create a plan that allows you to sell your appreciated asset and transfer the proceeds, tax deferred into a specialized trust that acts much like an IRA, whereby:
- You can draw from the assets each year as needed to support your lifestyle;
- You must approve the investments within the Trust to suit your specific requirements without being limited to like kind exchanges;
- You only pay taxes on the amounts you actually receive from the trust from year to year;
- You can give your heirs the same benefits over assets you may leave behind.
Sounds too good to be true? It’s not, but it seems so to a fair number of people. But why is that?
Interested parties may learn about this strategy and then seek out guidance from their own CPA, personal attorney or investment advisor. Despite the growing awareness and popularity of the DST, in many cases your professional advisors have not yet heard of the DST, which makes them skeptical and wary, especially when their client brings it to their attention and not the other way around. I have heard many times such professionals proclaim that “If I have not heard of this it must not be legitimate”, and then proceed to steer you to the other more well known strategies, whether they fit your needs or not, and if not, to advise you to simply pay your taxes. If there is another “Way Out” that has been proven to be legal and sufficiently tested, would it be a ridiculous idea to not at least explore it?
There is a simple reason why the DST may not yet be known to them and that fact should not reflect negatively on their overall knowledge and competence to advise you in tax matters.
The simple fact is that the DST strategy was developed over two decades ago by our tax attorneys, CPA’s and LLM’s-(Masters in Taxation designation), in association with the Estate Planning Team. It meticulously follows strict IRS rules and guidelines and has survived several individual IRS audits, two formal IRS reviews, and independent reviews by some of the top tax and CPA firms in the country, as well as FINRA without a single adverse finding or consequence.
As a proprietary strategy, the Estate Planning Team has forged a trail in this area for over two decades, in large measure escaping the notice of other tax law professionals. Many of them are well aware of this now after seeing over 20 years of success, but while some might be capable of approximating this strategy, none of them can demonstrate successful and untarnished scrutiny from the IRS, FINRA or other independent legal and tax professionals as we have.
The term “Deferred Sales Trust” is a trademark for the strategy as a whole, and the name itself can puzzle legal and tax professionals who are not yet familiar with it because that term is not cited in IRS Code. Once your legal and tax professional is persuaded to investigate further, in part by speaking with our tax attorneys, they will learn that the strategy is based on IRC Section 453, making the DST a specialized form of installment sale, which has been codified in the law for about 90 years. This is the key piece of information that signals to them that there is likely a legal basis for the successful use of the DST Strategy and that by conferring with our tax attorneys who are the architects of the strategy, they can independently help their clients evaluate the DST for their own needs and benefit.
Do yourself a favor. If you are looking for a legal way to mitigate the punishing burden of capital gains taxes and your tax professional advises you that this won’t work or that you should just pay your taxes, without doing the independent due diligence on your behalf, you should ask them if they are willing to do the proper due diligence necessary to properly and professionally advise you. The CPA or attorney who simply says “this is no good because I have not heard about this or am not familiar with this” is not doing their best to represent you.
Alternatively, if you wish to have a referral to an independent tax attorney or CPA who has done a thorough investigation of the DST for advice, Reef Point would be happy to help.