Even though the Deferred Sales Trust has been available for more than 20 years, it’s still relatively unknown. If you’ve never heard of a DST, the most important thing you need to know about this unique, proprietary strategy is that it allows you to defer your capital gains taxes when you sell a highly appreciated asset. But that’s just the beginning of what a DST features and how it can benefit you.
Key DST Features
As you likely already know, Section 453 of the Internal Revenue Code authorizes installment sales. The DST is an elegant, innovative type of installment sale. As such, it has the following key features:
- Campbell Law and the Estate Planning Team are the only authorized providers of the DST.
- It is a safe, legal, tested and proven tax strategy.
- It has conducted 3,000+ transactions totaling hundreds of millions of dollars since its inception.
- It has undergone 14 IRS field audits, all of which resulted in “No-Change” Letters.
- It has undergone several reviews by both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), none of which resulted in an adverse opinion.
- It allows broker-dealers to approve their advisors to participate in it.
- It serves as an excellent exit strategy when selling highly appreciated assets.
- It provides an excellent 1031 exchange alternative, and can even rescue a failed 1031 exchange.
Primary DST Benefit
The main benefit of the DST, and the primary reason why owners of highly appreciated assets seek it out when they wish to sell, is that it allows you to defer recognition of your capital gains for years. And what you don’t recognize, either actually or constructively, you don’t pay capital gains taxes on.
The DST does this by providing you with a third-party trust to which you sell your highly appreciated asset in exchange for a secured installment sale contract. Since the DST now owns your asset instead of you personally, it deals with your designated buyer and becomes the legal selling party when the sale closes. Consequently, the sale proceeds go into the trust rather than coming to you personally. This relieves you of tax recognition by either constructive or actual receipt.
The DST then pays you according to the terms of your installment sale contract. You only pay tax on whatever portion of the installment payments represents a capital gain on the sold asset. In addition, when you do pay capital gains taxes, you do so with depreciated dollars. All of this can save you hundreds of thousands of dollars.
Additional Key DST Benefits
Unlike with a 1031 exchange, you can, by utilizing a DST, invest in virtually any type of asset you wish. This allows you to diversify your investment portfolio to include such things as:
- Stocks
- Bonds
- Commodities
- Real estate
- REITs
- Annuities
- Any other “prudent investment”
Other key DST benefits include the following:
- You can receive part of your payments now as retirement income.
- Your Independent DST Trustee manages the trust for you and makes investments on your behalf that you preauthorize.
- With proper estate planning, your DST may provide you with an “estate tax freeze” and/or allow you to avoid probate.
- It eliminates your ownership risks by converting what was originally “exposed” or liability-prone collateral to “no-liability” assets such as diversified financial instruments.
Reef Point can help you learn more about how a Deferred Sales Trust is a beneficial investment conversion strategy for your highly appreciated illiquid assets. Contact us today!