If you’re new to the concept of a Deferred Sales Trust, you likely will have numerous questions about what a DST is, how it functions, and how you go about creating one.
A DST is a special proprietary installment sale vehicle that allows you to defer recognition of your capital gains and payment of your capital gains taxes when you sell a highly appreciated asset. In essence, the DST is a legal contract between you and a third-party trust whereby you sell a business or real or personal property to the trust in exchange for the DST’s contractural promise to pay you a fixed sum over a prearranged future period in the form of an installment sale note. Not only can you can use a DST as an individual, but also if you’re a legal entity, such as an LLC or an S or C election corporation.
Establishing your DST entails the following four fundamental steps:
1. Begin the Process of Selling Your Highly Appreciated Asset
Whatever asset you wish to sell, you likely will hire one or more professional agents or brokers to market it to interested buyers. Keep in mind that your asset can be any of the following:
- A real estate investment property
- A personal residence
- A business
- A high-value collectible
- A cryptocurrency
- A highly concentrated stock position
2. Meet With the DST Estate Planning Team
During the marketing period, or shortly after you’ve decided to accept an offer, you meet with the DST’s Estate Planning Team, whose core members include:
- A tax attorney
- An Independent Certified DST Trustee
- A Registered Investment Advisor
You can add others to this team, such as the following:
- Your tax CPA
- Your financial advisor
- Your real estate broker
- Your business broker
- Your independent attorney
The main purposes of this meeting are to determine the feasability of using a DST for your particular anticipated sale, learn your investment goals and objectives, establish your investment risk tolerance, and determine what payment amounts you want to begin receiving immediately and what amounts you want to receive in the future. Assuming a DST is feasible, the tax attorney creates the trust for you and begins coordinating with you and all the other parties managing the sales transaction.
3. Sell Your Asset to the DST
Instead of closing the sale and receiving its proceeds yourself, thereby recognizing immediate capital gains, you sell your asset to the DST. This is a legally binding decision on your part that transfers all your rights, title and interests in the asset to the trust.
4. Receive Your Installment Contract
In exchange for your asset sale to the DST, Greg Reese, your Reef Point Independent Certified DST Trustee, gives you a secured DST installment contract, the payment terms of which you specified in the Estate Planning Team meeting.
Subsequent DST Transactions
From this point on, your Independent Trustee manages all aspects of the DST, but only as and when you authorize them. For instance, when it comes time for the final sale closing, the Trustee sells your former asset, now owned by your DST, to your designated buyer for the same price as the DST bought it from you. He places the proceeds in the DST’s controlled bank account that requires your signature, as well as his and the bank officer’s, to open. This is the account from which he buys the investments you authorize and makes periodic payments to you per the terms of your installment contract.