Avoiding capital gains tax may be the primary selling point of a Deferred Sales Trust, yet it is not the only benefit. Furthermore, some may even argue that deferring taxes is not even its best feature, considering the flexibility you have when structuring the trust.
So, before you write a DST off as a one-trick pony, let’s look at some of the secondary, and perhaps more compelling advantages that might be appropriate for your financial planning objectives.
Not only can a DST help you defer your capital gains tax liabilities for as long as necessary, but it can also provide a sort of estate tax freeze. Estate planning strategies often include moving assets into irrevocable trusts that permanently transfer them out of ownership and estate tax liability. Even though a DST is technically revocable, if your estate is worth more than $5 million ($10 million, if married), we can structure your DST using additional proprietary planning methods that shelter the trust from estate tax liability.
A DST can also protect your real estate assets from other exposures that include seizure by creditors, or damages in a property liability lawsuit. Third parties may be able to successfully win judgments that allow access to income from your trust, but they cannot claim the principal that you do not own.
Flexible Distribution Structure
DSTs can structure the sale of an illiquid asset, such as real property or a business, into cash installments. Plus, you and your Deferred Sales Trustee will create any manner of distribution schedule that best suits your needs. Instead of receiving a considerable lump sum from the buyer and remitting the highest tax bracket percentage of the profit to the IRS, you can set up the payments to minimize your capital gains tax rate. Additionally, since you do not realize taxes on the full gain upon completion of the sale, you have an opportunity to invest more of the principal for longer periods of time.
This in itself has three major benefits: You will be able to build wealth faster with an undiluted principal investment, and you could employ a payback structure that consists of income earned from the investment. Now, you have a steady cash stream that is taxable at income rate levels while the principal continues to generate wealth. And the third benefit? You can meet with your trustee, and if appropriate and agreed to by the Trustee, to change the term and amortization of the installment note, the trust investment strategy, or even cancel the contract — at any time.
Diverse Investment Opportunities
Although you can transfer the sale of almost any asset into a Deferred Sales Trust, the strategy is especially ideal for highly valued fixed assets. For instance, a 1031 exchange requires you to find a like-kind asset of equal value within a matter of weeks. With a DST, after completing the sale and creating the trust agreement, your principal could theoretically sit in the trust indefinitely, waiting for you to decide when and where to reinvest it.
You are not limited by the like-kind restriction, either. Your DST investment advisor can help you build an investment portfolio made up of different asset classes that best suit your aims. The trustee can even help you set up a manager-managed LLC, allowing you to reinvest your principal in alternatives while protecting the principal from capital gains tax obligations. These could include angel investments, hard money loans, or new business ventures.
Learn About the Additional Benefits of a DST
Reef Point can help you learn more about how a Deferred Sales Trust is a beneficial investment conversion strategy for your illiquid assets. Our expert advisors can help you establish a DST from your asset sale. Call us at (714) 581-5376 today.