You likely have heard about the Deferred Sales Trust (DST) and how it allows you to sell a highly-appreciated asset without paying any immediate capital gains taxes. But are you aware that there are two DST structures from which you can choose? There are: the Standard DST and the DST Plus. You can even combine the two for maximum flexibility.
Let’s look at each of these structures in greater detail.
The Standard DST works from the installment sale method authorized by Section 453 of the Internal Revenue Code. Here you sell your asset to your DST in exchange for an installment sale note. Your Independent Certified DST Trustee then sells the asset to your intended buyer for the same price and places the sale proceeds into the trust.
He then invests these proceeds per your direction and begins making payments to you, again at your direction as to their timing and amounts. You pay no capital gains taxes unless and until any of these payments include trust principal as well as interest.
One potential downside to the Standard DST is the fact that Section 453 imposes an interest charge, usually around 2%-3%, on the sale if its net proceeds exceed $5 million (if you’re single) or $10 million (if you’re married). While you still have the benefits of tax deferral, this interest charge can nevertheless decrease the net amount of investment earnings you can receive during the life of your Trust.
The DST Plus solves this problem. We often look at this as a companion strategy that addresses the potential limitation of Section 453. The DST Plus is based on Section 72 of the IRS Code, the section setting forth rules for annuities, endowments and life insurance contracts.
Consequently, the DST Plus works somewhat differently from the Standard DST. Differences include the following:
- Under the Standard DST, you may be subject to the IRS interest charge; under the DST Plus, you aren’t.
- Under the Standard DST, you have full control over the amount and timing of your installment note payments and can change these whenever you have a good reason for doing so; under the DST Plus, you receive actuarially-based payments throughout your lifetime (and that of your spouse if you’re married), and you cannot change the amount of these payments once they begin. You can, however choose when you want payments to begin. The longer you may wish to push out the start date, the higher your payments will be.
- Under the Standard DST, your note can continue after your death if your designated heirs so desire; under the DST Plus, the remaining balance in your trust passes directly to your designated heirs at your death or the deaths of you and your spouse.
- Under the Standard DST, the value of your DST at the time of your death is includable in your estate, possibly subjecting it to estate taxes; under the DST Plus, whenever the trust assets pass to your heirs, they do so outside of your taxable estate.
To cover all your bases and maintain maximum flexibility, you may wish to place some of your sale proceeds into your Standard DST and some into your DST Plus. This is perfectly legal and quite doable.
Want to Know More?
Admittedly, the above is a lot to process and you likely have additional questions regarding how the Standard DST, DST Plus, or a combination of the two can work in your situation. No problem. Simply contact Reef Point. We’ll be happy to answer all your questions and discuss all the ways in which the DST can benefit you when you sell a highly appreciated asset.