Given that most mergers and acquisitions involve a large company, you likely have many tax considerations when another company wishes to merge with yours or to acquire yours. One of your most pressing needs likely is a strategy whereby you can defer the capital gains you undoubtedly will face when your company merges with another company or agrees to be acquired by it. This is where a Deferred Sales Trust can save you hundreds of thousands of dollars in taxes while allowing you to diversify your overall investment portfolio.
If you stand to gain at least $250,000 on your merger or acquisition, you definitely need to consider creating a DST. Said another way, if your merger or acquisition likely will cost you between $80,000 and $100,000 or more in capital gains taxes, a DST can defer those taxes, spacing them out over many years so you pay them piecemeal at lower rates. In addition, a DST allows you to invest the money you would otherwise pay in taxes in virtually any type of investment. You need not invest in the company merging with or acquiring yours unless you want to. Your investment options are almost unlimited, and include the following:
- Stocks
- Bonds
- Commodities
- Mutual funds
- ETFs
- Real estate
- REITs
- Green energy
- Life insurance
Sound too good to be true? Not at all.
The Deferred Sales Trust in a Nutshell
Section 453 of the Internal Revenue Code authorizes the owner of a highly appreciated asset to use an installment sale when selling it, thereby deferring the capital gains. A Deferred Sales Trust is a special form of installment sale that savvy investors have been using for over 25 years to not only defer their capital gains liability, but also to give them maximum flexibility while doing so.
A DST is a bona fide third-party trust managed by a legitimate third-party trustee. You establish your DST by first meeting with our Estate Planning Team prior to your contemplated merger or acquisition. Composed of a Tax Attorney, a Registered Investment Advisor and an Independent Certified Trustee, you can also include your own tax CPA, business broker, independent attorney or any other professional you wish.
After fully discussing not only your upcoming merger or acquisition, but also your overall investment goals and objectives, the Tax Attorney structures your DST. You then sell your business to the DST in exchange for a secured DST installment contract.
The DST now has legal title to your business. Consequently, when the merger or acquisition takes place, the DST owns the “sale proceeds.” This is what shields you from constructive or actual receipt of the funds, thereby allowing you to defer the capital gains taxes that you would otherwise be required to pay.
Keep in mind, however, that a DST does not eliminate your capital gains tax liability. It merely defers it. How long it defers it depends on the terms of the installment contract regarding when and how much you will receive in installments. Your Certified DST Trustee handles and oversees all such installment payments.
Want to Learn More?
Request a Reef Point consultation today to discover how our mergers and acquisitions professionals can help you achieve your goals and objectives. Our Certified DST Trustee, one of only 13 fully trained and vetted Independent Trustees in the entire country, will be happy to discuss your company’s upcoming merger or acquisition and the advantages you can expect to receive by utilizing a DST to maximize your profits while minimizing your capital gains taxes.