When people call Reef Point with questions about the Deferred Sales Trust (DST) and whether this unique, proprietary tax strategy may be right for them when they sell a highly appreciated asset, one question they frequently ask is: How much lead time do I need to give the Estate Planning Team to construct my own DST?
The answer to that question depends on a number of factors, including the following:
- What type of asset are you planning to sell?
- How far along are you in your sale negotiations?
- If you’re selling real estate, how much time is left before your escrow closing date?
- Is your sale part of a 1031 exchange?
- If so, how much time, if any, is left before your 45-day deadline to identify potential replacement properties?
- How much time is left before your 180-day deadline to complete the exchange?
Establishing a DST can be a complicated process. Consequently, the Estate Planning Team prefers that you start the process as far in advance of your proposed sale as possible. That way we’ll have time to cross all the t’s and dot all the i’s to ensure that your DST complies with all federal and state laws, rules and regulations, particularly those set forth in Section 453 of the Internal Revenue Code. This is the section that authorizes installment sales as a legal way in which to defer paying capital gains taxes when selling a highly appreciated asset.
Mechanically, we can typically create the trust and the environment for you to successfully defer your taxes if we have about 10 days to two week before your transaction is set to close. The important thing is that we integrate with you before the point in the sale timeline where you have constructive receipt of the proceeds, where all possible contingencies to the sale have been signed off on by both buyer and seller. To help alleviate and manage any particular complexities that may arise or be present in your sales transaction, it may be helpful to all concerned to not wait until the final stretch of your escrow or closing process to learn about the DST. A helpful consideration here is that every client we work with begins with a conditional engagement agreement. This means that we will create the conditions for a successful close and tax deferral in advance but if for any reason, you should choose not to use the structure we create for you, you will owe us nothing.
In addition to all of the above considerations, there are definite guidelines for a DST to qualify as a legal and feasible strategy for deferring your capital gains taxes. First and foremost is the requirement that your sale must be a minimum viable transaction. This means that your expected gain should be at least $250,000 and your expected tax liability without serious pre-sale planning should be at least $80,000 to $100,000.
Furthermore, your DST’s trustee must be a legitimate third party, completely independent from you, for your trust to qualify under Section 453. You’ll be glad to know that this is no problem whatsoever when the Estate Planning Team establishes your DST for you. Greg Reese, Reef Point’s Principal and Managing Member, is one of only 13 fully vetted, trained and approved Independent Certified DST Trustees in the nation.
Want To Know More?
Now that you know some of the main reasons why you need to give the Estate Planning Team adequate time to prepare your DST and installment note documents, would you like to start the process? That, too, is easy. Simply contact Reef Point.