Building Generational Wealth with a Deferred Sales Trust

You’ve spent your career building substantial wealth that can change your family’s life for generations to come. Now you must protect your hard work so your family’s generational wealth can last. Learning how to build generational wealth with a trust — and safeguard it — can help your family create the financial success and support that can carry you through the decades.

Certain types of trusts, such as deferred sales trusts, can help families protect and grow generational wealth. They do so by managing the tax implications of investing and reinvesting wealth, as well as sheltering family wealth from creditors and other potential risks.

We invite you to explore the strategies that may be available for tax deferral and generational wealth. Contact 453 Trust Powered by Pennington Law today for an initial case evaluation with a knowledgeable deferred sales trust attorney.

How a Deferred Sales Trust Preserves Family Wealth Across Generations

DSTs can provide families with an effective strategy to preserve more of their wealth to pass on from one generation to the next. A deferred sales trust can help families preserve their wealth across generations in the following ways:

• Managing the tax implications of selling assets and reinvesting wealth, as families only become responsible for capital gains taxes when the trust distributes proceeds from asset sales to former owners
• Reinvesting the proceeds from selling high-value assets like business ownership interests, real estate, or securities can help accelerate wealth growth
• Protecting wealth from creditors or other financial risks, as your family’s creditors cannot reach wealth held in a bona fide third-party trust

Why Capital Gains Deferral Protects Family Assets

One of the primary benefits of deferred sales trusts is that they can help defer capital gains tax liability following an asset sale.

When a person transfers an asset to a deferred sales trust in exchange for an installment contract and the trust sells the asset to a third-party purchaser, the former owner does not immediately owe capital gains tax on the sale. Instead, the owner pays capital gains tax as the trust distributes the sale proceeds to the former owner.

Thus, when families seek to cash out of assets and reinvest their wealth to achieve specific financial and estate planning goals, deferring capital gains tax liability can help families keep more of their money for reinvestment.

Using a Deferred Sales Trust to Transfer Generational Wealth

A deferred sales trust can help individuals transfer generational wealth to children or grandchildren through various scenarios, such as passing on wealth generated in family businesses or leaving substantial wealth in assets like real estate, securities, and other high-value property.

Situations where you might use a DST for intergenerational wealth transfers include the following:

Business Owners

When business owners determine they cannot pass on their businesses to family members or when family members indicate they do not want to take over a business, owners can still preserve and pass on the wealth they’ve built in the business through a deferred sales trust. Owners may use a deferred sales trust to sell a business to a strategic partner, capturing the wealth generated by that business, and managing the tax implications of the sale so that owners can continue to build on that wealth by reinvesting it in stocks or other investments that can generate income for family members.

Estate Planning

Individuals who have spent their careers building wealth may incorporate deferred sales trusts into their estate planning strategy. A deferred sales trust can be part of an estate plan, offering tax benefits by managing capital gains tax liability from asset sales and potentially mitigating estate taxes. Trusts can also help families distribute inheritances to family members without going through the time and expense of probate.

Common Mistakes That Can Jeopardize Generational Wealth

Some of the most frequent mistakes that individuals and families make that can jeopardize their generational wealth include the following:

• Not Having a Comprehensive Estate Plan – Families that own substantial wealth should have comprehensive estate plans that match the complexity of their assets. When a family fails to develop a thorough estate plan, they risk not taking advantage of tax-efficient legal strategies or not protecting wealth from creditors.
• Overlooking Tax Management Strategies – Legal tools such as deferred sales trusts can help families mitigate the tax consequences of managing wealth. However, failing to consider tax management strategies may result in families losing wealth to taxes, such as capital gains tax or estate taxes.
• Financial Mismanagement – Families can lose generational wealth when succeeding generations lack the financial literacy to manage substantial, complex assets. When heirs are unsure of how to manage family wealth, they may risk compromising the family legacy through overspending, poor investment decisions, or falling prey to scams.
• Poor Communication – When families feel uncomfortable about discussing money, they may end up jeopardizing family wealth by failing to pass on financial literacy to succeeding generations, confusing family members about the details of the family’s estate, and creating unclear intentions about what should happen to assets when the family patriarch or matriarch passes away.

Is a DST the Right Choice for Your Family?

A deferred sales trust may be an ideal choice for your family’s financial and estate planning objectives when you own substantial assets that you wish to reinvest to create a multigenerational legacy.

DSTs can help you manage the tax implications of selling assets like business interests or real estate, so you can keep more of the wealth from selling those assets to reinvest. It can also help protect your family’s wealth from creditors or other financial risks. Finally, by having a bona fide third-party trustee to manage your family’s wealth, you can benefit from a financial professional who can properly manage assets and investments.

Start Building Generational Wealth with a Deferred Sales Trust Today

When you’ve worked hard to build wealth, a deferred sales trust can help you manage your money, mitigate tax implications, and accelerate the growth of your family’s wealth. Discover how to safeguard trust strategies for generational wealth. Contact 453 Trust Powered by Pennington Law today for a confidential consultation with a DST attorney.