How a Deferred Sales Trust Works for Selling Securities

If you’ve invested money in the stock market or other securities, and your investments have grown in value over the years, you face important decisions if you wish to sell them. Suppose you want to reinvest or diversify, or you need the income for retirement or other purposes. In those circumstances, you may worry about the tax implications of selling those assets.

A deferred sales trust (DST) can help. Selling appreciated securities with a DST can help you manage the tax effects of liquidating your investments to provide an income source or reinvest and diversify your portfolio. At 453 Trust Powered by Pennington Law, we invite you to discover how DSTs can help with selling securities and other investments. Contact us today for a free case review with a deferred sales trust attorney.

Why Use a Deferred Sales Trust to Sell Securities?

Federal law has a broad definition of a “security,” which includes assets and legal structures such as:

• Stocks
• Bonds
• Notes
• Debentures
• Options
• Certificates of deposit for securities
• Investment contracts
• Fractional interest in oil, gas, or mineral rights

Many types of investments involve putting money into an asset that qualifies as a security. However, when a person sells a security for more than the purchase price they paid, they may owe taxes on that capital gain (the difference between the sale price of a capital asset and the seller’s basis in that asset).

A deferred sales trust provides a legal strategy that enables a securities holder to defer paying capital gains taxes on the sale of their securities. Deferred sales trusts can also offer other options for handling the sale proceeds, such as reinvesting or diversifying wealth.

How to Set Up a Deferred Sales Trust

Setting up a deferred sales trust begins with structuring the trust document and selecting a trustee for the trust. A deferred sales trust must have a bona fide third-party trustee who is independent of the seller and selling their securities through the DST. The seller sells their securities to the trust in exchange for an installment contract, which makes the seller a creditor and governs how the trust will pay the seller.

The trust then sells the securities it obtained from the seller. The trustee may either distribute the sale proceeds to the seller as required by the installment contract or reinvest the proceeds to generate further returns.

The seller pays capital gains taxes on the securities sold to the DST only when the trust distributes the proceeds from the sale, with the seller’s tax liability based on the amount of proceeds they receive in a tax year.

Using a DST to Diversify When Selling Stocks or Bonds

When a person holds stocks or bonds for an extended period, they can accumulate significant value as the market appreciates. Eventually, an investor may want to sell out of old positions to reinvest the wealth they’ve built and further diversify their portfolio, ensuring stable, continued growth.

A deferred sales trust can offer an advantageous solution for diversifying when selling stocks or bonds. By selling your stocks into a DST, the trust can sell the securities without incurring immediate capital gains tax liability. With the full amount of proceeds from selling the stocks or bonds, the trust can reinvest that money into new investment opportunities.

Depending on your financial needs and objectives, a DST can help you sell your stocks or bonds to diversify into safer investments that can help you maintain a steady source of income for retirement or spending time building a new business. For example, a deferred sales trust can reinvest the proceeds from selling stocks or bonds into fixed indexed annuities, which can further defer taxes on the growth of the annuity while providing lifetime income that can supplement installment contract payments from the DST.

Cost and Setup Process for a DST

Setting up a DST can involve several upfront expenses, including legal fees to hire attorneys with experience in developing deferred sales trusts.

DSTs also have ongoing expenses, including management fees owed to the third-party trustee responsible for overseeing the trust. Furthermore, the setup process for a DST must occur before the seller sells the asset they wish to place in the trust.

Entering a contract to sell the asset before putting it in the DST may jeopardize the tax benefits of the trust. Furthermore, when a seller has constructive receipt of the proceeds of selling the asset, they may become immediately liable for all capital gains taxes on the sale.

Estate Planning Advantages of a DST for Securities Holders

Utilizing a deferred sales trust to sell securities and reinvest your wealth can offer several estate planning benefits, such as:

• Reinvesting the Full Amount of Sale Proceeds – Because a deferred sales trust pays no capital gains tax when it liquidates securities, it can immediately reinvest the full amount of the sale proceeds into other securities or investments, allowing wealth to continue growing without having to pay a portion of the sale proceeds immediately.
• Deferring Capital Gains Tax Liabilities – Deferred sales trusts enable securities holders to manage the capital gains tax liability from selling their securities by spreading it over multiple years. Thus, securities holders can make their capital gains tax payments more manageable, including by taking advantage of capital losses or more favorable tax rates in various years.
• Creating an Income Stream for Retirement – Because a deferred sales trust can make payments to a securities holder over multiple years, putting securities investments into a deferred sales trust may enable an individual to create an additional source of income for retirement. A deferred sales trust can pay an investor a percentage of the principal they put into the trust plus income generated from reinvesting the proceeds of selling securities, which may provide a dependable income stream for retirement.

Contact an Experienced Deferred Sales Trust Today

If your investments in securities have gained in value, selling appreciated securities through a DST may help you obtain significant tax benefits. Contact 453 Trust Powered by Pennington Law today for a confidential consultation with an experienced attorney. We’ll explain the options for tax deferral strategies for securities using deferred sales trusts.