How Deferred Sales Trusts Help Diversify Investments After a Sale

When you have an asset or investment that has substantially appreciated, you may want to redeploy that capital into new investments to diversify your portfolio. One strategy some investors choose to use is a deferred sales trust (DST).

A DST allows you to defer capital gains taxes on the sale of a highly appreciated asset by placing the proceeds in a trust, which can then be reinvested. By deferring taxes, you may have more capital available to grow your wealth over time, while diversifying into new investment opportunities.

Structuring a trust to maximize your reinvestment into a diversified portfolio after selling an asset requires precision to meet IRS compliance standards and avoid triggering immediate tax liabilities. A knowledgeable Deferred Sales Trust attorney from 453 Trust Powered by Pennington Law can help you set up a trust tailored to your financial needs and goals while carefully managing the associated tax implications.

Recognized as the Best Deferred Sales Trust Law Firm in the U.S. in 2024, our national practice has a team of seasoned professionals in tax law, asset protection, and financial advisory services. Firm founder Andre Pennington has earned recognition from publications like The New York Times, Forbes, The Wall Street Journal, USA Today, and top ratings by Super Lawyers, Lawyers of Distinction, and Best Attorneys in America. Contact us today for a confidential consultation to learn about how a DST could work for you.

Why Diversification Matters After a Major Asset Sale

You may accumulate a substantial portion of your wealth in a specific asset, such as a business or a parcel of income-generating real estate. However, keeping a significant percentage of wealth in an individual investment can put that wealth at risk from one adverse event. For example, a downturn in your business’s industry or local economic changes that made an investment property less valuable can diminish the wealth you’ve built in that company or piece of real estate. Diversifying wealth can protect you against specific economic risks and market downturns.

How DSTs Can Help You Reduce Investment Risk

Deferred sales trusts can help manage investment risk through their unique benefits and features. Other installment sale methods, such as Section 1031 exchanges, also allow reinvestment while managing tax burdens, but the investment flexibility with a deferred sales trust gives you more options regarding the types of investments you can reinvest proceeds into from an asset or business sale. By deferring taxes and reinvesting across a broader range of asset classes and industry sectors, a DST can potentially minimize losses from industry-specific downturns or broader economic declines and protect your financial future.

Working With Advisors to Maximize DST Investment Opportunities

You must meet specific criteria to enjoy the tax benefits of a DST. Collaborating with seasoned attorneys who have extensive experience in structuring deferred sales trusts can help you leverage the advantages of a DST while properly managing potential tax liabilities.

Here’s how the process works:

• Establish the DST – This step must be done before selling your asset to a third-party buyer.
• Independent trustee – The DST must have a bona fide third-party trustee independent of your influence or control.
• Transfer and asset sale – After transferring your asset to the DST in exchange for an installment agreement, the trust sells the asset to the ultimate buyer and receives the sale proceeds. You, the property owner, cannot have actual or constructive receipt of the sale proceeds.
• Reinvestment – The trust can reinvest the sale proceeds and make payments of principal and income. The DST allows you to delay capital gains taxes, and you’ll only be liable for taxes on any portion of the sale proceeds the trust distributes to you in a given tax year.

Because DSTs require independent, third-party trustees, you may work with investment and financial professionals to maximize continued wealth growth through reinvestment and portfolio diversification. 

Is a Deferred Sales Trust Right for Your Diversification Plan?

A deferred sales trust may be the right avenue for diversifying your wealth, but it depends on your individual circumstances. People often use DSTs for portfolio diversification when:

• They have a substantial percentage of their current wealth tied up in a single asset or asset class.
• They want to sell their business as part of their retirement.
• They want to receive passive income through a DST investment.
• They aim to obtain tax-deferral benefits while maintaining greater flexibility in reinvesting proceeds from asset sales.

Benefits of Diversifying Through a Deferred Sales Trust

Diversifying wealth portfolios through deferred sales trusts can provide you with various financial benefits, including:

• Capital gains tax deferral – When selling an asset through a DST, you (the former owner) do not immediately owe capital gains taxes. Taxes come due when you receive distributions of the sale proceeds from the trust. The trust can reinvest the full amount of the sale proceeds into a diversified investment portfolio.
• Flexibility in reinvestment opportunities – DSTs do not have restrictions on the classes of investments into which the trust can redeploy sale proceeds:
• No strict timing rules – Unlike other legal tools that facilitate the deferral of capital gains taxes, DSTs do not have to follow specific rules regarding the timing of reinvesting sale proceeds. 

Common Mistakes to Avoid When Diversifying With DSTs

Some of the top mistakes that individuals make when trying to diversify their wealth portfolio through DSTs include:

• Negotiating the sale of an asset before setting up the deferred sales trust – You cannot have actual or constructive receipt of the sale proceeds when using a DST. Otherwise, you may become liable for the full capital gains tax on the sale.
• Not having a third-party trustee – Having a trustee subject to your control or influence (such as a family member or a corporate trustee in which you have an interest) may result in IRS compliance issues.
• Not working with financial and investment advisors – The effectiveness of a deferred sales trust in meeting your goals depends on how it is structured and whether you understand all available options. Working with a firm that includes knowledgeable attorneys, financial advisors, and tax professionals can help you build a well-diversified investment portfolio and structure payments from the trust to achieve your economic objectives.

Protect Your Wealth and Diversify With Confidence — Talk to a DST Attorney Today

When you have gained substantial wealth in a particular asset or investment, a deferred sales trust could be the Tax Tool You Didn’t Know You Had for reinvesting money into new, diversified opportunities. At 453 Trust Powered by Pennington Law, we can advise you on developing a financial plan for wealth preservation that leverages available tax-deferral strategies and potentially reduces your tax obligations.

Whether you are a high-net-worth individual, business owner, real estate investor, or refining your estate planning goals to include a steady income stream in retirement, our firm is prepared to discuss how a deferred sales trust could be the way to meet your financial objectives. Contact us today for a free consultation with one of our experienced team members.