How Deferred Sales Trusts Help When Selling a Business

If you spent your career building a successful company, you deserve to enjoy the fruits of your labor when the time comes to sell, whether through an acquisition by a strategic partner or as part of your retirement. One way to maximize the benefits of this sale is through The Tax Tool You Didn’t Know You Had — a deferred sales trust (DST). A DST can manage the tax consequences from a sale and facilitate the reinvestment of your wealth.

At 453 Sales Trust Powered by Pennington Law, we can establish a deferred sales trust designed to preserve your gains and get the most out of your business sale. We were recognized as the Best Deferred Sales Trust Law firm in the U.S. in 2024. Our national team includes legal, financial, and tax professionals who aid clients with matters such as asset protection, financial advisory services, estate planning, wealth preservation, and tax law. Firm founder Andre Pennington has received widespread praise in the legal community, earning listings in Super Lawyers, Lawyers of Distinction, and Best Attorneys in America. He has also appeared in publications like The New York Times, Forbes, The Wall Street Journal, and USA Today.

Contact our experienced attorneys today to discuss how you can sell your business with a DST. There’s no charge for the initial consultation.

Why Consider a DST When Selling Your Business?

Selling your business can trigger significant capital gains tax liability, which can eat into the wealth you’ve built over your career. One way to manage the tax implications of selling your business is through a deferred sales trust, which allows you to spread taxes over multiple years. Selling a company with a DST can also facilitate reinvesting the sale proceeds, helping you continue to build wealth, benefit from a steady income stream, enjoy a comfortable retirement, and stabilize your financial future.

Steps to Set Up a Deferred Sales Trust Before Selling a Business

The process of establishing a deferred sales trust to sell a business involves the following steps:

• Establish the DST – A business owner cannot enter into any agreement to sell their company before setting up the DST.
• Appoint an independent trustee – The trust must appoint a bona fide third-party trustee independent of the business owner’s influence or control.
• Transfer and installment contract – The business owner then transfers their ownership interest to the DST in exchange for an installment agreement. This contract sets the schedule for the payment of sale proceeds to the owner.
• Business sale and reinvestment – The DST trust sells the company to the ultimate buyer and reinvests the sale proceeds into other investment opportunities. These investments generate income to cover the trust’s administrative costs and to be distributed as required by the installment agreement.

How DSTs Defer Capital Gains Taxes on Business Sales

The Internal Revenue Code (IRC) § 453 authorizes taxpayers to defer tax payments on a sale when the proceeds are not received in the same tax year. Deferred sales trusts fall under § 453 as an installment sale method. When a business owner transfers their ownership interest into the DST in exchange for an installment agreement, they spread out the capital gains tax liability from selling their business over multiple years. This approach can help business owners avoid triggering higher capital gains tax brackets and mitigate tax liability through careful financial planning.

Benefits of a Deferred Sales Trust for Business Owners

The primary benefit of a DST for business owners is that it delays immediate capital gains tax liability, which can be a substantial financial blow in a single year. Using a tax-deferral tool like a DST aids in overall financial planning.

Other advantages include:

• Reinvesting generated wealth – Because the DST defers the tax liability generated by the sale of a business, the trustee can reinvest the full proceeds of the sale. This potentially enables wealth from business interests to grow faster through strategic reinvestment.
• Providing an income stream – For owners who sell their companies in conjunction with their retirement, utilizing a DST can help generate a steady income stream from the principal and sale proceeds, providing long-term financial stability.

Who Can Benefit Most from a DST in Business Transactions?

Using a deferred sales trust to sell a business can help business owners who:

• Own multi-million-dollar companies – High-value sales can trigger substantial capital gains taxes, including the top long-term capital gains bracket.
• Want to use a DST for estate planning and diversifying wealth – A DST allows sale proceeds to be reinvested across multiple asset classes and industries, helping manage risk and integrate with broader estate planning strategies.
• Are approaching retirement – DST installment payments can provide a steady income stream to support living expenses after leaving the business, while also helping structure wealth transfer for heirs.

Common Misconceptions About DSTs in Business Sales

Let’s dispel some common misconceptions about DSTs:

• DSTs are sham trusts or tax loopholes – Deferred sales trusts are legal and covered under the provisions of IRC § 453.
• Deferred sales trusts are only for owners of giant corporations – DSTs can work for a wide range of business owners.
• DSTs eliminate taxes – The key phrase in a “deferred sales trust” is defer. You can delay capital gains tax liability on a business sale, but you cannot rid yourself of it entirely.
• Structuring a DST is risky and complicated – Like all tax tools, a deferred sales trust must be set up carefully to comply with IRS rules. An experienced attorney can help you set up the trust to minimize administrative and compliance risks.

Ready to Sell Your Business Tax-Efficiently? Contact Us Now 

If you have questions about deferred sales trusts for business owners, 453 Sales Trust Powered by Pennington Law has answers. Our firm includes top-rated lawyers, financial advisors, wealth management professionals, and tax advisors, all working under one roof. We work collaboratively to develop a financial strategy tailored to meet each client’s specific needs and objectives.

The first step is a free consultation. Call or contact us today to speak with a knowledgeable attorney about what a DST can do for you.