A High-Net-Worth Individual’s Guide to Deferred Sales Trusts

After working hard throughout your life to build a lucrative career, you want to protect the wealth you generated to pass on to your loved ones. But how do high-net-worth individuals (HNWIs) protect their assets from taxes and creditors? Various strategies can provide asset protection for wealthy individuals, but a lesser-known yet effective tool is the deferred sales trust (DST). 453 Trust Powered by Pennington Law refers to DSTs as “the tax tool you didn’t know you had” — a testament to their power and versatility.

When set up properly, a deferred sales trust offers significant tax savings when selling highly appreciated assets. At 453 Trust Powered by Pennington Law, our experienced wealth attorneys, tax professionals, and financial advisers can discuss IRS-compliant strategies to reduce your tax burden and position you for financial success. Contact us today for an initial consultation with a knowledgeable deferred sales trust attorney.

How Does a Deferred Sales Trust Work for High-Net-Worth Individuals (HNWIs)?

Deferred sales trusts represent one of the most innovative tax deferral strategies for high-net-worth individuals. A DST allows an HNWI to defer paying capital gains taxes on selling a high-value asset that has appreciated during ownership, such as real estate, business interests, as DSTs leverage the installment sales taxation method under IRC 453.

With a deferred sales trust, a property owner transfers an asset they wish to sell into a trust managed by a third-party trustee. The DST must have a bona fide third-party trustee independent of the asset owner.

When the property owner transfers their asset to the trust, they receive an installment payment contract that governs how the trust will pay the proceeds from the asset sale to the owner. The trust sells the asset and receives the sale proceeds, which the trust can reinvest to generate income. The trust then pays principal and income from the trust assets as the installment payment contract dictates. This allows the property owner to delay capital gains tax liability and spread it out over the period outlined in the installment agreement.

What Are the Benefits of a DST for Your Highly Appreciated Assets?

Some of the primary benefits of using a deferred sales trust to manage and sell highly appreciated assets include:

• Deferral of capital gains taxes – The primary benefits of DSTs include deferring capital gains taxes from high-value asset sales, enabling HNWIs to manage the tax liabilities from selling their assets more advantageously.
• Reinvestment of capital – DSTs provide substantial flexibility in reinvesting capital in appreciated assets into new opportunities compared to other tax strategies like 1031 exchanges. Reinvesting the proceeds of an asset sale can give an HNWI an income stream from their wealth.
• Preservation of wealth – By deferring capital gains taxes, HNWIs can preserve more wealth for reinvestment. Deferred sales trusts enable HNWIs to reinvest their full capital into new channels, helping them grow their wealth faster.
• Creation of family or retirement funds – A person who has worked hard to build a high-value asset can use a DST to cash out of that asset, creating a fund to provide income for retirement or to create family wealth.
• Avoiding probate and minimizing estate taxes – HNWIs may use deferred sales trusts to distribute inheritances to loved ones without the need for the time and expense of probate. DSTs may also serve as part of a tax strategy to minimize estate taxes.

What Can High-Net-Worth Individuals Invest In?

HNWIs may use deferred sales trusts to manage capital gains tax liability from selling assets such as real estate, business ownership interests, stocks, and high-value artwork or collectibles. The advantage of a DST is that it allows HNWIs to reinvest proceeds from selling such assets into various other investment opportunities, like securities, commercial real estate, or government bonds.

Is a Deferred Sales Trust Right for Your HNWI Portfolio?

As you evaluate whether to incorporate deferred sales trusts into your financial strategy, some key considerations to keep in mind include:

• Cost – Deferred sales trusts have significant setup and operational costs compared to other tax strategies. Setting up a DST requires guidance from legal counsel with substantial experience in DSTs. Furthermore, DSTs have ongoing costs in trustee fees and other expenses like brokerage costs or legal/financial advisor fees.
• Restricted liquidity – Selling an asset through a deferred sales trust means an HNWI cannot enjoy full liquidity from the sale, as the sale proceeds initially must remain in the trust. Thus, an HNWI might not use a DST if they need immediate liquidity from an asset sale.
• Risk of unexpected taxes – Mistakes in structuring and running a deferred sales trust may lead to disqualification from the ability to defer capital gains taxes from an asset sale, potentially exposing an asset owner to an unexpectedly large capital gains tax bill, plus penalties, fees, and interest for unpaid taxes.

How Our Deferred Sales Trust Attorneys Can Help You

At 453 Trust Powered by Pennington Law, our deferred sales trust attorneys can advise on the suitability of a DST for meeting your financial needs and goals. But our firm is not your everyday law office. We’re comprised of professionals in the legal, financial, tax planning, insurance, investment, estate planning, and wealth preservation industries. Affluent clients often see their financial matters distributed across these sectors in separate businesses. In our experience, that strategy opens the door for compliance problems and other errors that could expose clients to unnecessary risks. We make it easier by bringing representatives from all of those realms under one roof.

When you come to us for advice, we will:

• Assess your current financial situation and proposed asset transaction to determine whether a deferred sales trust can help you achieve your objectives
• Discuss the pros and cons of deferred sales trusts compared to other tools
• Structure your DST to meet IRS requirements and maximize your tax benefits
• Provide ongoing advice and support during the life of the trust

Contact Our Firm Today for a Complimentary Consultation

When you’ve spent your lifetime building substantial wealth, experienced legal counsel can help you protect your hard work and allow you to leave a lasting legacy for your loved ones. Contact 453 Trust Powered by Pennington Law today to schedule an initial consultation and explore financial planning strategies for high-net-worth individuals.