Benefits of a Deferred Sales Trust

For years, wealthy individuals and families have known the benefits of deferred sales trusts – something our law firm likes to call “The Tax Tool You Didn’t Know You Had.” Although DSTs allow individuals to defer paying capital gains taxes when selling appreciated assets, these trusts also offer other financial and legal benefits, including flexibility in financial planning, support for estate plans, and advantages to investment or business real estate owners.

However, using a deferred sales trust requires experienced legal guidance. The legal team at 453 Deferred Sales Trust Powered by Pennington Law has earned a nationwide reputation as professional, trustworthy advisors. Our firm has gained recognition as the Best Deferred Sales Trust Law Firm in the U.S. of 2024. Our seasoned attorneys have developed extensive insights into tax law, asset protection, estate and trust planning, wealth and fiduciary matters, and financial reinvestment.

Contact our firm today for a free consultation to discuss how we can help you with tax and financial management through a deferred sales trust.

What Deferred Sales Trusts Are About

So, what is a deferred sales trust (DST)? A deferred sales trust leverages the taxation method available under federal tax law for installment sales. When an asset owner sells their asset via a deferred sales trust, they must establish the trust before arranging the sale. In exchange for transferring the trust to the asset, the owner receives an installment payment contract that outlines how the trust will pay principal and income from the sale proceeds to the owner. The trust must have a bona fide third-party trustee independent of the owner’s control.

Once the trust receives the asset, it can sell it to a bona fide third-party purchaser, taking possession of the sale proceeds. The trust can reinvest the proceeds and distribute principal and income from the proceeds per the terms of the installment payment contract.

The Tax Advantages of a DST

The tax benefits of a DST allow an asset owner to defer capital gains tax when selling an asset. Under IRC 453, which deferred sales trusts rely upon, an asset owner pays no capital gains tax when they transfer their asset to a deferred sales trust or when the trust sells the asset to a third-party buyer. Instead, the owner incurs tax liabilities only to the extent the trust distributes the sale proceeds to the owner, as directed by the installment payment contract.

Thus, a deferred sales trust allows an asset owner to spread the tax burden from selling their asset over multiple years. These benefits may enable an asset owner to minimize their overall tax burden by incurring capital gains tax liability in future years when it might become more advantageous, such as when an owner has a net capital loss in a tax year or when their income falls below the threshold that might trigger the 20 percent long-term capital gains tax rate.

Although a deferred sales trust can defer capital gains taxes for a long time, it cannot eliminate capital gains tax, which becomes due once the proceeds of the asset sale leave the trust.

Financial Advantages of a DST

Deferred sales trusts can have other financial advantages besides deferring capital gains taxes on an asset sale. Some of the financial benefits of a DST include the following:

• Ability to Diversify Investments – By selling an asset through a deferred sales trust, an owner can have the trust reinvest the sale proceeds into other investments, diversifying the owner’s wealth portfolio by shifting wealth accumulated into one or a few assets into a more diverse portfolio.
• Preservation of Wealth Growth – Deferring capital gains taxes allows asset owners to reinvest the full value of their assets into new opportunities, preserving and accelerating wealth growth since an owner does not have to hand over a portion of the value of their sold asset in capital gains taxes.
• Redeployment of Capital into Better Growth Opportunities – An asset owner can use a DST to sell out of an asset that has reached the end of its growth runway and redeploy capital into other investments with more significant growth opportunities.
• Flexibility Over Income Stream – Deferred sales trusts allow asset owners to structure payments of asset sale proceeds in a manner tailored to the owner’s financial needs and objectives, such as by scheduling fixed payments or paying income from reinvested sale proceeds that remain in the trust. For example, an owner may use a deferred sales trust to create a retirement fund using the wealth accumulated in a high-value asset.

Estate Planning Advantages of a DST

Some asset owners incorporate deferred sales trusts into their estate plans to leverage the tax and financial benefits of DSTs to maximize family wealth passed on to loved ones. Potential estate planning benefits of a DST include the following:

• Having the Ability to Pass More Wealth to Succeeding Generations – A deferred sales trust’s ability to defer capital gains taxes allows asset owners to keep more of their wealth initially when selling their property, enabling them to continue growing their wealth and have more to pass on to loved ones.
• Creating Income Streams for Family Members – Deferred sales trusts may work with estate plans to develop family wealth funds to provide income and inheritances for loved ones.
• Minimizing Tax Burdens – A deferred sales trust can also help an asset owner’s estate plan manage and mitigate taxes.

Real Estate Advantages of a DST

When you use a deferred sales trust to manage the sale of real estate or real estate interests, you can leverage other benefits beyond managing capital gains taxes on the sale. Real estate benefits of a DST can include the following:

• Diversifying Holdings – A property owner can utilize a deferred sales trust to diversify their real estate holdings, selling a single high-value asset to spread capital to various other real estate investments.
• Having the Ability to Move Capital into Properties with Better Growth Prospects – Owners may use DSTs to exit a real estate investment that has reached the end of rapid value growth and use the proceeds to reinvest in other property projects with significant growth potential.
• Avoiding the Limitations of 1031 Exchanges – Deferred sales trusts can give real estate owners a more flexible alternative to 1031 exchanges. DSTs do not have the like-kind requirement of 1031 exchanges, allowing real estate owners to reinvest their sale proceeds in assets other than real estate. Nor do DSTs have the timing rules of 1031 exchanges, putting less pressure on reinvesting sale proceeds.

Legal and Regulatory Matters

Using a deferred sales trust to manage the tax implications of an asset sale can involve complex legal and financial issues. Hiring experienced counsel can help you manage the details of using a deferred sales trust to mitigate capital gains taxes when selling assets.

The following are some of the legal and regulatory considerations of a DST that asset owners should keep in mind when deciding whether to use a deferred sales trust to structure their asset sales:

• Complexity of Structuring DSTs – Deferred sales trusts utilize complex tax rules, requiring a careful approach to structuring and operating a trust so asset owners do not jeopardize their eligibility for the tax benefits of a DST.
• Ongoing Operations Expenses – DSTs require third-party, independent trustees to manage the trust, requiring property owners to incur ongoing management fees and other operational costs for as long as the trust remains open.
• Loss of Ownership/Control Over Assets – An asset owner must transfer ownership of their property to a deferred sales trust before arranging the sale of the property to its ultimate buyer. As a result, using a DST requires giving up control of the asset to the trust and its trustee.
• Restrictions on Liquidity – The tax benefits of DSTs mean that asset owners cannot realize immediate liquidity from selling their assets.
• Tax Consequences for Failed DSTs – An improperly structured deferred sales trust can expose an asset owner to unexpected capital gains taxes, plus potential penalties, fees, and interest if the discovery of the trust’s failure occurs in later years.

How Can a Lawyer from 453 Deferred Sales Trust Powered by Pennington Law Help?

Utilizing a deferred sales trust for tax and financial planning benefits requires experienced legal advocacy and support in setting up and using the trust correctly under applicable tax law. A lawyer from 453 Deferred Sales Trust Powered by Pennington Law can help you maximize the financial and legal benefits of DSTs through the following:

• Discussing your proposed asset sale and your financial needs and objectives to assess the suitability of a deferred sales trust
• Explaining the benefits of DSTs to help you make an informed decision about how to structure your sale
• Structuring the DST so it meets legal requirements and you obtain the tax and financial benefits you want and need
• Facilitating additional transactions required to sell your asset through the deferred sales trust

Contact Our 453 Deferred Sales Trust Lawyers Today

When you’ve considered establishing a deferred sales trust to manage your asset sale and take advantage of the tax benefits of DSTs, you need experienced legal guidance and support to help you set up a DST correctly. Contact a deferred sales trust attorney from 453 Deferred Sales Trust Powered by Pennington Law for a free consultation. We’ll help you discover the benefits of DSTs and discuss whether a deferred sales trust can help you achieve your financial and legal objectives from your asset sale.