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When you set up a deferred sales trust to manage the tax implications of selling an asset, you must decide who to appoint to serve as trustee. Clients often ask: “Can a trustee also be a beneficiary of a trust?” Because deferred sales trusts (DSTs) leverage specific IRS rules, there are certain restrictions on who may serve as a trustee of a DST.
Who Can Legally Serve as a Trustee in a Deferred Sales Trust?
A deferred sales trust must have a trustee independent of the owner of the assets placed in the trust. If an owner can control or influence the trustee of the DST, the IRS may view the trust as a sham trust created to avoid taxation and may impose full capital gains tax liability, interest, and penalties on assets sold by the DST. As a result, an asset owner may not use a corporate entity they own or control as the trustee of a DST, nor can they appoint a family member or business partner whom they might influence. Instead, only a person or entity with arm’s length independence from the asset owner may serve as the trustee of a deferred sales trust.
Can the Seller Act as Both Trustee and Beneficiary?
Deferred sales trusts leverage the installment method of taxation under IRC §453. Under this section, an asset owner becomes liable for capital gains taxes on the sale of their asset when they receive the sale proceeds. A seller who acts as the trustee of a deferred sales trust takes possession of the sale proceeds upon selling the asset, making them liable under tax law for capital gains tax on the sale.
Furthermore, the IRS may consider a seller who becomes a beneficiary of a deferred sales trust to have constructive receipt of the sale proceeds, which also may make them liable for capital gains taxes. Instead, sellers receive sale proceeds through a deferred sales trust via an installment agreement, under which the trust agrees to pay the seller both principal and income from the sale proceeds according to a specific payment schedule.
How to Effectively Navigate Trustee as Beneficiary Conflicts of Interest
Sellers can avoid trustee and beneficiary conflicts of interest by working with an experienced attorney who can help them understand the rules and limitations on designating trustees and beneficiaries of deferred sales trusts. Knowledgeable legal counsel can prevent an asset seller from making mistakes that can cause a DST to fail and expose the seller to unexpected tax liabilities, interest, and penalties.
Contact a Deferred Sales Trust Attorney Today
Are you thinking about establishing a deferred sales trust? If so, we can answer any questions you may have about how to structure your DST to maximize benefits with minimal risk. Contact 453 Trust Powered by Pennington Law today to arrange a free consultation with an experienced deferred sales trust attorney.
