623-229-0463 
Many wealthy individuals and business owners know that deferred sales trusts are a legal strategy for managing capital gains taxes from business or asset sales. Although a deferred sales trust can offer significant tax advantages, these tools also have challenges or downsides. Some of them may require asset sellers to consider the suitability of DSTs for their financial goals or plan to mitigate the problems of deferred sales trusts. Among the reasons for the DST controversy are issues and limitations with deferred sales trusts that may make these structures less suitable for some individuals, depending on their needs and goals.
When you decide to sell an asset that has increased in value during your ownership, an experienced lawyer from 453 Deferred Sales Trust Powered by Pennington Law can walk you through the pros and cons of deferred sales trusts to help you identify the appropriate legal solution for your financial needs and objectives. Our in-depth experience with DSTs earned us recognition as the Best Deferred Sales Trust Law Firm in the U.S. of 2024. As a nationwide practice, we assist clients with numerous legal aspects of various financial and fiduciary matters, including the following:
- Tax law
- Asset protection
- Financial advisory services
- Estate and trust planning
- Wealth and fiduciary matters
- Irrevocable trusts
- Professional third-party trustee duties
- Financial reinvestment
- Insurance
Contact 453 Deferred Sales Trust Powered by Pennington Law today for an initial case evaluation to learn more about the potential downsides of deferred sales trusts. We’re happy to discuss whether a DST — “The Tax Tool You Didn’t Know You Had” — might provide the best solution for your financial needs and goals.
What Are Common Problems with DSTs?
Some of the common problems with DSTs that individuals may run into when using deferred sales trusts to manage the tax implications of an asset sale include:
- Ineligibility for Specific Aspects of a Sale – A deferred sales trust has multiple specific restrictions and requirements for an asset sale to take advantage of the tax benefits of a DST, including pre-sale formation requirements, the obligation for the asset owner to transfer the asset to the trust, and the requirement for the trust to hold all legal and equitable interest in the sale proceeds.
- High Upfront and Ongoing Expenses – The legal complexity of a deferred sales trust requires highly experienced counsel to help an asset seller correctly establish a trust to gain the benefits of deferred capital gains taxes. As a result, sellers can incur significant upfront legal costs to create an effective deferred sales trust. DSTs also have high ongoing expenses as the trust must have a bona fide third-party trustee; when the trust reinvests sale proceeds, the trustee also must have the experience and skill to manage investments.
- Risk of Investment Loss by Choosing to Invest the Sale Proceeds – When a seller structures a deferred sales trust to reinvest the proceeds of an asset sale and pay income generated from those investments, the seller faces the inherent risk of loss of their investment and, therefore, loss of the value created by selling their asset.
- Restrictions on Liquidity – Using a deferred sales trust means a seller cannot enjoy immediate liquidity from selling their asset. Receiving payment of any principal from the sale proceeds will trigger capital gains taxes on those payments. Thus, a seller who wishes to temporarily or indefinitely defer capital gains taxes from an asset sale must face restrictions on liquidity from the sale.
- You Still Have a Tax Obligation – A deferred sales trust can defer capital gains taxes indefinitely, but not permanently. When a seller or their successor receives the principal from the sale proceeds, they must pay capital gains taxes on those proceeds. Thus, a seller must have a plan to eventually pay capital gains taxes on their asset sale.
What Are Alternatives to a DST?
Asset sellers who determine that a deferred sales trust may not best serve their financial needs and objectives may use other legal strategies to manage an asset sale’s tax implications. Common alternatives to DSTs include the following:
- Section 1031 Exchanges – A person selling real estate may use a Section 1031 exchange as an alternative to a deferred sales trust to defer capital gains taxes on the sale. In a Section 1031 exchange, the property seller must reinvest the proceeds from the real estate sale into a " like- like-kind; property, usually defined as a property of equal or greater value. Furthermore, Section 1031 exchanges impose strict deadlines for reinvesting the sale proceeds in a new property to obtain deferment of capital gains taxes.
- Tax-Loss Harvesting – A seller who owns other investments that have depreciated may sell those investments in the same tax year as the asset sale, using the losses from those investments to offset capital gains tax from the asset sale.
- Installment Sales – An asset seller may conduct an installment sale that complies with IRC 453 directly with the buyer rather than conducting the sale through a deferred sales trust. However, a true installment sale effectively acts as a loan from the seller to the buyer, meaning the seller must trust that the buyer will make the required installment payments. When the buyer plans to make installment payments from profits generated by the purchased asset (such as a business), unexpected poor financial performance may result in a buyer defaulting on their payment
obligations.
How You Can Avoid DST Problems
Although deferred sales trusts can present challenges for asset sellers, taking proactive steps can help manage the downsides of DSTs. Some of the suggestions for how to avoid DST problems include:
- Selecting a Qualified Third-Party Trustee – An asset seller must rely on the trustee of the deferred sales trust to appropriately manage the sale proceeds to avoid investment losses or diminishing value due to inflation. Sellers can avoid these issues by selecting a highly experienced trustee with a proven record of managing trust investments.
- Carefully Evaluating Financial Needs – Sellers may run into problems with DSTs when they do not structure the trust to meet their specific financial needs and goals. Consulting financial advisors and legal professionals to determine one’s specific needs and objectives can help sellers tailor their deferred sales trust to their objectives, whether those involve gaining liquidity from the sale, managing tax liabilities from the sale, or establishing a retirement or family wealth fund.
- Working with Experienced Legal Counsel – Any mistake in setting up or utilizing a deferred sales trust may lead to the loss of tax benefits under the Internal Revenue Code, which can lead to unexpected capital gains taxes, penalties, fines, and interest. Retaining legal counsel with extensive experience in deferred sales trusts can help you avoid errors that may lead to many of the potential problems of DSTs.
How 453 Deferred Sales Trust Powered by Pennington Law Can Help You
When you have questions about potential DST pitfalls, let the legal team at 453 Deferred Sales Trust Powered by Pennington Law help you in the following ways:
Meeting to Discuss Your Situation and Whether a DST or 1031 Exchange Can Help You Meet Your Goals
Our team will thoroughly review your financial situation and objectives to evaluate your legal options for meeting your needs and goals from an asset sale. We can help you determine whether a deferred sales trust or another legal strategy, such as a 1031 exchange, will best serve your goals, whether those involve managing capital gains taxes, obtaining liquidity from the sale, or creating a retirement or wealth fund.
Establishing a DST Correctly to Take Advantage of Its Benefits and Avoid Problems
When you choose to use a deferred sales trust to accomplish an asset sale, our experienced attorneys can help you avoid mistakes that could jeopardize the DST’s tax benefits. Our firm will leverage its knowledge and insights to reduce the risks of having to pay unexpected capital gains taxes or avoidable penalties, interest, and fines.
Structuring Your DST to Meet Your Unique Needs and Goals
Our firm can help you structure a deferred sales trust to achieve your specific objectives from an asset sale. For example, when you want to manage capital gains taxes from a sale, we can help you set up your DST to pay the proceeds of the sale over time, spreading out capital gains taxes over multiple years. Alternatively, suppose you intend to use the asset sale to fund your retirement. In that case, we can help you create a deferred sales trust that will reinvest the sale proceeds to provide you with a stream of retirement income while indefinitely (but not permanently) deferring capital gains taxes on the sale.
Contact Our 453 Deferred Sales Trust Lawyers Today
Before you sell an asset through a deferred sales trust, talk to an experienced attorney from 453 Deferred Sales Trust Powered by Pennington Law about DST risks. Contact our firm today for a free, confidential consultation with our deferred sales trust lawyers to discuss the advantages and disadvantages of DSTs for managing the tax liabilities of asset sales. We look forward to learning about your situation and reviewing your options.
