Deferred Sales Trusts vs Conventional Installment Sales

People who have accumulated wealth in capital assets have various legal options for managing the tax implications of selling those assets, including installment sales and deferred sales trusts. An experienced advisor can help you understand the advantages and disadvantages of deferred sales trusts vs. structured installment sales.

What’s the Difference Between a Deferred Sales Trust and a Structured Installment Sale?

Both deferred sales trusts and structured installment sales utilize the taxation method under IRC §453, known as the installment method, which allows an asset seller to defer payment of capital gains taxes by spreading out the payment of the sales proceeds over multiple years. However, deferred sales trusts and structured installment sales differ in the complexity of the asset sale.

Deferred Sales Trust

With a deferred sales trust, the asset owner transfers their property to an independent third-party trust and cannot retain any direct interest in the asset or its sale proceeds. Instead, the asset owner receives an installment contract that outlines how the trust will pay the proceeds from selling the asset to the owner. The trust then sells the asset to the ultimate buyer and receives the sale proceeds. The trust may invest the sale proceeds and pay the principal and income generated from the investment to the former owner, as per the terms of the installment contract. The former owner then pays capital gains taxes when they receive payments of the sale proceeds.

Structured Installment Sale

With a structured installment sale, an asset owner sells the asset to a third party. Rather than receiving the purchase price in a lump sum, the owner agrees to accept installment payments over time. Thus, the owner only pays capital gains taxes on payments received in a tax year.

How Do Deferred Sales Trusts and Installment Sales Compare for Risk and Asset Protection?

Structured installment sales provide less asset protection than deferred sales trusts but generally involve less complexity and risk. In an installment sale, the seller bears the risk of buyer default unless the transaction is secured with an annuity or handled through an assignment company to guarantee payment. Still, Internal Revenue Code §453 expressly authorizes installment sales as a valid method of deferring capital gains taxes.

Deferred sales trusts, meanwhile, provide stronger asset protection and greater flexibility than structured installment sales. By transferring the asset, and later the sale proceeds, into a trust, owners can preserve wealth while tailoring distributions to meet their financial goals. Although the IRS has scrutinized DSTs in the past, those concerns typically arise when the trust is improperly structured or managed. When structured properly with the guidance of experienced legal counsel, a deferred sales trust can be The Tax Tool You Didn’t Know You Had — a powerful, IRS-compliant tool for deferring capital gains, protecting assets, and planning for long-term financial security.

How Our Lawyers Help You Choose the Right Tax Deferral Strategy for Your Investment Goals

The legal team at 453 Trust Powered by Pennington Law can review your situation to determine the tax deferral strategy that aligns with your goals. Our professionals can explain the advantages and drawbacks of installment sales and deferred sales trusts so you can make an informed decision when selling appreciated assets.

Contact Our Deferred Sales Trust Attorneys Today

If you’re preparing to sell an appreciated asset, contact 453 Trust Powered by Pennington Law for a free consultation. We’ll help you compare installment sales and DSTs and determine which option supports your financial objectives.