DST vs. CRT: Choosing the Right Trust Strategy for Your Financial Goals

Paul Rodriguez | | Sales Trust
deferred trust

Are you interested in legal strategies to manage the tax liabilities that come with selling high-value assets? If so, you might be wondering about the differences between a deferred sales trust (DST) and a charitable remainder trust (CRT). Understanding the potential benefits and drawbacks of these strategies will help you make an informed decision that aligns with your financial and philanthropic goals.

What are the main differences between a deferred sales trust and a charitable remainder trust?

DSTs and CRTs differ in structure, tax treatment, and purpose. A DST uses the installment sale rules (IRC §453) to defer capital gains tax by exchanging the asset for an installment note. A CRT, by contrast, is generally tax-exempt under IRC §664, which allows the trust to sell appreciated assets without immediate capital gains tax and provides the donor with a partial charitable income tax deduction.

Tax treatment and distributions

  • Deferred Sales Trust: distributions from a DST may include principal, interest, or capital-gain components depending on the trust’s investments and the installment note terms.
    Tax is paid only as payments are received.
  • Charitable Remainder trust: CRT distributions follow the IRS tier system, ordinary income first, then capital gains, then tax-exempt income, and finally tax-free return of principal.
    beneficiaries report taxes on distributions in that order.

Benefits, Purpose, and Beneficiaries

A DST is designed for tax deferral and reinvestment flexibility and can name non-charitable beneficiaries (subject to compliance with installment-sale rules). A CRT blends income for life or term with charitable giving — the remainder must go to one or more qualified charities at the end of the term.

DST vs. CRT tax benefits: Which trust offers better long-term savings?

Both vehicles can deliver long-term tax advantages, but they serve different objectives:

  • DST — Tax deferral and liquidity: spread capital gains tax over multiple years instead of paying it all in the year of sale. this preserves liquidity and can keep you in lower tax brackets. see our deferred sales trusts page for details.
  • CRT — Income plus philanthropy: avoid immediate capital gains tax when the trust sells the asset, receive an income stream (crat or crut), and obtain a charitable deduction for the remainder interest. if charitable giving is a priority, a crt often creates additional tax and estate-planning value. learn more on our charitable remainder trusts page.

which is better? it depends on your goals: choose a DST to maximize deferral and reinvestment flexibility without charitable commitments, or choose a
CRT if you want lifetime income and to support charity while achieving tax savings.

How a DST helps defer capital gains taxes when selling appreciated assets

  1. Transfer to trust: you transfer the appreciated asset to an independently managed trust in exchange for an installment note. because you receive a note (not cash), no taxable gain is triggered at transfer under IRC §453.
  2. Trust sells asset: the trust (as legal owner) sells the asset and reinvests proceeds.
  3. Installment payments: the trust pays you according to the note schedule; you recognize tax on the gain portion only as payments are received.
  4. Tax-deferred growth: proceeds reinvested inside the trust can compound without increasing your immediate tax burden.

How a CRT provides lifetime income while supporting charitable giving

A charitable remainder trust (CRT) allows donors to convert appreciated assets into lifetime or term income while eliminating upfront capital gains tax:

  • Tax-exempt sale: the crt sells donated assets without immediate capital gains tax because it is tax-exempt under IRC §664.
  • Income to donor: the trust pays income to the donor or another noncharitable beneficiary (crat = fixed annuity; crut = unitrust percentage).
  • Remainder to charity: at term end the remaining assets pass to one or more qualified charities, and the donor receives an immediate partial income-tax deduction for the actuarial value of that remainder.

Choose the right trust strategy for your financial goals

These planning tools are complex and highly fact-specific. to evaluate which strategy fits your situation, request a consultation with an attorney experienced in tax and trust planning.
contact 453 Trust (powered by Pennington Law) for a free consultation. we’ll review your goals – tax deferral, income needs, and charitable intent – and recommend a tailored approach.