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You may have several options for managing capital gains tax liabilities you incur from selling an asset, including conducting the sale through a structured installment sale or a deferred sales trust. An experienced attorney can explain the differences between a structured installment sale vs. a deferred sales trust, helping you decide which option might be right for you.
Why Compare Structured Installment Sales and Deferred Sales Trusts?
Structured installment sales and deferred sales trusts both allow asset owners to manage capital gains tax liabilities after selling an asset that has increased in value. However, both strategies have significant differences that could make one more suitable than the other. It depends on a person’s financial needs, concerns, and objectives.
Key Differences Between a Structured Installment Sale and a DST
There are several differences between structured installment sales and deferred sales trusts. The biggest include:
- Cash flow – With a structured installment sale, a buyer structures their payment obligation to a seller over time and assigns that obligation to a third-party company (typically an insurance company or annuity provider). The buyer pays money to the assignment company to purchase an annuity, which issues payments to the seller according to the agreed-upon schedule. Conversely, a deferred sales trust distributes cash to the seller under an installment agreement.
- Payout flexibility – Structured installment sales issue payments to an asset seller per the established schedule of annuity payments. A DST may distribute principal from the sale proceeds or income generated by reinvestments.
- Cost – Structured installment sales have lower upfront and ongoing costs for sellers. A deferred sales trust may have higher upfront legal fees and ongoing administrative expenses.
Legal and Tax Implications to Consider
Structured Installment Sales
- Simpler formation process – Easier to set up than a DST, with fewer administrative requirements
- Secured payments – Provide secured payments of sale proceeds through an annuity
- Tax deferral – Capital gains taxes are spread over the installment schedule as payments are received.
- Limitations on reinvestment – Sellers cannot immediately reinvest proceeds.
- Financial risk – If the annuity provider experiences financial trouble, it could affect your payment security.
Deferred Sales Trusts (DSTs)
- Reinvestment flexibility – The ability to immediately reinvest the sale proceeds can generate returns and income so your wealth continues to grow.
- Capital gains deferral – The periodic distribution schedule determined by the trust agreement can optimize capital gains and income tax liability.
- Legal complexity – Requires careful drafting of trust documents and the selection of an independent trustee.
- Ongoing administrative costs –Trustee fees and management expenses should be considered during financial planning.
- Personalization – A tailored distribution schedule can help you meet personal financial goals and during estate planning.
How a Deferred Sales Trust Can Protect Your Investment
A deferred sales trust can protect the value of the wealth you’ve built in a business or investment by allowing you to defer paying capital gains taxes upon selling an asset or company. The trust can reinvest the sale proceeds into other investments that grow in value or generate an income stream. With a DST, you can pay capital gains taxes from an asset sale over time as you receive distributions of the sale proceeds while continuing to grow wealth through reinvestment.
Contact Our Deferred Sales Trust Attorneys Today
Are you selling an asset and wondering how you can get the most out of the proceeds of that sale? Contact 453 Trust Powered by Pennington Law today for a confidential consultation with an experienced attorney to learn more.
