Monetized Installment Sale vs. Deferred Sales Trusts

In recent years, individuals seeking to sell highly appreciated assets have employed various legal strategies to manage the tax implications of sales, including deferred sales trusts (DSTs) and monetized installment sales (MIS). These legal structures can offer other advantages besides tax benefits. However, monetized installment sales and certain types of deferred sales trusts have attracted regulatory scrutiny from the Internal Revenue Service (IRS).

Before you use a legal strategy to mitigate the tax consequences of an asset sale, contact the experienced attorneys at 453 Trust Powered by Pennington Law for an initial case evaluation. Our nationally recognized lawyers and advisors can discuss the distinctions between monetized installment sales vs. deferred sales trusts, monetized installment sale compliance risks, and your other options for preserving value from the sale of your asset.

Firm founder Andre Pennington, Franco Tenerelli, and the professionals at 453 Deferred Sales Trust Powered by Pennington Law are recognized by the Forbes Financial Council, the Inc. 5000 Entrepreneur list, legal rating services such as Super Lawyers, and publications like The New York Times and The Wall Street Journal.

You’ve worked hard to build substantial asset holdings. Now it’s time to learn about ways to protect your financial future and unlock significant tax savings. Contact us today for a free consultation about how we might assist you.

Comparing the Legal Structure of DST vs. Monetized Installment Sale Under IRC Section 453

Internal Revenue Code §453 provides an alternative method for deferring capital gains taxes, known as the installment method. The installment method allows a seller of an asset that has increased in value to delay capital gains taxes until the year in which they receive payments for the asset’s sale, spreading the tax liability over multiple years rather than recognizing it all at once.

IRC §453 enables certain legal structures like deferred sales trusts. With a DST, an asset owner transfers the asset they want to sell to a bona fide third-party trust in exchange for an installment contract. The contract spells out how the trust will make payments to the seller.

The trust then sells the asset to the ultimate buyer and holds the proceeds, paying principal and income from the sale proceeds as required by the installment contract. The former owner pays capital gains taxes only as they receive payments from the trust. By spreading the recognition of the gain over time, the installment method can help the seller manage their annual tax burden more effectively.

However, DSTs have limitations that may not work for some asset owners. Owners cannot gain immediate liquidity from the asset sale because they must wait for distributions from the trust to occur. As a result, some asset owners opt for a legal strategy called monetized installment sales.

In a monetized installment sale, a business or property owner transfers their asset to an intermediary entity in exchange for an installment contract under IRC §453. The intermediary then sells the asset to the final buyer. Independently, the owner may borrow money from a third-party lender, using the contract as collateral. This method allows the seller to access immediate liquidity and repay the loan using the installment payments received over time. 

How Does the IRS Treat Monetized Installment Sales vs. Deferred Sales Trusts?

The IRS generally has a negative stance on monetized installment sales, seeing them as an abusive tax shelter since the asset owner effectively gains immediate access to the sale proceeds while still deferring liability for capital gains taxes. In recent years, the Treasury Department and the IRS have proposed regulations to designate monetized installment sales as “listed transactions,” which would require taxpayers and financial advisors to disclose the transaction to the IRS or face penalties for noncompliance.

Conversely, deferred sales trusts rely on an interpretation of the permissible installment method of taxation under IRC §453. However, the IRS has viewed some DSTs with suspicion when the transaction’s structure allowed the asset owner excessive control over the sale proceeds, the trust, or the trust’s investments. In cases where the IRS has found that a deferred sales trust does not comply with the requirements of IRC §453, it may have declared the capital gain from the asset sale immediately taxable.

In either case, it’s crucial to consult an experienced attorney before making decisions about how you wish to sell your property. The structure matters when it comes to monetized installment sales and deferred sales trust compliance. Without the right setup, you could incur a steep tax bill. A skilled lawyer familiar with the intricacies of the U.S. tax code can help you design a sound legal strategy tailored to your property sale. 

Why Estate Planning Attorneys May Recommend DSTs Over MIS Structures

Financial and estate planning lawyers may recommend deferred sales trusts over monetized installment sales due to concerns from the IRS regarding monetized installment sales as potentially abusive transactions.

By contrast, the IRS has not taken as aggressive a stance on deferred sales trusts, making them a more conservative option while still offering the benefits of delaying payment of capital gains taxes on appreciated property.

For recommendations about your particular circumstances, reach out to our estate planning team for a free case review. 

Can You Use a Deferred Sales Trust Instead of a 1031 Exchange or Monetized Sale?

Some property owners opt to utilize a deferred sales trust to manage capital gains taxes resulting from a property sale rather than other tax deferral methods, such as a 1031 exchange or a monetized installment sale. Here’s why:

• More flexibility than the 1031 exchange – You can use a deferred sales trust for a broad range of assets. A 1031 exchange only applies to real property or real estate transactions and has strict timing requirements for reinvesting sale proceeds into “like-kind” property. DSTs have no reinvestment deadlines or restrictions on the types of assets for reinvestment.
• Lower risk – Owners may prefer deferred sales trusts to monetized installment sales because the IRS’s enforcement actions against monetized installment sales are more aggressive compared to those against DSTs. Using a monetized installment sale also carries a risk of loan default if the seller fails to make loan payments to the third-party lender, which can have significant financial consequences.

Contact Our Deferred Sales Trust Attorneys Today

Curious about the risks and benefits of a monetized installment sale over a deferred sales trust for your high-value assets? Call or contact 453 Trust Powered by Pennington Law today for a confidential and free consultation with one of our knowledgeable attorneys.