Questions sellers ask about the Deferred Sales Trust

A Deferred Sales Trust is a tax deferral strategy built on an installment sale, sometimes called a seller carry back. Instead of taking the sale proceeds directly, the seller sells the asset to a trust in exchange for a promissory note, and the trust pays the seller over time. Because the seller is paid over time, capital gains tax may be deferred and recognized as principal payments are received.

It can potentially be used on the sale of a business, a primary residence, investment or commercial property, art and collections, certain types of stock, and other highly appreciated assets.

The strategy is IRS compliant, based on Section 453 of the Internal Revenue Code, the tax law that governs installment sale taxation. The IRS does not independently approve particular trust structures or investments.

Section 453 is the part of the tax code that covers installment sales, where the seller receives at least one payment after the year of the sale. Under it, the gain is generally taxed as payments are received rather than all at once in the year of the sale. The Deferred Sales Trust is one way of structuring an installment sale, a seller carry back, under Section 453.

A Deferred Sales Trust does not carry the main 1031 exchange requirements: there is no 45 day identification deadline or 180 day closing deadline, no like-kind replacement property requirement, and no requirement to replace the same equity or debt.

The note is an obligation of the trust, and the seller is repaid from the trust's assets. The interest rate on the note is generally between 6 and 8%, derived from the trust's asset allocation, and is not guaranteed.

The term of the note is usually between 5 and 10 years, and in certain circumstances it may be changed as the seller's needs change over time. Whether and when it can be changed depends on the trust documents and the tax rules, and is not guaranteed.

If the noteholder (seller) has other income and doesn't need the payments right away, they may elect to defer the start date of the note payments. The tax code does not require payment of the capital gains tax until the seller starts receiving payments of principal.

The trustee decides how the proceeds are invested, based on the seller's risk tolerance statement. What is permissible is set by the trust agreement, the trustee's authority, the investment advisor's mandate, applicable securities laws and the structure of the transaction.

A conditional engagement agreement is provided by the DST attorney for your review. There is no upfront cost or obligation. You are under no obligation to proceed or pay for any services unless your sale closes and you decide to fund the trust.

Yes. Your own tax and legal advisors are welcome to join the introductory call, and every seller should have independent tax counsel review the exact transaction and compare it with other alternatives.

The note payments and the capital gains tax deferral effect from the DST will continue to the next generation upon the demise of the seller. Death does not eliminate the deferred gain: the note may remain an estate asset, and the unrecognized installment gain generally remains taxable to the heirs.

No. They are separate things despite the shared initials. On this website, DST means Deferred Sales Trust.

The IRS may challenge an arrangement that lacks genuine economic substance and business purpose, the seller depends on the trust's ability to repay its note, trust assets may decline in value, the seller generally cannot withdraw trust assets at will, and fees may reduce returns. The full list is on the benefits and risks page.