How it works
How the Deferred Sales Trust works
The Deferred Sales Trust is a type of IRC Section 453 installment sale, also known as a seller carry-back sale.
The structure
Under Section 453, the seller may achieve significant tax-deferral benefits by not receiving actual or constructive receipt of the proceeds at the time of the sale, instead receiving payments made to them over time. The Deferred Sales Trust has greater flexibility than a conventional installment sale with respect to risk management, the repayment timeframe, and the trust's investment selection.
When the taxpayer decides to proceed, the ownership of their highly appreciated capital asset is transferred to a dedicated trust. There are generally minimal capital gains taxes due from the trust on the sale, since the trust often purchases the property for a price and value similar to what it may get sold to a third-party buyer for.
By utilizing the DST structure, the seller of the property becomes a noteholder (creditor), and the trust makes the agreed upon payments to the noteholder pursuant to a payment agreement called an "installment sales contract." The trust is obligated to make installment payments to the noteholder, representing interest on the pre-tax proceeds or principal from the sale, or both.
If the noteholder 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.
Here, DST means Deferred Sales Trust. It is a separate thing from a Delaware Statutory Trust, despite the shared initials.
Step by step
Steps to creating your Deferred Sales Trust
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Share the details of your sale
Enter the relevant details of the sale of your real property, business, or other highly appreciated asset on Michael's case intake page, or call Michael at 415-314-8800, who can assist you with the process. This information will be used to evaluate your case. An experienced DST attorney, trustee, and case manager will review your case to determine if the DST is a good fit for your transaction.
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Introductory conference call
An introductory conference call is set up to discuss how you may benefit from using a DST for your sale, and a tax deferral illustration is created for you. During this call, the Deferred Sales Trust structure will be explained to you and any questions that you have will be answered. Follow-up calls can be scheduled, if necessary. Your own tax and legal advisors are welcome to join the call.
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Conditional engagement, no upfront cost
A conditional engagement agreement is provided to you by the DST attorney for your review. There is no upfront cost or obligation. Once the conditional engagement is signed, the law firm will establish the trust and engage in preliminary planning. You are under no obligation to proceed or pay for any services unless your sale closes and you decide to fund the trust.
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Implementation at the close of sale
The attorney prepares the documentation and implements the Deferred Sales Trust at the close of sale, either through escrow or your attorney. The pre-tax proceeds from the sale are delivered to the trust, the funds are invested in a manner that is consistent with your risk tolerance and preferences, and payments are made to you pursuant to the payment schedule.
How the tax is recognized
The capital gains tax that will be recognized and paid to the IRS and the state is only that portion of the overall capital gains due from the taxpayer's sale to the trust, based upon the proportion of principal repayment established in the terms of the installment agreement.
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, though: the unrecognized installment gain generally remains taxable to the heirs. See benefits and risks.
Who is Estate Planning Team?
Estate Planning Team is a membership organization with a network of experienced professionals who offer the Deferred Sales Trust. These professionals include financial advisors, insurance and real estate professionals, business brokers, attorneys, CPAs, Qualified Intermediaries, and other professional partners.
The Deferred Sales Trust is offered by Estate Planning Team members along with experienced and specialized attorneys. These attorneys have unique expertise at structuring transactions in this manner for sellers of highly appreciated real estate, businesses or other highly appreciated assets who wish to defer their capital gains taxes.
See whether a Deferred Sales Trust may fit your sale
An introductory call explains the structure and answers your questions. Your own tax and legal advisors are welcome to join.