Do you have highly appreciated assets, such as real estate, stock, or businesses, that are causing you tax worries? If you find yourself with these assets and would like to diversify to generate income and increase stability, we can help you strategize to get the most out of a deferred sales trust and cut down on your long term gains taxes.
What is a Deferred Sales Trust™?
Simply put, a deferred sales trust is a financial vehicle that allows investors to transfer highly appreciated assets to a trust for the purpose of deferring payment of capital gains taxes and generating an income stream. These trusts are an alternative to 1031 exchanges and direct sales and can protect your assets from being too highly taxed.
A DST is a contractual arrangement between an individual and a trust in which the individual sells property to the trust in exchange for the trust's agreement to pay the individual a certain amount over an agreed period of time.
Other than deferring taxes, what other benefits might be available to you through a deferred sales trust?
Benefits of a Deferred Sales Trust™
The benefits of a Deferred Sales Trust are exceptional:
- Investors can allocate more funds to their portfolio than what would result from a direct sale.
- A larger income stream may result.
- Investors may achieve greater overall portfolio stability through diversification.
- Initial, upfront, and larger capital gain taxes are spread out over installments.
- Investors may achieve greater investment returns resulting from a larger starting balance.
Deferred Sales Trust™ FAQS
When making a decision to opt into a deferred sales trust, there are plenty of factors to take into account. Here are some additional details to help you make the most well-informed financial decision for your situation.
Will I be taxed when I sell the asset to the trust?
No. When properly structured, there is no taxable gain at the time of the sale.
How am I taxed on the payments?
Part of each payment is returned to you tax-free as a return of your basis. The remainder of each payment is taxed partially as capital gains and partially as ordinary income. Some depreciation recapture may have to be accounted for as well, depending on the type of asset sold.
What if the law changes?
The tax code is changed by Congress, not the IRS. When U.S. tax laws change, they are very rarely made retroactive. So, if there is a law change, most likely, it will not affect pre-existing DSTs.
Will the assets be included in my estate for Medicare?
The assets will not be included in the seller's estate for Medicare purposes. However, the installment note will most likely be included.
Will I be more likely to be audited if I enter into a DST transaction?
There is nothing in the transaction that should cause an audit flag, but if there is an audit, it should be remembered that a properly structured Deferred Sales transaction conforms to current tax regulations and law. The law firm that implements the DST should be consulted for further guidance and/or counsel should an audit occur.
What happens if I die?
The DST has no effect on your estate taxes. However, it can be used in conjunction with other estate planning tools to reduce or eliminate estate taxes.
Once a Deferred Sales Trust is established, can additional property be sold?
Yes, additional property can be sold to the trust after it has been established.
Once a Deferred Sales Trust is entered into, can it be canceled?
Under certain circumstances, including default on the payments by the Deferred Sales Trust, the Deferred Sales Trust can be dissolved, and any capital gains will be owed for the remaining portion at that time.
Is this a loophole that will be closed by the IRS?
This is not a loophole. Tax code IRC 453 allows for installment sales. The tax code has had a provision for installment sales for many years.
Is there a limit to the amount of property that can be sold to a Deferred Sales Trust without causing tax to be recognized?
Yes, five million dollars per year, per person.
If I don’t report any taxes upon the sale of the property to the trust or subsequent sale of the property, when do I incur taxes in a deferred sales trust transaction?
The individual receiving the payments will report the income as it is received from the trust.
Is it possible to defer collecting payments until my retirement?
The installment note may be drafted to provide for almost any type of payment structure and term, as long as it is commercially reasonable.
Can the transfer of assets be challenged under fraudulent conveyance laws?
As long as the property is sold for fair market value, the transfer should not be overturned under the fraudulent conveyance laws.
Are the payments received from the trust safe from creditors?
The laws of many states provide an exemption for some portion of the payments. The assets of the trust are protected from your creditors. However, creditors may be able to attach to your right to receive payment from the trust.
Steps to Set Up a Deferred Sales Trust™
If you believe that a deferred sales trust is the right option for you, you will want to take particular steps to ensure that the process is carried out correctly. This is what you need to do:
1 - Locate A Financial Professional Trained in Deferred Sales Trusts
1 on 1 Financial can serve as your main liaison during the setup, implementation, investment and distribution of your Deferred Sales Trust.
2 - Retain a Licensed Tax Attorney
Working with our firm we will help you identify and retain an attorney to handle the setup of your Deferred Sales Trust.
3 - Transfer Property to the Trust/Trustee
During this step, your property is effectively transferred to the Trust.
4 - Sell the Property
Now that the property is held by the Trust it can be sold with the taxes deferred. The resulting assets from the sale are held within the Trust.
5 - Asset Selection
Working with our firm we will help you identify suitable investments for the real estate sale proceeds based on your income goals, risk tolerance, and time horizon.
6 - Income Distribution
Now that your Deferred Sales Trust is funded, your income distributions will commence with Estate Management Group providing ongoing investment insights.
For more information or to run an illustration on what your savings could be go to http://mydstplan.com/1on1financial
Additionally, let me help you evaluate if a DST is right for you and answer any questions you may have, contact me at 909-981-1720 so we can arrange a convenient time and place for us to meet.
Philip A. Board MSFS, CFS, is a retirement planning specialist and the founder of 1on1financial, an independent comprehensive investment firm serving individuals and businesses near Upland, California. Through educational workshops and a non-sales environment, 1on1financial specializes in working with employees of Southern California Edison, UPS, Esri and Verizon.