Deferred Sales Trust
The Deferred Sales Trust (DST) is a product to consider using when you want the benefits of an installment sale
- defer capital gains
- get monthly income for retirement
without the risks of carrying paper. You’ll never have to worry about having to foreclose if the buyer defaults, because the buyer brought you cash (or cash to new loan) to acquire your property. Your monthly payment is not secured by the property or business, but by the trust itself, which consists of a portfolio that you help define using standard investment vehicles.
You don’t have to trust the buyer to pay you, you have to trust:
- The money managers (you may choose your own)
- Wall Street and the economy not to collapse entirely
The Deferred Sales Trust takes over where the Private Annuity Trust left off.
This strategy is gaining popularity among those who have highly appreciated assets, or assets that would be hard to exchange, such as business interests.
An average transaction deals with $2.4 million in gain that needs to be sheltered from a direct capital gains hit, but should be considered any time there is a gain of $100,000 or more. We are currently working on a trust worth $44,000,000. Investors selling business + real estate (such as a dental practice) commonly use this vehicle.
Here’s the anatomy of the transaction:
- seller ‘sells’ his property to a trust owned by a third party company on 100% seller carry installment note
- trust lists and sells the property conventionally (getting cash or CTNL from the buyer)
- trust pays seller with a payment contract called an “installment contract” paid over an agreed period of time (up to 20 years). The returns are usually 3-6%, possibly higher if you define a more aggressive, risk tolerant portfolio with your advisor when the trust is set up.
Deferred Sales Trusts are drafted pursuant to IRC 453, the same as the installment sale in the seller financing scenario. The capital gains tax is realized or triggered, but not recognized or paid (not until the seller starts receiving the payments, and even then capital gains are only paid a little at a time).
You need to price your property to sell. If you’re not going to offer terms through an Installment Sale, or through a Title Holding (Land) Trust (which helps maximize price point), then you’ll have to be very realistic on price
Get an illustration of how the DST would work for you in your particular situation: Deferred Sales Trust Illustration
