Deferred Sales Trust™ FAQ

What is a Deferred Sales Trust™?

The Deferred Sales Trust™ is a Trust that purchases the Seller’s property and then resells it to the ultimate buyer. It allows the Seller to treat the sale as a “Seller-carry back” transaction where the buyer pays the purchase price over time. The language in the Trust documents and the purchase documents (referred to as the “DST Note”) between the Trust and the Seller cause the Seller’s income tax (otherwise due on the sale) to be deferred until the Seller actually receives the money from the Trust. After the asset is sold by the DST to the ultimate buyer, the Trust may invest the funds in any asset of its choice. There are no investment restrictions or timeframes for which investments are to be made.

What Types of Assets Can be Sold Using the DST?

Just about any asset that is subject to capital gains taxation can be deferred with the DST. These assets include rental properties, primary homes, commercial properties, private stocks and bonds, family businesses, and your insurance policies that need to be sold for cash. Most common types of asset sales using the DST are the sale of real estate and the sale of a business. The DST can sometimes be used for other types of asset sales and transactions such as:

  • a 1031 Exchange that would otherwise fail to be properly completed can be “rescued” using the DST;
  • the refinancing of a note receivable from a third party;
  • sales of marketable securities where there are restrictions on the stock or limited trading volume of such stock;

When is the Tax on the Sale Paid?

The Seller sets up the timeline of when the payments will be made (interest and principal), and the amount of each payment. The payments can be structured in any timeline and amount that the Seller wishes. Payments can be interest only with the principal amount paid in one balloon payment at the end, or where there are even payments paid over the term of the structure. Regardless, the taxes on the gain are triggered when the principal payments are received. Capital gains rates in the year the payment is received is the rate applied to the principal payments as received. The interest earned on the principal is taxed at ordinary tax rates in the year received.

What are the costs involved in doing a DST?

The costs are based on the sales price of the underlying asset involved in the transaction. (See chart below)

General DST Fee Chart:

Gross Sales Price of the asset being sold:

$1-Million and under: 1.50%

$1-Million and over: 1.25%

If my client has multiple Assets or Properties that they want to sell over a period of time can the DST work?

Yes. One DST structure will suffice for multiple assets sold over a period of time. However, planning is required for each asset sold at different times and new documents must be executed. Each sale will require its own separate DST Note but the same Trust can be used. The original fee schedule shall apply to the sale of each additional assets added to the original Trust with the preparing law firm.

How can I best explain these concepts to my clients?

The DST provides a means to sell your asset in a manner that allows you to get the tax benefits of a “Seller Carry-back” type transaction where you receive your payment, and your taxed over time without sustaining the same level of risk that an inexperienced buyer or illiquid buyer may cause. During this time period and until the installment payment is fully paid, your clients have the advantage of having a larger amount of cash working for them to achieve more value over that selected installment period. With additional planning, the DST can be used in conjunction with estate planning to allow you to transfer your client’s assets to their heirs, free Federal Estate Tax, Gift Tax and GST Tax.

What is the total amount of assets that can be sold in a DST per person per year?

The Seller/taxpayer can create an installment note up to $5 Million per person per year. Thus, if your taxpayer is married, then up to $10 Million per calendar year can be sold using the DST. If the sale is near the end of the year or beginning of the year, then action may be taken to spread the transaction across two calendars years to double this amount.

Who can serve as Trustee or Manager and what is the cost of this service?

We only allow professional fiduciaries serve as the Trustee. Many people have used their family friend, attorney, accountant, or a combination of both using a Co-Trustee scenario. When Co-Trustees are employed, both the professional fiduciary as Trustee and the Co-Trustee must sign off on any DST transaction. This method allows for a ‘checks and balances’ procedure that can provide another level of protection for the Seller/Taxpayer.

How does the Deferral process work?

The longer one can defer the installment payments, the longer the money can ‘work’ and allow for some incredible gains through the magic of compound interest. The amount and timing of payments is something that should be discussed with the DST financial advisor and Trustee.

Is the Deferred Sales Trust™ an Insurance product?

Sometimes the general public becomes confused and thinks this is a structured sale with a commercial annuity type of product. The Deferred Sales Trust™ does not involve insurance. However, commercial annuities and securities can be used as part of the investments inside the DST. But that is simply one investment option.

Can my clients get loans against the DST?

Seller/Taxpayer can borrow against their DST Note. Banks are always looking to make loans against assets. The DST Note or the assets of the Trust are assets that can serve as collateral for a loan. We have banks to refer your clients to that will make such loans.

What happens to the DST when I die?

If the Seller/Taxpayer dies before the DST Note is repaid then the Trustee will continue to pay the heirs of the Seller/Taxpayer until the DST Note is repaid. Often the Seller/Taxpayer holds the note in their living Trust so the note will pass to their heirs without probate.

What if the Client has a Living Trust already?

This is fine. The Living Trust usually becomes the holder of the DST Note, and thus, the DST Note is transferred upon the Client’s death in the same manner as the other assets in the Living Trust.

Is the DST included in my taxable estate?

Seller/Taxpayer should know that the DST Note would be included in their taxable estate just like any other asset. Estate Planning Team (EPT) will work with you to educate the DST client about their potential estate taxes. If there are estate tax problems, EPT and the tax lawyers can help to work to reduce their estate tax liability.

Is the DST a Trust that can protect my assets?

Seller/Taxpayer cannot rely on the DST to protect their assets. The Seller/Taxpayer should know that the DST is an asset that belongs to you and that a creditor can attach your DST Note payments. However, creditors cannot touch the assets in the Trust. Thus, the DST serves as a great deterrent against creditors because the only thing the creditor can get to is the payments to be made under the DST Note per the terms of the DST Note. Therefore, most creditors are willing to settle for far less after negotiating with you for a lump payment up front. There are other asset protection tools that can work in conjunction with the DST to protect your assets. Please call EPT about the different Trusts that offer true asset protection.

Why is it so important to have a tax attorney close the DST?

Seller/Taxpayer need to be protected in doing tax saving transaction by tax lawyers who understand U.S. Tax laws. Dealing with lawyers who specialize in implementing the DST will help your case close, as they will understand the details of the DST. We find so many lawyers and CPA’s don’t understand the DST and don’t have a strong tax background. Each outside professional looking at this structure has to make sure that the DST is a sound structure for their clients. The tax lawyer who specializes in the implementation of the DST is by far the best representation for you on every case.