The Deferred Sales Trust – A Tax Strategy That Needs More Respect

Capital gains taxes can significantly burden individuals who want to sell a highly appreciated asset. Often, these taxes consume a large portion of the sale proceeds, leaving the seller with less than expected. Fortunately, there is a strategy that can help defer capital gains taxes, allowing sellers to retain more of their hard-earned money. This strategy is called a Deferred Sales Trust (DST).

?What is a Deferred Sales Trust?

?A Deferred Sales Trust is an arrangement that allows a seller to defer capital gains taxes on the sale of an appreciated asset. Instead of selling the asset outright and paying taxes on the gain, the seller transfers the asset to a trust, which then sells the asset and holds the proceeds. The seller defers receiving the proceeds and the taxes on the gain until a future date, typically over several years.

?How does it work?

?To set up a DST, the seller must work with a Qualified Intermediary (QI) who will prepare the relevant legal documents and facilitate the transaction. The QI will create the trust and serve as its trustee. The seller will transfer the appreciated asset to the trust, which will then sell it on the seller's behalf. The proceeds will be held in the trust and invested, generating income for the seller.

?The seller can then choose when and how to receive the proceeds. They can receive periodic payments over several years or defer receiving the proceeds until a future date. The deferral period can be up to 30 years, giving the seller significant flexibility and control. During the deferral period, the seller is not required to pay taxes on the gain.

?Benefits of a Deferred Revenue Agreement

?The greatest advantage of a DST is that it allows the seller to defer capital gains taxes, which can be a considerable expense against the proceeds of the sale. By delaying the tax liability, the seller can retain more of the sale proceeds, which can be reinvested or used for other purposes. Additionally, the seller can benefit from the time value of money, earning interest on the proceeds that would have otherwise been paid in taxes.

?A DST also offers significant flexibility. The seller can choose when and how to receive the proceeds, tailoring the payments to their financial needs and goals. Additionally, a DST can provide estate planning advantages, allowing the seller to transfer wealth to their heirs in a tax-efficient manner.

?Potential downsides of a Deferred Sales Trust

Despite its benefits, a DST is not without risks. One potential downside is the cost. Setting up and administering a DST Trust can be expensive, requiring the services of legal, tax, and financial professionals.

Examples Where the DST is Used

?Is used predominantly in these areas: collectibles; fine arts; businesses; high value homesteads, commercial real estate; professional practices; stock portfolios; investment property. Sometimes this technique can help the seller get more than market value for an asset as it can be financed for the buyer and that alone has a value.?

?Conclusion

?A Deferred Sales Trust is a legitimate strategy to help sellers defer capital gains taxes, retain more sale proceeds, and provide flexibility and estate planning advantages. However, it does require careful planning and execution to ensure that it is done correctly. If you are considering this possibility, you must work with a qualified intermediary who can direct you through the process and offer the essential expertise.

?For questions? call Bill Biggs at 940-566-1313. Check us out on the Web at AffiliatedAdvisors.net???? If you would like to see the impact of how planning could help in a real case email your request to [email protected] and ask for the DST Example.

?

?