Deferred Sales Trust: Here’s A Complete Overview (2024)

Selling an item you have held onto and watched rise in value is generally seen as a smart investment move. But then the taxman comes knocking, wanting his share of your profits. That introduces capital gains tax into the picture.

It’s a tax that could significantly affect your bottom line, especially with respect to extremely valued assets like companies or real estate. You might think your only option is to pay up, but what if there was a way to save more of your hard-earned money?

That’s what the strategic tool known as the Deferred Sales Trust (DST) might be able to do for you. It could allow you to postpone or maybe even reduce those capital gains taxes.

Consider it as a financial time machine, allowing you to control when you pay those taxes, therefore enabling you to reinvest and increase your wealth even more.

And you should have a team of professionals at your side if you really want to safeguard your assets and maximize your financial future.

Our area of expertise at Dominion is protecting our clients’ wealth using advanced techniques including offshore asset protection and careful tax planning. We understand the complicated nature of the financial world, and we’re dedicated to helping you accomplish your objectives.

Understanding the Capital Gains Tax Beast

Let’s first dissect this capital gains tax. Simply put, it’s the tax you pay on the profit from asset sales. You pay a specific price for something, it gains value, you sell it for more. The difference is your capital gain.

The rub is that your tax rate will vary based on the length of ownership of the asset. Held less than a year, it’s a short-term capital gain taxable at your regular income tax rate. If you owned it for more than a year, however, it is a long-term capital gain and the tax rates are usually lower.

Sounds basic enough, but given high-value assets specifically, the impact may be significant. We’re talking maybe tens or even hundreds of thousands of dollars in taxes. Therefore, it is important to have a strategy in place to minimize these taxes while keeping more of your capital working in your favor.

What Exactly Is a Deferred Sales Trust?

It may be a smart financial decision for you to look into a deferred sales trust. Why? Because with a DST, you transfer your valuable asset to a trust rather than selling it outright.

This effectively creates an immediate tax liability. This trust then sells the asset on your behalf, and in doing so, arranges the payments over time instead of handing you one big amount.

By deferring those significant capital gains taxes with this deliberate action, you generate breathing room to reinvest the money and maybe even significantly raise your wealth at the same time.

Another popular tax-deferral strategy gaining ground these days is 1031 exchanges. Yes, both want to delay capital gains taxes, but DSTs clearly offer you more due to their flexibility.

With 1031 exchanges, you can only exchange like types of properties, known as 1031 swaps. But with DSTs, investors enjoy greater opportunities and have access to a wider range of assets with which to do business.

A DST essentially functions under the legal framework of Internal Revenue Code Section 453, which specifies installment sales guidelines. This section of the statute recognizes that sometimes it makes sense to spread the tax burden over time rather than having to pay a big tax bill all at once.

A Deferred Sales Trust’s Inner Workings

Let’s take a moment to see what a DST’s practical use looks like. The process starts with you passing your valued asset – real estate, a company, even intellectual property – to a trust. That trust is run under the direction of an impartial trustee.

After that, this trustee looks after selling the asset and meticulously arranges the payments to you over a predefined period. This installment payment system is beautiful in that you only realize a fraction of the capital gain with each payment, therefore distributing your tax load over several years.

The entire process is designed to help you better manage your money and enable you to deliberately balance your tax burden and reinvest the earnings for the best growth possible.

Example of an Asset Sale

Let’s consider an example to get a clearer picture of DST. Let’s say you sell a house for $1 million, and your capital gain comes to $300,000. Using a DST can result in $50,000 yearly for six years instead of paying taxes on the entire $300,000 at one time. Your tax obligation will be much more reasonable each year as you just pay taxes on the $50,000 part of the gain.

What Kind of Benefits You Can Expect Using the Deferred Sales Trust

The Deferred Sales Trust is appealing for financial freedom and control as much as it is for tax deferral. We need to take a look at the many advantages that justify its use in preserving and growing wealth.

Financial Breathing Room

The DST shines mostly in its ability to break down the often scary capital gains tax load into sensible portions. Rather than paying all at once, you can divide a sizable tax payment over several years.

This gives you breathing room so you can reinvest your money and maybe earn even more before the taxman calls.

Possibly Avoiding Taxes

The DST’s appeal isn’t limited to just breathing room. By carefully planning the regular payments, you may conceivably postpone such taxes forever. As long as the payments you get come only from the interest created on the sales proceeds, you avoid immediately producing any capital gains.

And that’s a big deal, as major long-term tax savings made possible by this help you to keep more of your cash.

Flexibility

Now let’s talk about flexibility, as it’s really important here. You see, DSTs allow you to transfer “like-kind” properties, therefore embracing a larger spectrum of assets than 1031 exchanges. 

This suggests you may make money from tax deferral on nearly anything (for example, the real estate, business enterprises, or even intellectual property we mentioned a moment ago).

This flexibility changes everything, especially for those who want to diversify their assets or exit a business without handling an unanticipated tax obligation.

Liquidity

Liquidity is also another major advantage of DSTs. You still receive monthly installment payments, so even if your capital gains might get delayed, you always have regular income flowing in. This ensures your living costs, investments, or any other financial needs have money.

Diversification for a Strong Portfolio

Furthermore, the profits from your asset sale – kept in the trust – can be reinvested into many kinds of assets. Although the DST offers tax benefits, this enables you to spread your risk and (ideally) generate bigger profits.

A deferred sales trust has purposes beyond only tax deferral. This clever system can help you decrease your tax load, enhance your wealth, and manage your financial future.

Who Stands to Gain the Most from a Deferred Sales Trust?

Though clearly advantageous, a deferred sales trust is not a universal solution. So, we have to investigate who is most likely to find this approach most beneficial.

High-Net-Worth Individuals

Those with significant assets and investments typically battle with significant capital gains tax liability. A DST might be an ideal instrument for these individuals to keep financial independence while conserving their money. 

Delaying taxes lets them reinvest their capital, look into new opportunities, and make better long-term financial decisions.

Property Owners

DST assists property owners contemplating a sale but are wary about the immediate tax implications. Whether the property is an investment property, a vacation house, or a regular residence, selling might produce a big tax load.

A DST helps these owners move and leave their land without disruption while controlling their tax load.

Entrepreneurs

A DST provides solace for entrepreneurs looking to sell a business and begin a new chapter. While it usually produces a significant monetary gain, selling a company can also have serious tax implications. A DST provides a clever exit plan that allows owners to properly manage their newly acquired wealth and evade taxes.

Investors

Finally, investors seeking alternatives to traditional tax-deferral techniques, including 1031 exchanges, should look into DST options. Its flexibility and larger selection of qualifying assets are quite tempting for those seeking to diversify their portfolios and make the most of their tax strategies.

A DST is intended especially for those seeking proactive financial future control. If you want a smart, flexible approach to asset preservation and are under heavy capital gains tax load, this might be the answer you have been looking for.

See a qualified financial counselor to learn whether a DST may be appropriate for your goals and circumstances.

Important Considerations and Limitations

Deferred Sales Trusts have many advantages, but it’s important to approach them knowing their nuances and restrictions. The IRS first and foremost has certain regulations controlling DSTs, hence compliance is rather important.

Straying from these rules may get you in hot water with severe fines. Working with seasoned experts who know the tax code both inside and outside will help to guarantee proper construction of your DST.

The selected trustee is another important consideration. “Sham trusts” designed solely to evade taxes make the IRS suspicious. It is thus absolutely essential to choose an impartial trustee free of personal or financial links to you. This guarantees the veracity of your DST and guards against possible legal issues.

The idea of “constructive receipt” is also a biggie. You have to give up control over the selling profits if you want to postpone your capital gains. Any direct or indirect control might set off instant tax obligation. Consequently, not you but the trustee handles the money and decides on investments.

Remember too that a DST does not completely exclude taxes; rather, it defers them. You will eventually owe capital gains taxes on that part when you get paid from the principal profits.

The beauty of a DST, though, is the flexibility it provides over when those taxes are due, which lets you deliberately handle your money and maybe lower your total tax load.

Understanding these important issues and working with experienced experts can help you to use Deferred Sales Trusts to meet your financial objectives while remaining on the correct side of the tax code.

Choose Dominion for Sustained Wealth

If you want to take control of your financial future and lessen the impact of capital gains taxes, looking at the possibilities of a Deferred Sales Trust is a wise move. Note that expert direction is required when negotiating the many elements of tax regulations and asset management.

At Dominion, we are here to help you attain stable financial success. Get in contact with us today to find out how we can tailor a wealth management plan suitable for your specific goals.