Is Uncle Sam about to give you a big haircut - taking their chunch of taxes from the sale of your asset!
It does not have to be that way – you can keep your beautiful locks!
What is a Deferred Sales Trust?
Picture this: You sell a property, but instead of cashing in immediately, you place the proceeds in a trust that periodically pays you back. Sounds intriguing? That’s a DST for you. It’s an innovative twist to direct selling, letting you postpone the capital gains tax.
Using a deferred sales trust acts like an installment sale (or an annuity for a DST Plus). Where the DST Trust purchases your right to proceeds from a transaction and has an opportunity to invest those proceeds. In exchange for purchasing your asset, you receive an obligation from the Trust for it to pay you back those proceeds, plus interest. You then pay tax when you receive funds from the trust. The taxes on those payments carry through the tax that was incurred at the time of the transaction – thus, not eliminating tax, but deferring it. This structure allows sellers to defer taxes and therefore, potentially earn a higher return on their sale proceeds than they would by paying taxes upfront and investing the remaining amount.
Todd Campbell developed the tax structure known as the deferred sales trust strategy around 1996 and through his team, has implemented thousands of these transactions. MeyerPink Law is a licensed advisor of this strategy.
Over the years, despite an overall extremely low audit rate, some transactions have been audited. In every one of those audit’s no changes have been required. We look at that as confirmation that the strategy is sound, has stood the test of time, and passed official scrutiny.
There are a number of considerations when selling appreciated assets. Each strategy has pros and cons. The Deferred Sales Trust is a powerful tool to use if it fits your situation.
The Pros of Deferred Sales Trust
Capital Gains Tax Deferral
- The power is in the deferral. If you sell something for $3 million and pay $1 million in taxes you would have $2 million left over to invest. How long will it take that after-tax principal to match the growth on the entire $3 million being invested?
- Know that cringe-worthy moment when a big portion of your profit gets swallowed by taxes? DST offers a cushion. You’re taxed only on the received installments, not the entire sale value upfront.
Real Estate Flexibility
- Eager to liquidate your property but anxious about the tax implications? DST offers a parachute, letting you leap without the tax shackles.
Diverse Investment Options
- Hate the idea of all eggs in one basket? DST resonates. It lets your trust spread funds across various investments, be it stocks or real estate.
Secure Retirement Planning
- Eyeing retirement? DST provides consistent payouts.
The Cons of Deferred Sales Trust
Costs and Fees
- Establishing and operating a DST isn’t pocket change. Be prepared for upfront fees and recurring management expenses. These costs are designed to be easily overshadowed by the gains you can make on the money that would have otherwise been sent to the taxing authorities.
Limited Immediate Access
- Had plans to buy that dream car post property sale? No problem, but every dollar you withdraw for spending, will be taxed. The greater the delayed gratification the greater the power of the DST.
Potential Legal Complexities
- DSTs are intricate legal creatures. They must be sculpted right to fetch those tax perks. A misstep can lead you into a expensive problems. Trust the team that has completed thousands of these transactions – Contact MeyerPink Law today for a consultation if this is the right option for you!
Managing Trustee Relationships
- Assigning control of your funds requires trust in the trustee. It’s like trusting someone with the last slice of your favorite pie. All business transactions require some risk – your financial advisor could defraud you (ask the thousands of people taken by Bernie Madoff). Your buyer could pay you over time and then run the business into the ground – leaving you with no recompense. With a DST you have visibility to your funds and direct communication with the Trustee in exchange for powerful tax deferral benefits.
When Is It Right for You?
No two investors are identical. While DST might be the dream for some, others might look elsewhere. Ponder over your investment aspirations, tax dynamics, and liquidity desires.
Next Steps for Potential DST Users
Venturing into the DST domain? Tread informed. Gauge the advantages against the drawbacks, grasp its workings, and if the waters get murky, remember, you’re not alone.
Puzzled or intrigued by Deferred Sales Trusts? MeyerPink Law has your back. Book your free consultation with our experts and navigate your financial journey with confidence!