The Deferred Sales Trust Advantage

Apr 20, 2021
Deferred Sales Trust Tax Planning

Thinking about selling a highly appreciated asset such as a real estate investment, corporation or business can be overwhelming. While it is certainly a positive to have highly valued assets, navigating the tax laws surrounding such assets is a difficult process. One option that is becoming more and more popular for persons in this position is a Deferred Sales Trust

One of the biggest advantages of a Deferred Sales Trust is that it will defer capital gains taxes associated with selling a highly appreciated asset. This can end up saving you thousands, if not hundreds of thousands of dollars. 

How does a Deferred Sales Trust work? 

At its most basic, a Deferred Sales Trust involves creating a legal contract between yourself (the owner of the asset in question) and a third-party trust. A key component of this arrangement is that the third-party trust agrees to pay you a fixed sum over an agreed-upon period of time. This payment is not in the form of cash, but with an installment sales contract. This lowers the overall tax burden associated with selling highly appreciated assets. Once the seller and trust finish this transaction, the trust turns around and sells the asset to an interested buyer.

The reason this works is that since the seller does not receive cash for the sale of the asset directly, the government does not lever capitals gains taxes against the sale. There are little-to-no capital gains taxes on the trust selling the asset to the buyer, because the trust usually buys the asset from the seller at a similar rate to what the trust sells it for. 

What are the benefits associated with a Deferred Sales Trust? 

There are many things that you can do if you defer thousands on capital gains taxes. For instance, you can use the funds from your Deferred Sales Trust for retirement income. You can also use a Deferred Sales Trust to create an “estate tax freeze” in certain circumstances. You can even use a Deferred Sales Trust to help your heirs avoid probate if you plan your estate correctly.

Additionally, using a Deferred Sales Trust eliminates any risks associated with directly owning the asset. It is common for the seller to take the payments from the asset’s sale and use it to diversify their own portfolios. This essentially turns a liability-prone asset into no-liability. For these reasons, Deferred Sales Trusts are popular with persons about to enter retirement. 

How is this different from a Charitable Remainder Trust? 

It is true that a Charitable Remainder Trust will do many of the same things listed above. However, there is one huge difference: with a Deferred Sales Trust, you do not need to give anything to charity. With a Deferred Sales Trust, you are completely in control of what happens to the funds associated with it. 

In turn, this helps you maintain wealth within your family. An appropriately constructed Deferred Sales Trust can help you pass on a large portion of the principle to your heirs. This is not possible with a Charitable Remainder Trust. 

Contact us Today

Navigating the sale of highly appreciated assets is tricky for multiple reasons. Contact us today at AmeriEstate to learn more about what a Deferred Sales Trust can do for you.