Generally, the terms of note will be Seller driven and the resulting terms must be reasonable and commercially viable. The initial term we would offer would be anywhere from 1 year to 10 years… Seller picks their desired term.
The payback structure is very flexible in that the seller could: defer receiving payments for up to a couple of years or so; take a partial or full interest-only distribution with a balloon payment down the road; create any form of amortization schedule including distributions of interest and principal.
The interest rate on the note is established between the Seller and the Trustee. The agreed-to rate is typically a function of reviewing a risk tolerance questionnaire the Seller completes, combined with the Sellers desired payback structure, and the initial term of the desired note.
This allows us to look at investment asset classes that would be suitable for the client’s risk tolerance and identify historical returns that correspond to the payback structure they are seeking.
Once the terms of the note are established, there can be flexibility in the ability to modify the note at one or more times in the future where the Seller may either wish to accelerate or extend the note or access a lump sum for some previously unforeseen need.
Under IRC 453, the Seller will only ever recognize and pay taxes on distributions he or she actually receives from year to year. This actually allows the taxpayer to control how much tax they are willing to pay each year. This may seem a little counterintuitive because the normal tax policy structure is to have you pay taxes on what you earn, while with the DST, you essentially only pay taxes on what you want to spend. This is more like a comparative analogy in that If you earn more than you spend (e.g. your requested distributions), then you don’t pay taxes on what you leave in the tank until you actually spend the money. (e.g. determining when and how to take future distributions)
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