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Deferred Sales Trust

KPP Financial proudly partners with the Estate Planning Team to provide quality real estate tax deferral strategies that give you greater flexibility in retirement and a potentially higher rate of return.

What is a Deferred Sales Trust?

The Deferred Sales Trust™ is a Trust that purchases the Seller's property and then resells it to the ultimate buyer. It allows the Seller to treat the sale as a "Seller-carry back" transaction where the buyer pays the purchase price over time. The language in the Trust documents and the purchase documents (referred to as the "DST Note") between the Trust and the Seller cause the Seller's income tax otherwise due on the sale to be deferred until the Seller actually receives the money from the Trust. After the asset is sold by the DST to the ultimate buyer, the Trust may invest the funds in any asset of its choice. There are no investment restrictions, or timeframes for which investments are to be made.

Who is this for?

The DST strategy works best for:

  • Business owners or real estate owners with a large amount of gain who want to avoid capital gain taxes or the 1031 exchange that requires them to buy more assets to receive the tax deferral benefit. 

Primary Benefits

Flexible Payment Options

Specific to each taxpayer, repayment terms include anything from minimal repayment of principal or rapid amortization. In addition, payments can be immediate or can be delayed into the future.

Liquidity and Diversification

Can potentially convert an illiquid asset, like a business or commercial real estate, into a diversified portfolio of liquid investments. Th is can help reduce risk and volatility by preventing overexposure to a single asset class.

Enhanced Retirement Income

Can provide a stream of income for retirement based on the pre-tax proceeds from the sale instead of the aft er-tax proceeds, which are likely to be substantially less.

Maintains Family Wealth

First, by avoiding a massive drain of equity at the time of the sale, resulting from the immediate recognition of the full capital gains tax liability at the highest rates. Second, by potentially providing significant estate planning benefits. And finally, the DST can provide estate liquidity.

Estate Tax Benefits

The DST can be combined with additional planning to accomplish an estate freeze for estate tax purposes, and to potentially remove the proceeds of the sale from the seller’s taxable estate, potentially beyond the amounts exempted by the unifi ed credit. Further, the ability to select the state in which to domicile the trust can provide additional tax savings.

A 1031 Exchange Alternative

Unlike a 1031 Exchange, the proceeds from the sale do not have to be invested in “like-kind” property in a very short timeframe to achieve tax deferral. Moreover, a DST can be used to rescue a 1031 Exchange that is in danger of failing, subject to the 1031 exchange being appropriately set up with a DST certified QI (“qualifi d intermediary”).

Can Sever Partnerships

When a partnership or other ownership group sells an appreciated asset, they do not need to remain together to achieve tax deferral, as is typically the case with a 1031 Exchange. Each individual owner can have their own Deferred Sales Trust™, the assets of which can be managed to each taxpayer’s own individual risk tolerance and preferences

Asset Protection

Can provide a stream of income for retirement based on the pre-tax proceeds from the sale instead of the aft er-tax proceeds, which are likely to be substantially less.

Avoids Probate

First, by avoiding a massive drain of equity at the time of the sale, resulting from the immediate recognition of the full capital gains tax liability at the highest rates. Second, by potentially providing significant estate planning benefits. And finally, the DSTcan provide estate liquidity.

How Does it Work?

The process starts with initial due diligence and prospective marketing and market research. If the transaction is viable, the trust and property owner will negotiate to reach terms with regard to the asset(s). If the transaction is feasible, the property owner, ("Seller/Taxpayer"), selling ownership of the property/capital asset to a dedicated trust (the "Trust") that is set up specifically for the Seller/Taxpayer and the contemplated transaction.

Next, the Trustee (must be DST Trained and Approved) of the trust pays the Seller/Taxpayer for the property/capital asset. The payment isn't in cash, but with a special payment contract called an "installment sales contract". It is strictly a private arrangement between the trust and the Seller/Taxpayer. The terms of payment are established in advance and pursuant to the sale contract negotiated by and between the Seller/Taxpayer and the Trustee.

The payments may begin immediately or they may be deferred for some period of months or years.

The Trust then sells the property. There are generally minimal Capital Gains Taxes due from the Trust on the sale since the Trust often purchases the property for a price and value similar to what it may get sold to a third party Buyer.

The Seller/Taxpayer is not taxed on the sale since he has not yet received any cash for the sale. Often Seller/Taxpayers will choose deferral because they have other income and don't need the payments right away. Of course, the payments may begin immediately.

Deferral is strictly an option. It is important to understand that payment of the capital gains tax to the IRS is done with an "easy installment plan" as the Seller/Taxpayer receives the payments. Part of the payment received is tax-free return of basis, part is return of gain which is taxed at capital gain rates, and part is interest.

DST Exploratory Form

See if the Deferred Sales Trust is Right for You

Fill out our DST Exploratory form and one of our advisors will reach out to you directly to schedule a call to discuss your options. 

 

 

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