Deferred Sales Trusts by Dustin Nichols
Monday, January 25, 2010 at 07:54PM Those of us who have clients that own businesses, highly appreciated stock, commercial or residential investment real estate assets, are often reluctant to sell because of capital gains taxes associated with the sale. But what other choice do we have other than a 1031 property exchange? Is there another way to deal with the capital gains tax liability that so many investors experience when they sell their real estate assets? The answer may lie in the Deferred Sales Trust™ ("DST").
This capital gains tax deferral and estate transfer tool could save your clients thousands of dollars, and at the same time, make a profit on the money you would have paid to the IRS in the year of the sale. Obviously, this strategy is gaining popularity among those who have highly appreciated assets. The DST™ can also be more simply described as a no risk "seller carry-back" financing structure.
The process starts with a property owner, transferring ownership of the property to a dedicated trust. The trust then sells the property, stock or other capital asset to the buyer of same. Next, the trust "pays" you. The payment isn’t in cash, but with a payment contract called an "installment sales contract." The contract promises to make installment payments to you or your trust, and said payments can even continue to future generations with additional estate planning. There are zero taxes to the trust on the sale since the trust “purchased” the property from you for what it sold it for.
You can choose to defer the start date of the principal payments. You may have other income and don’t need the payments right away. The tax code doesn’t require payment of the capital gains until you start receiving installment payments. The capital gains tax paid to the IRS is only that portion of the capital gains due in proportion to the number of years established in the term of the installment agreement.
The Deferred Sales Trust™ has the ability to generate substantially more money over the long run that a direct and taxed sale. It is also superior to a direct installment sale as the concerns of a defaulting Buyer in said installment arrangement are eliminated.
Primary Benefits:
Tax Deferral: when appreciated property is sold, tax on gain is deferred until receipt of payments
Estate Tax Benefits: accomplishes an estate freeze for estate tax purposes.
Maintains Family Wealth: helps to maintain wealth within the family.
Estate Liquidity: converts an illiquid asset into monthly payments.
Retirement Income: provides a Stream of income for retirement.
Probate Avoidance: with proper estate planning.
Eliminates Risks Associated with Ownership: by utilizing the DST™, you have taken an asset that is otherwise liability prone and converted it to a no risk asset.
Dustin I. Nichols, Esq.
Rimel & Nichols, LLP.
1251 E. Dyer Rd., Suite 120
Santa Ana, California 92705
714.544.5193 telephone
714.544.3796 facsimile