GENERAL QUESTIONS
WHAT IS A DEFERRED SALES TRUST?
A Deferred Sales Trust is a method used to defer capital gains tax when selling real estate, businesses, cryptocurrency, or other highly appreciated assets that are subject to capital gains tax. Instead of receiving the sale proceeds at closing, the money is put into a trust and only taxed as the funds from the sale are received.
HOW DOES THE DEFERRED SALES TRUST WORK?
The Deferred Sales Trust acts as a third party between the seller and buyer. Traditionally, if you own a business or property that you’re looking to sell, you would sell that property to a buyer and receive your profit. Once you receive your profit, however, you have to pay what is known as capital gains tax on the profit of your sale.
With the Deferred Sales Trust, you do not sell your asset directly to the buyer. Instead, you sell your asset to the trust. We then sell your asset to the buyer. And instead of getting a lump-sum payment for your asset, you receive a promissory note that promises to pay you your proceeds in monthly installments.
You, as the seller, determine how you want your proceeds paid to you. You have the option of the trust investing your entire proceeds, which can defer capital gains tax and generate monthly income in the form of interest per the terms of your promissory note. You can also take a portion of your proceeds and pay capital gains tax on that portion only.
WHAT IS THE GREATEST ADVANTAGE OF USING THE DEFERRED SALES TRUST?
There are many advantages of using the Deferred Sales Trust, most importantly being that the ability to defer the taxes allows you, the seller, to earn interest on untaxed sales proceeds. This is of the utmost importance in preserving your wealth. By deferring your tax burden on highly appreciated assets, you may be able to generate substantially more wealth over the long term than a direct and taxable sale.
You can control the timing of tax payments while also managing your tax rate risk.
WHY HAVEN'T I HEARD OF THE STRUCTURE BEFORE? WHY HASN'T MY ACCOUNTANT, FINANCIAL ANALYST, AND OR ATTORNEY HEARD OF THE STRUCTURE BEFORE AND WHY DID THEY NOT RECOMMEND IT TO ME?
We have our own closed network, and if your advisors are not in our network, chances are, they haven’t heard of this structure.
Furthermore, the job of most CPAs is compliance and not necessarily performing due diligence on tax strategy.
DOES THIS MEAN I NEVER HAVE TO PAY CAPITAL GAINS TAXES?
No, the structure allows you to defer your capital gains taxes by establishing an installment sale under the IRC 453, using a 3rd party trustee. This allows you to tax engineer, paying taxes at a later date when it's more advantageous to your income situation.
The amount of capital gains tax you defer will depend on how you structure your monthly payments. If you decide that you want the trust to pay you a portion of the profits from your sale (the principal) every month, then you will have to pay capital gains tax on that portion of the principal only.
To defer your capital gains tax, your monthly payments can be structured so you only receive the interest on your investment each month. You do not need to pay any capital gains tax on the interest made from your investments in the trust. If you do not take out any principal, then you do not need to pay capital gains tax. You can keep deferring your capital gains tax by keeping your principal invested by the trust and making money off the interest.
MORE INFORMATION
HOW CAN THE DEFERRED SALES TRUST HELP ME DEFER CAPITAL GAINS TAX?
The biggest advantage of the Deferred Sales Trust is its ability to defer capital gains tax. But why are you able to defer it? The reason is that you are avoiding “constructive receipt,” which is an accounting term that requires an individual or business to pay taxes on income despite the fact that the money has not yet been received in actuality. Constructive receipt matters for reporting taxable income – especially under the cash-basis method of accounting.
By selling your asset to the trust, you are not selling directly to the buyer. The trust sells your asset to the buyer, which avoids constructive receipt. As a result, your capital gains taxes are deferred under IRC 453 of the tax code.
WHAT IF THE CAPITAL GAINS TAX RATES CHANGE?
From time to time, the issue of adjusting the capital gains tax rates is discussed. If the capital gains rates are changed by law, then you would be subject to the new rate. But remember, you only need to pay capital gains tax if you decide to withdraw some of your principal (or profit) from the sale. You do not need to pay any capital gains tax on the interest you make from your investments.
MORE INFORMATION
WHO CAN SELL ASSETS TO THE DEFERRED SALES TRUST?
What sets the Deferred Sales Trust apart from other capital gains tax solutions is its flexibility. If you own any kind of business, medical practice, or real estate, you may be able to sell your assets to the Deferred Sales Trust and defer capital gains tax. Our professionals at Freedom Bridge Capital offer a free DST analysis to help determine if the Deferred Sales Trust is right for you.
IS THE DEFERRED SALES TRUST THE SAME AS A MONETIZED INSTALLMENT SALE?
No. The structure is different. The IRS has recently cracked down on monetized installment sales and released an analysis done by the Office of Chief Counsel, citing 6 ways that the transaction does not work as claimed.
DO YOU DO ESTATE PLANNING?
Yes, that is one of the services provided by Freedom Bridge Capital. An attorney who is certified in estate planning will discuss your options and provide proper guidance for your family to settle your trust.
CAN YOU DESCRIBE THE DEFERRED SALES TRUST PROCESS?
In short, a Deferred Sales Trust (DST) is a trust that utilizes the installment sale under the Internal Revenue Code (IRC) §453 to defer the taxes due on the sale of a highly appreciated asset. This includes family-owned and closely-held businesses, real estate, rental properties, vacation homes, commercial properties, cryptocurrency, vacant land, industrial complexes, retail developments, farm ground, or other capital assets.
Once the closing of the sale commences, the trustee of the Deferred Sales Trust then purchases the asset from the seller and the seller receives an installment sales contract or promissory note. The terms of the promissory note will be determined based upon the factors negotiated by the seller noted above.
WHAT ARE MY RIGHTS AS THE SELLER?
At the completion of closing, the seller becomes a noteholder and creditor of the trust.
WHAT IS THE ROLE OF THE TRUSTEE?
An unrelated and independent trustee must be used for the Deferred Sales Trust. When using the installment method under the Deferred Sales Trust, an unrelated third-party trustee thus becomes necessary to effectuate a true transfer of ownership and control of the asset. Any perceived control over the proceeds by the seller will be treated as a constructive receipt. This includes having a “related party” within the meaning of the IRC act as trustee of the Deferred Sales Trust.
WHO ELSE OFFERS THE DEFERRED SALES TRUST?
The Deferred Sales Trust is by the Estate Planning Team (EPT) members along with experienced and specialized attorneys to achieve capital gains tax deferral. The EPT is a membership organization comprised of a network of experienced professionals who offer the Deferred Sales Trust. These professionals include financial advisors, insurance and real estate professionals, business brokers, attorneys, CPAs, qualified intermediaries, and other professional partners.
Successful use of the Deferred Sales Trust structure requires a team of experienced experts in different fields, whose collaboration is critical to a successful result. It is not just the legal and tax structure that is important, but the experience and collaboration of a team.
WHAT OTHER SERVICES DOES FREEDOM BRIDGE CAPITAL PROVIDE?
We specialize only in the Deferred Sales Trust and its related estate planning. Our team concentrates on this one entity to provide unparalleled service.
WHAT IS THE ONGOING PROCESS? WHAT HAPPENS AFTER THE TRUST IS ESTABLISHED?
At Freedom Bridge Capital, our clients are our family. It’s an ongoing relationship. Dr. Steven Demko and our financial team will review your trust and investments with you every quarter.