Spread the tax on a sale across years, not one closing day.
A deferred sales trust lets a seller who's selling a business or other appreciated asset receive the proceeds over time through an installment note, and recognize the capital gain as the payments come in.
It can be a powerful tool. It's also one the IRS looks at closely, so it has to be designed, sequenced and documented properly. That's the work we do.
How it works.
Before the sale, you sell the asset to a trust run by an independent trustee in exchange for an installment note. The trust then sells the asset to the buyer. Because the trust bought it at its current value, it generally owes little or no tax on that resale.
The trust invests the proceeds and pays you under the note. Under IRC Section 453, you recognize the gain as you receive principal, so the tax is spread across the life of the note.
- The sale to the trust has to happen before any binding sale to the buyer
- The trustee must be truly independent, never you or an entity you control
- The note needs a market interest rate and a real payment schedule
Deferred sales trust or 1031 exchange.
A 1031 exchange defers gain on real estate only if you reinvest in like-kind property on a strict timeline. A deferred sales trust doesn't require reinvesting in a like-kind asset, can be used for a business as well as real estate, and lets the proceeds be invested more broadly.
The trade-off is complexity, the cost of the trustee and ongoing administration, and the fact that you're relying on the trust's investments to pay the note. It's not the right answer for everyone, and we'll tell you if it isn't for you.
What we handle.
We set up the structure before signing and stay involved through closing and the years of payments that follow.
- Fit analysis: does a DST make sense against the alternatives?
- Independent trustee selection and trust formation
- Installment note design and gain recognition modeling
- Closing sequence: sale to the trust, then the trust's sale to the buyer
- Coordination with the buyer's counsel, escrow and your accountant
- Ongoing reporting and coordination with your estate plan
Deferred Sales Trusts: common questions
What is a deferred sales trust?
It's a structure in which you sell an appreciated asset to a trust in exchange for an installment note. The trust sells the asset to the buyer and pays you over time, and you generally recognize the capital gain as you receive payments, under the installment sale rules of IRC Section 453.
What can be sold through a deferred sales trust?
It's most often used for a business or appreciated real estate. Some assets, like publicly traded stock and inventory, aren't eligible for installment treatment, and some income, such as depreciation recapture, is taxed in the year of sale regardless.
Is a deferred sales trust legal?
It relies on long-standing installment sale rules, but it isn't a structure the IRS has specifically approved, and it gets scrutiny. A properly independent trustee, correct sequencing and real economic terms are essential. That's why it should be set up by counsel, not a promoter.
When do I need to set it up?
Before you sign a binding agreement with the buyer. If the sale to the buyer is already committed, the structure generally can't be used.
Weighing a deferred sales trust?
Tell us about the asset, the buyer and where the deal stands. We'll review it and tell you whether it fits.