How Does a Deferred Sales Trust Work?

Are you looking for a way to defer capital gains taxes on the sale of a highly appreciated asset? A deferred sales trust might be the solution you need. At Pennington Law, PLLC, our experienced deferred sales trust attorneys can help you understand this complex but powerful financial tool. Call or contact us online to learn how a deferred sales trust can benefit your estate planning strategy. The first consultation is free.

Introduction to Deferred Sales Trusts (DSTs)

A deferred sales trust is a sophisticated legal arrangement that allows you to sell a significantly appreciated asset while deferring capital gains taxes. This valuable tool can be handy for individuals looking to sell real estate, businesses, or other valuable assets without immediately facing a substantial tax burden.

You might consider a DST if you find yourself in situations like these:

• You are a business owner planning to sell your company and want to spread out the tax impact over several years.
• You own investment property that has significantly appreciated and want to sell it without a large, immediate tax bill.
• You are approaching retirement and want to sell assets to diversify your portfolio without triggering a substantial tax event.
• You have inherited valuable property and want to sell it while managing the tax implications.

A deferred sales trust lawyer from Pennington Law, PLLC can guide you through the setup and management of a DST. We aim to help you maximize the benefits of this strategy while ensuring compliance with all relevant tax laws and regulations.

How a Deferred Sales Trust Differs from a Traditional Trust

While the primary uses of traditional trusts are for estate planning and asset protection, a deferred sales trust serves a unique purpose. Here is how a DST differs from other types of trusts:

• Tax deferral – Unlike traditional trusts, DSTs are specifically designed to defer capital gains taxes on the sale of appreciated assets.
• Flexibility – DSTs offer more flexibility regarding investment options and distribution schedules than most traditional trusts.
• Specialized structure – DSTs involve a third-party trustee and an installment sale agreement, which are not typical features of traditional trusts.

Our estate planning lawyers can help you understand these differences and determine whether a DST aligns with your financial goals.

How Deferred Sales Trusts Provide Tax Deferral

The tax deferral benefit of a DST stems from its unique structure:

• You transfer your appreciated asset to the deferred sales trust before selling it.
• The trust then sells the asset to a buyer.
• Instead of receiving the sale proceeds directly, you receive an installment note to disburse the proceeds based on a chosen schedule.
• The sales proceeds, now in the trust, are invested.
• You receive payments from the trust based on the terms of the installment note, deferring capital gains taxes and reducing your tax burden.

This structure allows you to spread your tax liability over many years, potentially resulting in significant tax savings. An experienced Arizona deferred sales trusts lawyer can help structure the installment note to suit your financial needs and tax situation.

Types of Assets Eligible for Deferred Sales Trusts

Deferred sales trusts can be used with a wide variety of appreciated assets, making them a versatile tool for many investors and business owners. Some common types of assets you can place in a DST include:

• Real estate (residential, commercial, or investment properties)
• Businesses or business interests
• Stocks and other securities
• Artwork and collectibles
• Intellectual property

At Pennington Law, PLLC, we can help you determine if your specific assets are suitable for a DST and structure the trust to meet your needs.

The Role of the Trustee in a Deferred Sales Trust

The trustee in a deferred sales trust is responsible for:

• Managing the trust assets
• Investing the sales proceeds 
• Making distributions to you according to the terms of the installment note

Selecting a suitable trustee is critical to the success of your DST strategy. The wealth management and estate planning team at Pennington Law, PLLC can help you choose a qualified, experienced trustee so that the trust operates smoothly and efficiently.

Benefits of a Deferred Sales Trust for Estate Planning

Beyond tax deferral, a DST can offer several benefits as part of your overall estate planning strategy:

• Asset protection – The deferred sales trust can shield assets from creditors and legal judgments.
• Wealth preservation – By deferring taxes, you keep more of your wealth working for you over time.
• Flexible income planning – You can structure the installment payments to align with your income needs in retirement.
• Estate tax reduction – The DST can potentially reduce the size of your taxable estate.

Our estate planning lawyers can help you integrate a deferred sales trust into a comprehensive estate plan, ensuring it works in harmony with your other estate planning tools and strategies.

Is a Deferred Sales Trust Right for You?

While deferred sales trusts offer significant tax benefits, they might not be the right solution for everyone. Consider a DST if you:

• Have a highly appreciated asset you’re planning to sell
• Want to defer a large capital gains tax bill
• Wish to find ways to manage your tax liability in retirement
• Need flexibility in how you receive the proceeds from an asset sale

However, DSTs are complex legal structures that require careful planning and ongoing management. It is crucial to work with experienced professionals who understand the intricacies of these wealth management tools.

The deferred sales trust lawyers at Pennington Law, PLLC can help you understand whether a DST is the right choice for your situation. We will evaluate your financial situation, learn your financial needs and goals, and guide you through the process of setting up a deferred sales trust if you decide it is an appropriate strategy for you.

Contact Us to Learn More About Deferred Sales Trusts and Estate Planning

Ready to explore how a deferred sales trust could benefit you? Contact Pennington Law, PLLC today for a free consultation with one of our experienced estate planning attorneys. We can help you make informed decisions about your financial future and legacy.