Deferred Sales Trust in Buckeye - Pennington Law, PLLC

Are you looking to sell a high-value asset while avoiding the impact of capital gains taxes on the proceeds? At Pennington Law, PLLC, we have extensive experience helping clients set up deferred sales trusts (DSTs) in accordance with Arizona and federal tax laws, allowing them to mitigate capital gains taxes and preserve family wealth.

What is a Deferred Sales Trust?

A deferred sales trust (DST) is a legal strategy used to mitigate or defer capital gains taxes on selling an asset that has increased in value. It allows an asset owner to delay capital gains tax liability by transferring the asset they wish to sell to a trust in exchange for an installment contract or note, under which the owner receives payments from the trust for the sale proceeds. DSTs take advantage of installment sale treatment under §453 of the Internal Revenue Code.

How Does a Deferred Sales Trust Work?

In the DST process, the seller creates an irrevocable trust and sells the asset to the trust in exchange for an installment payment note or contract. The contract entitles the seller to payments from the trust, including interest, usually spread out over five to ten years or more. The seller does not become an owner or beneficiary of the trust; instead, the seller becomes a creditor through the installment payment contract.

After taking ownership of the asset, the trustee of the deferred sales trust will immediately sell the asset to a buyer for the same price the trust paid to the seller under the installment payment contract, resulting in no financial gain or loss for the trust. The trustee, usually a third-party financial or investment advisor, will invest the sale proceeds and use the income from those investments to pay the seller per the terms of the installment payment contract. The trustee can invest the sale proceeds into market securities, annuities, bonds, certificates of deposit, real estate investment trusts, or income-generating real estate.

The DST then allows the seller to spread capital gains tax liability over the term of the installment payment contract, as the seller only pays capital gains tax on principal payments received from the trust.

Benefits of a Deferred Sales Trust for Buckeye Residents

Using a deferred sales trust (DST) for the sale of a valuable asset can offer several benefits, including:

Deferral of Capital Gains Taxes – DSTs allow sellers to defer payment of capital gains taxes until they receive principal payments from the trust under the installment payment contract. Sellers can, therefore, spread out tax payments or time when capital gains tax liability takes effect so they can take advantage of other tax benefits that can mitigate capital gains liability.
Estate Tax Freeze – Asset owners might use DSTs to transfer assets or wealth to family members or beneficiaries to mitigate estate tax liabilities for the owner’s estate. DSTs can also help avoid the time and expense of including a complex, valuable asset in probate.
Preserving Family Wealth – Sellers can structure installment payment contracts to keep the principal sale proceeds in the trust, minimizing capital gains taxes and allowing sellers to pass that wealth to family members or beneficiaries.
Avoids Limitations of Section 1031 Exchange – Deferred sales trusts do not have many of the same limitations as 1031 exchanges, which are tax-deferred exchanges for selling one investment property for another. Section 1031 exchange limitations include strict timeframes for completing the transaction and “like-kind” exchange requirements (requiring the new property to be of equal or greater value than the property being sold).

Requirements for a Deferred Sales Trust in Arizona

To qualify for deferral of capital gains taxes, a DST must meet several requirements, including:

Bona Fide Third-Party Trust – The trust must employ a trustee completely independent from the seller. If a trustee has any affiliation with the seller, or the seller can exercise control over the trustee, the IRS may consider the DST a sham trust.
Sale Proceeds Go to the Trust – The seller cannot receive any direct proceeds from the asset sale. Instead, the trust must take legal title to the sale proceeds directly from the buyer or a third-party intermediary.
Pre-Sale Trust Formation – The seller must establish the trust before the asset sale occurs or before the applicable tax trigger date. The seller must transfer the asset to the trust before the sale to the buyer occurs and cannot retain any beneficial interest in the asset.
Due Compensation – Sellers can only use DSTs to transfer assets or interests to third parties when the trust receives fair value compensation.

What Assets Are Suitable for a DST?

Individuals or businesses might use a deferred sales trust to defer capital gains taxes for high-value assets that have appreciated significantly in value during ownership. Assets valued at over $1 million can justify the administrative costs of a DST. Examples of assets that you might use a deferred sales trust for include:

Business ownership interests
Stocks, cryptocurrencies, or other investments
Real property, including commercial or income-generating real estate
Artwork
Antiques or collectibles
Jewelry

Choosing the Right Deferred Sales Trust Lawyer in Buckeye

Setting up a DST requires careful planning to avoid the IRS viewing the deferred sales trust as a sham and accelerating capital gains tax liability. As such, you should consult an experienced deferred sales trust attorney to help you determine whether you should use a DST and ensure your trust meets the legal requirements. Look for an attorney with extensive experience setting up deferred sales trusts under Arizona and federal tax laws, as the right attorney can:

Explain the benefits of DST, including the postponement of capital gains taxes
Advise you of potential drawbacks, like loss of investment value or future tax law changes to DSTs
Set up a DST on your behalf and guide you through critical choices, including independent trustee selection and trust and installment payment contract establishment

If you’re interested in selling a high-value asset, a DST can help you manage the financial consequences of capital gains taxes. Contact Pennington Law, PLLC, today for an initial consultation with a Buckeye deferred sales trust lawyer. Discover the suitability of a DST for your situation and learn more about the process of establishing a deferred sales trust in Buckeye.