The Deferred Sales Trust

Compared to the Monetized Installment Sale

Considering a Deferred Sales Trust?

Perhaps as an alternative to a 1031 Exchange?

Did you know there's an alternative that lets you 

obtain cash when you sell

while deferring your capital gain for 30 years?

Learn why DSTs may not be your best capital gain deferral option,

and what to do instead.

A Monetized Installment Sale includes the sale of an appreciated asset in exchange for an installment agreement, which defers capital gains tax under IRS Sec. 453. The future payments received on this note are then monetized via a tax-free loan, providing cash at closing equivalent to 93.5% of the net sales proceeds.

A Deferred Sales Trust is a term used to describe a sale and investment arrangement in which an appreciated asset is sold in an installment sale by a trust which the owner of the asset causes to be formed. The sales proceeds then are invested and managed by the trust. Distributions to the seller from the trust are taxable to the extent that they include return of principal.

The Deferred Sales Trust is more expensive in the long run, requires more effort to maintain and is based on a weaker legal precedent than the Monetized Installment Sale.

The main differences between these two tax strategies are explained below:

Tax Deferral Duration

Deferred Sales Trust

(DST)

Monetized Installment Sale

(MIS)

Depends on installment sale repayment terms. Usually returns taxable principal via amortizing loan payments.

100% for 30 years.

With a DST, the seller can dictate the terms of repayment of the installment sale, which may be regular payments, deferred, or some combination. Usually the arrangement is for an amortizing note, which pays a combination of principal and interest. Capital gains tax is deferred via the installment sale, and tax deferral decreases with any return of principal, usually via amortizing payments annually.

 

Unless the seller instructs the trust to distribute no funds to you for 30 years the seller will receive earlier principal repayment related to the original asset sale than with a Monetized Installment Sale. A MIS completely defers capital gains taxes for 30 years.

Liquidity

Deferred Sales Trust

(DST)

Monetized Installment Sale

(MIS)

Low

93.5% of sale proceeds immediately available in non-taxable cash

If the seller wants liquidity in the form or return of principal from the DST they must sacrifice tax deferral. A MIS provides loan proceeds up front that are non-taxable for 30 years, creating much more liquidity for the seller.

Up Front Cost

Deferred Sales Trust

(DST)

Monetized Installment Sale

(MIS)

Variable trust set-up costs

6.5% of net sales proceeds

DST up-front fees can be as much as 1%-2%, followed by annual fees (see below). A MIS has a one-time 6.5% fee up front, with negligible ongoing fees (see below).

Ongoing Costs

Deferred Sales Trust

(DST)

Monetized Installment Sale

(MIS)

Typically, 1.5% to 2% per year for trust and investment management services

$300 per year escrow fee

Admin & Compliance Burden

Deferred Sales Trust

(DST)

Monetized Installment Sale

(MIS)

Significant admin & compliance

None

With a DST there are many rules and legal restrictions. The IRS examines trusts closely to ensure compliance. The IRS expects trusts to be independent, which means DST participants should not appoint someone related to them by family or business to manage a deferred sales trust. To prevent the trust from being considered a sham by the IRS, there must be a truly independent trustee, which normally would be a fiduciary, which itself entails significant ongoing costs.

 

The fiduciary must be consulted on all decisions, so DST participants are not fully in control.

None of these burdens exist with a MIS.

Ongoing Third-Party Involvement

Deferred Sales Trust

(DST)

Monetized Installment Sale

(MIS)

Trust Manager

Investment Manager

None

The funds in the DST will be professionally managed by a third-party investment firm, which is nearly always not the investment manager the DST participant has worked with in the past. There is usually a significant money management fee charged.

A MIS requires no third-party involvement other than the low-cost long-term escrow to automatically manage payments from the dealer and to the lender and provide reporting of payments.

Control Over Investments

Deferred Sales Trust

(DST)

Monetized Installment Sale

(MIS)

Control Over Investments

Deferred Sales Trust

(DST)

Monetized Installment Sale

(MIS)

Shared with Trust Manager

Unlimited

Shared with Trust Manager

Unlimited

With a DST, the trust manager is responsible for oversight of the trust’s investments. Unlike the DST participant, the MIS participant is completely in control.

Legal Basis

Deferred Sales Trust

(DST)

Monetized Installment Sale

(MIS)

None

IRS Memorandum approving a specific monetized installment sale

The Monetized Installment Sale is patterned after the IRS General Counsel Ruling in 20123401f and is based on a similar transaction that at least ten public companies have implemented and continue to report in the public SEC filings. These transactions were implemented with the full disclosure and acquiescence of the companies’ management, outside auditors, in-house counsel, and the public.

 

For a time, the Deferred Sales Trust was based on a private letter ruling (200944002). However, the IRS rescinded it shortly thereafter, although this was based on a determination that the taxpayer misrepresented the facts of the case (rather than the substance of the law).

Deferred Sales Trust Problems Are Avoidable

Before deciding to set up a Deferred Sales Trust, talk with us about the Monetized Installment Sale. This option can provide you with far greater liquidity while deferring capital gains tax for up to 30 years.

 

If you are in a 1031 exchange that can’t close, and you are searching for a DST alternative to defer capital gains tax, give us a call. We can walk through the numbers with you in just a few minutes, so you can talk it over with your tax advisor.

It’s your money…do you want it now, or do you prefer to put it into DST investments for an indeterminate time period, with money managers, management fees, and limited access and control? You decide.

How to Defer Capital Gains Tax for 30 Years

and

Simultaneously Obtain Cash

Equal to 93.5% of Your Net Sales Proceeds

(2:20 video)

Learn More

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