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Is a Deferred Sales Trust Legal?

Two women at a desk with laptop and paper. Is a deferred sales trust legal?

Deferred sales trusts are increasingly popular as an investment strategy, but is a deferred sales trust legal? This guide explains the pros and cons of deferred sales trusts, and how they can benefit investors who want to defer taxes while investing in different securities or real estate.

What is a Deferred Sales Trust?

A deferred sales trust (DST) is an innovative investment strategy that allows investors to defer taxes on investments. It allows a property owner to sell their property while deferring the capital gains tax they would otherwise have to pay on the sale.

With a DST, the property owner (referred to as the “seller” or “grantor”) transfers ownership of the property to a third-party trust, called the “trustee,” in exchange for an installment note, which represents the right to receive payments over time. The trustee then sells the property to a buyer and holds the proceeds of the sale in the trust on behalf of the seller.

The seller can use the funds in the trust to purchase other assets or investments and receive payments over time. The capital gains tax on the sale of the property is deferred until the seller receives payments from the trust, at which point it is taxed as income.

DSTs are typically used by property owners who are looking to sell their property and avoid paying a large amount of capital gains tax. However, they are complex financial arrangements that should be carefully evaluated and considered in consultation with a qualified financial advisor or tax professional.

Deferred sales trusts have become increasingly popular as a tool for diversifying portfolios and deferring taxes until later years.

Is a Deferred Sales Trust Legal?

The answer is yes, a Deferred Sales Trust is legal. Deferred Sales Trusts are drafted pursuant to Section 453 of the Internal Revenue Code just like an installment sale note. Your capital gain is recognized, but it is deferred over a predetermined period of time that you choose in advance.

Contract Law Principles Supporting the Use of DSTs.

One of the main legal principles that support the use of a deferred sales trust (DST) is the contractual intent between the parties involved. The parties must clearly express their intentions in a legally binding contract. This agreement will include all details surrounding the process, including potential tax consequences and other liabilities. Additionally, contracts may also provide for certain rights and obligations, as well as remedies and damages should any of these terms be violated by one or more parties.

No Guidance from IRS or U.S. Treasury.

Despite the resources and tools available to the public, the IRS and Treasury Department have not taken a specific stance on deferred sales trusts. As such, exactly which types of DSTs are allowed — and even what constitutes a DST — can vary depending on the state in which it is located. Despite this lack of clarity, many professional tax advisors suggest that using a DST can be beneficial for reducing capital gains and other taxes when selling assets from family-owned business.

Is a Deferred Trust Legal For Your Situation?

If you have questions about deferred sales trusts, give us a call at 602-443-4888. We’re here to help.



Founding attorney Paul Deloughery has been an attorney since 1998, became a Certified Family Wealth Advisor. He is also the founder of Sudden Wealth Protection Law.