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CAPITAL GAINS TAX FAQS

Deferred Sales Trust FAQs

The Deferred Sales Trust can help business owners defer capital gains tax. This legal and time-tested strategy of capital gains deferral is not very well-known, so it’s normal to have questions. For many business and property owners, they have never heard of the Deferred Sales Trust.

Even many financial advisors and tax professionals are unaware of the benefits of using a DST. We’ve put together a list of the most common questions we receive in order to help you better understand this way of potentially deferring capital gains tax on the sale of your company, practice, or real estate. Additionally, our Deferred Sales Trust specialists at Freedom Bridge Capital are here to help answer your questions in more detail.

GENERAL QUESTIONS

WHAT IS A DEFERRED SALES TRUST?

A Deferred Sales Trust is a method used to defer capital gains tax when selling real estate, businesses, cryptocurrency, or other highly appreciated assets that are subject to capital gains tax. Instead of receiving the sale proceeds at closing, the money is put into a trust and only taxed as the funds from the sale are received.

HOW DOES THE DEFERRED SALES TRUST WORK?

The Deferred Sales Trust acts as a third party between the seller and buyer. Traditionally, if you own a business or property that you’re looking to sell, you would sell that property to a buyer and receive your profit. Once you receive your profit, however, you have to pay what is known as capital gains tax on the profit of your sale.

With the Deferred Sales Trust, you do not sell your asset directly to the buyer. Instead, you sell your asset to the trust. We then sell your asset to the buyer. And instead of getting a lump-sum payment for your asset, you receive a promissory note that promises to pay you your proceeds in monthly installments.

You, as the seller, determine how you want your proceeds paid to you. You have the option of the trust investing your entire proceeds, which can defer capital gains tax and generate monthly income in the form of interest per the terms of your promissory note. You can also take a portion of your proceeds and pay capital gains tax on that portion only.

WHAT IS THE GREATEST ADVANTAGE OF USING THE DEFERRED SALES TRUST?

There are many advantages of using the Deferred Sales Trust, most importantly being that the ability to defer the taxes allows you, the seller, to earn interest on untaxed sales proceeds. This is of the utmost importance in preserving your wealth. By deferring your tax burden on highly appreciated assets, you may be able to generate substantially more wealth over the long term than a direct and taxable sale.

You can control the timing of tax payments while also managing your tax rate risk.

WHY HAVEN'T I HEARD OF THE STRUCTURE BEFORE? WHY HASN'T MY ACCOUNTANT, FINANCIAL ANALYST, AND OR ATTORNEY HEARD OF THE STRUCTURE BEFORE AND WHY DID THEY NOT RECOMMEND IT TO ME?

We have our own closed network, and if your advisors are not in our network, chances are, they haven’t heard of this structure.

Furthermore, the job of most CPAs is compliance and not necessarily performing due diligence on tax strategy.

DOES THIS MEAN I NEVER HAVE TO PAY CAPITAL GAINS TAXES?

No, the structure allows you to defer your capital gains taxes by establishing an installment sale under the IRC 453, using a 3rd party trustee. This allows you to tax engineer, paying taxes at a later date when it's more advantageous to your income situation.

The amount of capital gains tax you defer will depend on how you structure your monthly payments. If you decide that you want the trust to pay you a portion of the profits from your sale (the principal) every month, then you will have to pay capital gains tax on that portion of the principal only.

To defer your capital gains tax, your monthly payments can be structured so you only receive the interest on your investment each month. You do not need to pay any capital gains tax on the interest made from your investments in the trust. If you do not take out any principal, then you do not need to pay capital gains tax. You can keep deferring your capital gains tax by keeping your principal invested by the trust and making money off the interest.

MORE INFORMATION

HOW CAN THE DEFERRED SALES TRUST HELP ME DEFER CAPITAL GAINS TAX?

The biggest advantage of the Deferred Sales Trust is its ability to defer capital gains tax. But why are you able to defer it? The reason is that you are avoiding “constructive receipt,” which is an accounting term that requires an individual or business to pay taxes on income despite the fact that the money has not yet been received in actuality. Constructive receipt matters for reporting taxable income – especially under the cash-basis method of accounting.

By selling your asset to the trust, you are not selling directly to the buyer. The trust sells your asset to the buyer, which avoids constructive receipt. As a result, your capital gains taxes are deferred under IRC 453 of the tax code.

WHAT IF THE CAPITAL GAINS TAX RATES CHANGE?

From time to time, the issue of adjusting the capital gains tax rates is discussed. If the capital gains rates are changed by law, then you would be subject to the new rate. But remember, you only need to pay capital gains tax if you decide to withdraw some of your principal (or profit) from the sale. You do not need to pay any capital gains tax on the interest you make from your investments.

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WHO CAN SELL ASSETS TO THE DEFERRED SALES TRUST?

What sets the Deferred Sales Trust apart from other capital gains tax solutions is its flexibility. If you own any kind of business, medical practice, or real estate, you may be able to sell your assets to the Deferred Sales Trust and defer capital gains tax. Our professionals at Freedom Bridge Capital offer a free DST analysis to help determine if the Deferred Sales Trust is right for you.

IS THE DEFERRED SALES TRUST THE SAME AS A MONETIZED INSTALLMENT SALE?

No. The structure is different. The IRS has recently cracked down on monetized installment sales and released an analysis done by the Office of Chief Counsel, citing 6 ways that the transaction does not work as claimed.

DO YOU DO ESTATE PLANNING?

Yes, that is one of the services provided by Freedom Bridge Capital. An attorney who is certified in estate planning will discuss your options and provide proper guidance for your family to settle your trust.

CAN YOU DESCRIBE THE DEFERRED SALES TRUST PROCESS?

In short, a Deferred Sales Trust (DST) is a trust that utilizes the installment sale under the Internal Revenue Code (IRC) §453 to defer the taxes due on the sale of a highly appreciated asset. This includes family-owned and closely-held businesses, real estate, rental properties, vacation homes, commercial properties, cryptocurrency, vacant land, industrial complexes, retail developments, farm ground, or other capital assets.

Once the closing of the sale commences, the trustee of the Deferred Sales Trust then purchases the asset from the seller and the seller receives an installment sales contract or promissory note. The terms of the promissory note will be determined based upon the factors negotiated by the seller noted above.

WHAT ARE MY RIGHTS AS THE SELLER?

At the completion of closing, the seller becomes a noteholder and creditor of the trust.

WHAT IS THE ROLE OF THE TRUSTEE?

An unrelated and independent trustee must be used for the Deferred Sales Trust. When using the installment method under the Deferred Sales Trust, an unrelated third-party trustee thus becomes necessary to effectuate a true transfer of ownership and control of the asset. Any perceived control over the proceeds by the seller will be treated as a constructive receipt. This includes having a “related party” within the meaning of the IRC act as trustee of the Deferred Sales Trust.

WHO ELSE OFFERS THE DEFERRED SALES TRUST?

The Deferred Sales Trust is by the Estate Planning Team (EPT) members along with experienced and specialized attorneys to achieve capital gains tax deferral. The EPT is a membership organization comprised of a network of experienced professionals who offer the Deferred Sales Trust. These professionals include financial advisors, insurance and real estate professionals, business brokers, attorneys, CPAs, qualified intermediaries, and other professional partners.

Successful use of the Deferred Sales Trust structure requires a team of experienced experts in different fields, whose collaboration is critical to a successful result. It is not just the legal and tax structure that is important, but the experience and collaboration of a team.

WHAT OTHER SERVICES DOES FREEDOM BRIDGE CAPITAL PROVIDE?

We specialize only in the Deferred Sales Trust and its related estate planning. Our team concentrates on this one entity to provide unparalleled service.

WHAT IS THE ONGOING PROCESS? WHAT HAPPENS AFTER THE TRUST IS ESTABLISHED?

At Freedom Bridge Capital, our clients are our family. It’s an ongoing relationship. Dr. Steven Demko and our financial team will review your trust and investments with you every quarter.

LEGAL QUESTIONS

IS THE DEFERRED SALES TRUST LEGAL?

The Deferred Sales Trust is classified as an installment sale that is recognized under IRC 453 of the tax code. When you sell your asset to the trust, we sell it to the buyer for you. This installment sale fulfills the requirements of Section 453 of the IRS tax code. The proceeds of the sale are then reported to the IRS using Form 6252.

MORE INFORMATION

“As part of the deferred sales trust, you are offered audit defense. You are represented at no additional cost for the life of the trust.”

WHAT IF I GET AUDITED?

If your trust is ever audited, you are represented by our legal team, at no cost, for the life of the trust.

WHAT IS THE GOVERNMENT’S POSITION ON THE DEFERRED SALES TRUST?

The Deferred Sales Trust and IRC §453 is favorable as the government receives the capital gains taxes on the appreciated property at some point in time, unlike other transactions with a step-up in basis where the government may never see any tax revenue.

MORE INFORMATION

TAX & INVESTMENT QUESTIONS

IS MY MONEY SAFE IN THE DEFERRED SALES TRUST? HOW AM I PROTECTED?

Once your trust is established and your money is deposited into the trust, you are given a promissory note by your trustee. This is a written agreement between you and the trustee on how much and when you would like to receive money from the trust. You can choose to only receive payments on the interest earned or structure principal payments.

The Deferred Sales Trust is a proven tax-deferral strategy with a track record spanning two decades and thousands of sales. Your money is safeguarded and there is full transparency of the funds.

When you sell your asset to the trust, the proceeds will be transferred from the trust to an agreed-upon financial institution. When the funds get there, they go into the name of the trust.

WHO MANAGES MY MONEY IN THE DEFERRED SALES TRUST?

Our wealth management team helps facilitate the direction of the trust investments. The funds are held by a custodian. The Freedom Bridge Capital team works with you to help offer guidance and create an investment plan that best fits your goals as a creditor.

HOW AM I TAXED ON MY EARNINGS IN THE DEFERRED SALES TRUST?

Anything that grows over the original invested amount is taxed as ordinary income; this is separate from capital gains tax.

You do not pay capital gains tax on the accrued interest, however. You only pay capital gains tax on the principal of your sale. If you take out a portion of the principal, you pay capital gains tax for that portion only.

HOW IS MY MONEY INVESTED?

After your risk tolerance questionnaire has been completed, an allocation will be developed, which determines how and where the funds of the Deferred Sales Trust are invested. Upon the Deferred Sales Trust’s receipt of the sales proceeds from closing, the funds will be invested according to the allocation that’s been agreed upon by you and the DST trustee. Acceptable trust investments typically include but are not limited to: stocks, bonds, mutual funds, securities, ETFs, REITs, annuities, and managed accounts.

HOW AM I TAXED ON THE DISTRIBUTIONS OF THE TRUST?

The interest payments received under the promissory note will be treated as ordinary income and will be subject to taxation at the noteholder's applicable income tax rate. Ultimately, when the principal payments are made to the noteholder, in periodic payments or a balloon payment at the maturity of the term of the promissory note, the capital gains taxes are paid accordingly.

CHARGES & FEES QUESTIONS

HOW MUCH WILL THIS COST ME, THE SELLER?

Cost is minimal compared to what you will pay in capital gains taxes. Fees are based on case complexity and amount of transaction and will be provided to you during your initial analysis. There is no fee for initiation, consultation, or establishing your trust.

WHAT IF I CHANGE MY MIND & DECIDE NOT TO JOIN THE TRUST? AM I STILL CHARGED?

No. Freedom Bridge Capital charges contingency fees, meaning that you are not charged until after the official agreement. If you contact us, start the process, and change your mind before agreeing, then you are not charged anything. If the buyer backs out of the sale, you are not charged anything. Only if the sale is agreed upon and completed are you charged for closing costs and annual fees.

“When you become engaged with the Freedom Bridge Capital DST, there are no fees until settlement. If the buyer walks away, there is still no cost to you. If you decide that you do not like the process, there is still no cost to you.”

WHAT ARE THE PREPARATION COSTS?

There are no preparation costs and no fees due until the deal closes.

DOES THE DEFERRED SALES TRUST WORK FOR ANY AMOUNT? IS THERE ANY MINIMUM TRANSACTION AMOUNT?

We have found that a seller that is facing a taxable gain or capital gains plus depreciation recapture of about $250,000 or more is a very good candidate.

SCHEDULE YOUR FREE VIDEO CONSULTATION

A ONE-ON-ONE WITH OUR DST TRUSTEE

Schedule a free video consultation with our deferred sales trust specialists today! Our estate planning team offers complimentary DST analyses to determine your estimated tax savings using the deferred sale trust investment strategy. We’re here to answer any questions you may have about the deferred sales trust and help you get started on the sale of your company, practice, or property.

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HOW DO I LEARN MORE ABOUT YOUR DST TO DEFER CAPITAL GAINS TAX?

The Freedom Bridge Capital team would be happy to speak with you in more detail regarding the Deferred Sales Trust to defer capital gains tax. Please give us a call at 800-897-0212 or request your free DST analysis today by filling out the form below.