With the all-time highs in the marketplace, highly appreciated asset owners are thinking more about diversifying their equity using The Deferred Sales Trust™ (“DST”) because who knows how long this bull market will last. I remember the 2008 great economic crash like yesterday. I wish someone had told my friends, family, and clients about the Deferred Sales Trust (DST) earlier. That doesn’t have to happen again if you know and understand what the Deferred Sales Trust is and how the funds are protected.
The answer is yes.
In a previous article, we discussed Why You Should Consider Using the Deferred Sales Trust (DST) Now More Than Ever and does the IRS Allow The Deferred Sales Trust? So far, the answer is yes. Once the legal confidence of the structure has been established, the next logical question is on the continued operation of the DST and how and where the funds are invested to pay you back per the terms of the secured installment note. In the context of the DST, “secured” is defined as all of the assets in the DST serving as collateral. Examples of this would be private or syndicated real estate, business ventures, own nothing but control everything, hard money lending, investment real estate development(s), mutual funds, ETFs, REITs, stocks, bonds, managed accounts, annuities, life insurance, etc. These assets are the security for repayment of the cash to you per the terms of the promissory note. Remember, you are now the lender to the DST and the DST owes you back the money it borrowed when it purchased the asset from you plus a rate of return, typically 8% compounding, over a specific period of time (usually 10 years). This term of 10-years, however, can be renewed every 10 years for 10 more years and passed in your living trust to your heirs.
The answer is securely with some of the largest investment banks in the world. Investments and movement of cash take your written authorization. As a secured lender, nothing moves without your prior approval. What else goes into this? This starts with the transaction itself when a third-party controlled bank account is set up to receive and secure the proceeds from the sale of your appreciated asset(s). Once the funds are secured, the next likely destination is to transfer the DST funds to an institutional investment custodian such as TD Ameritrade, Charles Schwab, Asset Mark, Bank of New York, etc. Before investments are made, a risk tolerance questionnaire is filled out by you. This becomes the foundation for how and where the funds are invested. It’s important to understand, and necessary for tax deferral, that Capital Gains Tax Solutions (CGTS) serves as a DST Trustee and makes all DST investments on your behalf based on the risk tolerance questionnaire; however, CGTS cannot do this without your prior written approval. The bank acts as a de facto escrow agent to verify the signed instructions and then carry out the instructions. CGTS works with experienced and vetted financial investment advisors and investment real estate syndicators to help make suitable and prudent recommendations. The final approval with regard to those recommendations rests with the secured lender, which is you.
A significant benefit of using a Deferred Sales Trust™ is that there are a broad variety of investments that can be selected to secure the principal and the return specified in the note, as opposed to a 1031 exchange where only compliant, like‐kind property (generally real estate) can be acquired with the pre‐tax proceeds. The 1031 exchange also has strict time restrictions of 45 days to identify a like-kind replacement property and 180 days to close escrow. The Deferred Sales Trust has zero time restrictions meaning you can sell high and buy low and dollar cost average into investments methodically which can lower your risk.
In a traditional installment sale, the only asset that has the ability to pay you back is the asset you sold. The challenge is you no longer control it. In most cases these short-term notes (usually 3-5 years) are secured against real estate or a business that is illiquid, meaning that it is a slow process and can take years to foreclose on the asset should the borrower stop paying you. Compare this to the Deferred Sales Trust (DST) options for investments where your collateral can be investing into liquid and diversified investments that you must approve.
John D. Rockefeller once stated, “Own nothing, but control everything.” In summary, he meant ‘what you don’t own can’t be taken from you.’ This is the number one fundamental rule of an asset protection plan that many people forget about and is one of the most commonly undervalued or overlooked advantages of the Deferred Sales Trust (DST). For example, let’s say someone sues you and obtains a judgment against you. The bad news is you are legally obligated to pay the judgment, however, the good news is the principal and earnings held by the offshore trust are generally out of reach since the DST owns the assets in it and not you. Remember, you are the secured lender. An important point to make here is the judgment holder might be able to access the distributions the DST is paying you. The reverse also works in your favor in case you’re wondering, “What if someone obtains a judgment against the Trustee (CGTS)?” In this scenario, the DST fund protection here is stronger than before since the Trustee is a fiduciary who manages and disburses the trust assets for the trust secured creditor (you) and by structure has no ownership in or claim to either the trust assets or the monies distributed to you per the installment sale agreement.
The (DST) has a proven track record and can give you debt freedom, liquidity, diversification, ability to move funds outside of your taxable estate all while not using a 1031 exchange. We don’t want you or your clients to have to feel trapped by capital gains tax or a 1031 exchange ever again. Here’s to feeling safe and secure with the management of the Deferred Sales Trust funds and to making the best decision for you, your family, and your estate, no matter if and when this bull market finally takes a dive.
Brett is the Founder of Capital Gains Tax Solutions and host of the Capital Gains Tax Solutions podcast. Each year, he equips hundreds of high-net-worth individuals and business professionals with the Deferred Sales Trust strategy to help their high net worth clients solve capital gains tax deferral limitations. Brett was formerly an associate at one of the largest CRE Brokerage firms in the country (Marcus & Millichap), and is also a Sacramento Multifamily Broker with eXp Realty. Brett lives in Roseville California, with his wife, Melanie, and their 5 children.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.