Blog Layout

How to Use a Deferred Sales Trust to Limit Capital Gains Tax When Selling Your Business

Dan Schmoll • Mar 20, 2024

Another Great Tax Savings Tool

By Dan Schmoll 

Introduction  

A Deferred Sales Trust (DST) is a tested means to defer capital gains tax and reduce the overall tax burden on the sale of real estate, businesses, and other highly appreciated assets. 

 

Background on Deferred Sales Trusts 

Most business owners who are able to sell their businesses have significant capital gains exposure.  In most cases, they are hoping the proceeds of the sale of the business will largely fund their retirement.  The DST is perfect for these owners because they can generate income based on the sales price as opposed to the net proceeds of sale minus the lump sum taxes they would otherwise pay. 


The DST was created as a vehicle under section 453 of the Internal Revenue Code can be used with any kind of entity, e.g. LLCs, S corporations, or traditional C-corps as well as by individuals who own real estate, rental properties, vacation homes, commercial properties, hotels, land, industrial complexes, retail developments or raw land. In fact, there are very few limits on the type of assets that might qualify for tax deferral using a DST.  


Over the long run, the Deferred Sales Trust has the ability to generate substantially more wealth than a direct and taxed sale. It may be superior to the Charitable Remainder Trust, installment sale or like-kind property exchange in many respects. Consult your tax advisor to ascertain the potential benefits of this option. 


The three Most Common Uses for the Deferred Sales Trust 

 

  1. An exit strategy including the sale of appreciated Real Estate, a Business, Collectible, or other high value asset & not repurchase the same asset class.  
  2. This is an option for the 1031 exchange alternative instead of a trade into more real estate.  With a DST you can park your sales proceeds indefinitely or wait for the right deal.  Also if you are transitioning away from real estate this is an excellent approach for you.  
  3. A DST can be used as a 1031 Exchange Rescue.  This is a way out from an exchange that has no suitable upside available in time or is in jeopardy of failing. 


Advantages of a Deferred Sales Trust 

 

Tax Deferral: The primary advantage of a DST is the ability to defer capital gains taxes on the sale of appreciated assets. Instead of paying the full tax liability at the time of the sale, the seller can defer the taxes and potentially spread them out over several years. This can provide significant cash flow advantages and allow for increased investment potential. 

 

Diversification and Investment Options: A DST provides the seller with the opportunity to diversify their investments. Instead of being tied to a specific property or business, the seller can invest the proceeds in a variety of assets, such as stocks, bonds, mutual funds, or even other real estate properties. This diversification can help reduce risk and potentially increase overall returns. 

 

Estate Planning Benefits: By deferring capital gains taxes through a DST, the seller can potentially reduce the size of their taxable estate. This can be beneficial for estate planning purposes, as it may help minimize estate taxes and provide more wealth for future generations. 

 

Flexibility in Timing: The DST offers flexibility in timing the receipt of funds. The seller can choose when and how much money they want to receive from the trust, allowing for strategic planning based on their financial needs and tax obligations 

 

Legacy Planning: A DST can provide a vehicle for charitable giving or leaving a legacy. The trust can be structured to include charitable contributions, allowing the seller to support causes they care about while potentially receiving additional tax benefits. 


Are Capital Gains Holding You Back from Selling? 

 

With over 4,000 DST Transactions totaling $200 Billion in total volume along with a proven track record, this makes the DST a great solution for seller’s business or of highly appreciated assets.  The DST should be offered exclusively through a proven Estate Planning Team.  These professionals should be vetted and help sellers of highly appreciated assets replace income or invest in growth with Tax Deferred proceeds from the sale. 

 

Discuss your specific situation with knowledgeable representatives that are in the industry or that have used a DST.  They should be able to help you determine how a DST can help if you selling your business or other highly appreciated assets.  Ask if they can provide you the solutions and help you keep more of your hard earned money and allow it to work for you with a wide range of investment tools based on your needs and risk tolerance.   


In the meantime, click on the link to here for more about the Deferred Sales Trust, this is a short explainer video. As always, please reach out to us at Landmark Advisors if you we can be helpful in connecting you with Dan Schmoll and the DST professionals who can take care of your needs.  

By Andrew Thompson 12 Apr, 2024
As a longtime consultant to entrepreneurs and startup founders at Landmark Advisors , not to mention a student of ancient scripture, one of the areas that fascinate and drives my efforts for funding and innovation most, is the prospect of improving human health. My interests lie both in the arena of increasing longevity as well as improvements to the quality of life of individuals as they occupy planet earth, and I see these two goals marching forward together rather than in conflict, at least most of the time. In this article, my focus lies more directly on longevity, as it provides a more objective target and there is more historical data from which we can discern what can be done to continue the progression. In the future though, I will dive into topics that address quality of life ("QofL") factors on their own terms, as I find this equally fascinating and of general concern to the human population at large. There are many ways to consider the possibility frontier, history and the hope for human longevity. Because our earliest recordings of human lifespan come from the ancient texts of the Hebrew scriptures, those texts are a great place to start. From Ancient Times to the Present This article is meant to encourage greater entrepreneurial thought around medical advancement and the capacity of for people to live their lives more abundantly, and not meant as an apologetic of Christian or Judaic faith, but as a good frame of reference for this discussion, it's helpful to consider that the patriarchs of the book of Genesis were said to have had very long lifespans compared with today, and then wihin several generations of the longest lifespans ever recorded few, if any people were living beyond the age of 100 years. Today, we see more people living beyond the age of 100 than at any time since teh earliest recorded human histories, but again, almost none are living beyond 120. Nonetheless, the prophets of the Old Testament found reason to believe that this would not always be the case, and the prophet Isaiah, in particular, didn't hesitate to proclaim what he foresaw for the future of human longevity. Interpreting Isaiah 65:20 In the Bible, Isaiah 65:20 mentions people living to be "100 years old," a verse often interpreted symbolically by Christian scholars as a sign of blessings and abundance, but not a literal increase in longevity. Hank Hanegraaff , a prominent Christian apologist, has discussed this verse in the context of biblical prophecy and its symbolic representation of a blessed and fulfilling life. It is difficult to find respected scholars who view this passage as meant to have a literal application, on the other hand, some who interpret it more figuratively seem to suggest that it foreshadows improving life expectancies and better health. In order to resolve an inherent contradiction in this passage, one must either conclude that there is an incremental progression of longevity as the cosmos approaches the new heavens and new earth (the "Whole of Scripture"), or that within the new heavens and new earth, there are people who still die, even if at a hundred years of age (the "Sudden Change"). In the context of Bible scholarship, the latter seems to make no sense. There is a near universal acceptance in the interpretation of the Bible that once the new heavens and earth are fully consummated, there shall or at least maybe a final judgment, but whatever death will occur at that time, the process of aging and death thereafter, will cease. "The last enemy to be defeated is death", etc. This is important because it creates a promise from the ancient scriptures that, understood from the Whole of Scripture, prophesies precisely what has been occurring in the last hundred years of human existence. Revisiting the Genesis Genealogies The genealogies in the book of Genesis, including Methuselah's 969 years, are subject to many different interpretations. Scholars like Dr. Elizabeth Johnson, who favors a symbolic approach to understanding the ages of Bibe patriarchs, suggest these ages may represent the importance of individuals rather than their literal lifespans, however, there is little evidence of how that importance would have been discerned over and against a description of the actual life span thought to be known for each of the patriarchs. Some scholars do debate, however, debate the reasons for a pattern of decreasing life expectancies in Old Testament times. Factors like environmental changes, dietary shifts, and genetic influences could have contributed to variations in lifespans over generations. The general theological supposition about this pattern is that sin had an impact over time that eventually settled in and hit a natural bottoming out, according to God's providence. Historical Stagnation in Life Expectancy Throughout history, factors like infectious diseases, limited medical knowledge, poor nutrition, and high infant mortality rates contributed to stagnant life expectancy, highlighting the challenges of the past. Infectious Diseases: Infectious diseases have historically been a significant contributor to mortality and reduced life expectancy. Documentation from sources like historical medical records, epidemiological studies, and anthropological research showcases the impact of diseases like tuberculosis, smallpox, cholera, and influenza on population health and life expectancy. Research studies provide insights into how diseases shaped human populations and life expectancy over time. Limited Medical Knowledge: Limited medical knowledge in earlier centuries meant that many illnesses and conditions were poorly understood and often untreated. This lack of medical understanding led to higher mortality rates and shorter life expectancies. Historical documents, medical journals, and scholarly articles on the history of medicine offer documentation of the evolution of medical knowledge and its impact on improving life expectancy. Poor Nutrition: Poor nutrition, including inadequate access to nutritious food, deficiencies in essential nutrients, and periods of famine or food scarcity, has been a significant factor in reduced life expectancy. Published studies highlight the link between nutrition and health outcomes throughout history. High Infant Mortality Rates: High infant mortality rates, often due to factors like infections, lack of prenatal care, and poor sanitation, have historically contributed to lower life expectancies. Historical demographic data, mortality records, and studies on child health and survival rates provide evidence of the impact of infant mortality on overall life expectancy averages. By examining historical data, medical literature, and demographic studies, we can gain a comprehensive understanding of how factors such as infectious diseases, limited medical knowledge, poor nutrition, and high infant mortality rates have historically influenced life expectancy trends. Revolutionizing Life Expectancy in the 20th Century Advancements in medical technology, sanitation, clean water access, the use of antibiotics and improved nutrition led to a dramatic rise in life expectancies globally during the 20th century. For most of human history, it’s been estimated that global life expectancy at birth has bounced between 20 and 30 years. Beginning approximately in the year 1820, global life expectancy started its exponential ascent, seeing its most impressive gains after 1950 as modern sanitation and medical advancements began to trickle down to developing nations. Navigating 21st Century Challenges Despite progress, the 21st century faces obstacles such as antimicrobial resistance, rising chronic diseases, healthcare disparities, environmental issues, and global pandemics, impacting life expectancy improvements. During the pandemic, the US saw declining life expectancies for consecutive years, 2020 and 2021, while making a comeback in 2022. It's too early to conclude that this, while directly, is simply a result of the pandemic, or if a reduction was more predictable regardless of the pandemic itself. The two biggest issues connected with longer term trends toward a decrease in life expectancy, however, appear to be mental health and chronic disease, especially diabetes, heart disease and cancer. If you consider mental health to be one of many forms of chronic disease, then every factor contributing to decreasing life expectancies is related to chronic disease. By focusing efforts at improvements in treatment, and most importantly, prevention of these conditions, there is a high probability we can eliminate the negative pressure on life expectancies and return to a long term trajectory of increased life expectancy. Promising Developments for Increased Longevity Exciting advancements in medical technologies, genetics, nutrition research, and healthcare infrastructure, especially in developing nations, provide optimism for extending human life expectancies. We will be developing a series of articles addressing significant innovations that continue to impact both longevity and quality of life as we continue adding content on this subject. There are other remarkable achievements in healthcare: breakthroughs in cancer treatments, cardiovascular disease management, and medical device technology that far exceeds earlier capabilities in all of these areas. All of these advancements in care and prevention have contributed significantly to longer and healthier lives, particularly in regions like Asia and even on the continent of Africa. Anticipating the Future The next 25 year period holds great promise with ongoing medical research, preventive healthcare emphasis, global healthcare accessibility improvements, and efforts to address environmental and social health determinants, potentially extending human life expectancies further. We predict that by 2050, the US will have a life expectancy at birth of between 80-85 years, and that longevity increases in other parts of the world will be even greater than they will be here, more than 10%, for example, in Africa, Latin America and parts of Asia. Conclusion: A Bright Outlook The journey of human longevity reflects a blend of interpretations, scientific advancements, and societal progress. While challenges persist, the trajectory toward longer, healthier lives offers hope for a brighter future, both literally and symbolically. For more information or to discuss scaling an innovative health technology, please contact Landmark Advisors to get started.
The sun is shining through the roof of an abandoned building.
04 Apr, 2024
Transforming a struggling business into a success story requires vision, precise execution, and deep insight. It demands strategic choices and a thorough understanding of the market.
More Posts
Share by: