What is a Deferred Sale Trust?
We often utilize trusts in asset protection and tax planning strategies. “Deferred sale trust” can mean a few different things in different cases, though, ultimately, it’s basically just dressing up other trusts, putting some special verbiage on it, and making it seem like a fancy new, unique legal vehicle for your assets. I’ll describe two ways that I’ve seen people use the term “deferred sale trust.”
Two Main Examples of a “Deferred Sale Trust”
1031 Exchange Trust
The first way I often see it used is in a 1031 Exchange. This is where you’re deferring gain on a sale, typically in real estate. In this scenario, you’ll put the assets in a trust and under Internal Revenue Code, Section 1031, you’re allowed to exchange like-type assets for other like-type assets. You can put one piece of property in, and take one out, effectively swaping for another piece of real property, and you can defer any gain in value on the transaction.
This isn’t treated as a sale, and if you were to go and swap in another type of asset, like stocks that you have in your portfolio, you’re gonna trigger a gain. That’s not going to work because those are not like-kind properties. Without getting too deep, this got restricted a few years ago, but you can still do this with real estate.
What this ultimately means is you’re deferring this gain until you actually sell the property.
Installment Sale of Assets
The other way I’ve seen a “Deferred Sale Trust” employed is when you put assets in a trust and then sell it to somebody else with installment payments. As you receive payments on the note, you’re recognizing the gain as a percentage of each payment.
Let’s say you’re selling an asset that’s worth a hundred dollars over 10 years, taking payments of $10 a year (we’ll ignore interest for right now). if your basis in that property (what it cost you) was $60, that means you’re getting $40 of total gain.
What will happen is, each year you receive $10, we count $6 of that as a return of your principle for the basis, so no tax on that. You’re also receiving $4 in gain or profit each year, and you’re going to pay tax on that. So you’ve got $40 of total gain, but instead of paying tax on it all in one year, you’re gonna spread it out over 10 years, and you’ll pay for that gain in bits and pieces.
A deferred sale trust is not a particular type of trust, per se, but more of a marketing term for a trust designed to delay or defer tax payment on profit of the sale of asset. Sometimes this is because like-kind real estate assets are swapped into the trust, in other cases, we’re chopping the sale into smaller pieces, and paying the taxes gradually. In either case, the trust is the vehicle by which we make this possible.
Have you just welcomed a new child to the family? You, as a parent, want to make sure you're doing everything you can to protect your children. So what legal documents do you need in place to make sure your family is secure and protected? I'll detail the top four you'll need to consider.
"Deferred sale trust" can mean a few different things in different cases, though, ultimately, it's basically just dressing up other trusts, putting some special verbiage on it, and making it seem like a fancy new, unique legal vehicle for your assets. I'll describe two ways that I've seen people use the term "deferred sale trust."