Leveraging Deferred Sales Trusts for Strategic Tax Management

Mallon FitzPatrick, CFP®, AEP®, CLU®

DSTs enable sellers of businesses or real estate to invest the proceeds while controlling the amount and timing of tax liabilities.

Key Points
• The trust can help control the amount and timing of tax liabilities.
• It’s often used when selling businesses or real estate.
• The seller avoids credit risk and gets tax deferrals from an installment sale.

Understanding a Deferred Sales Trust

In the ever-evolving landscape of wealth management, advisors continually seek innovative strategies to meet their clients’ financial planning objectives.

One such approach that has gained traction recently is the Deferred Sales Trust (DST), especially as discussions around tax deferral strategies flourish. These discussions are often sparked by media coverage that emphasizes the specific advantages of DSTs in certain scenarios. However, while a DST offers potential benefits, its appropriateness depends on the individual situation.

The Deferred Sales Trust is a tax deferral mechanism that utilizes a Section 453 installment sale to help control the amount and timing of tax liabilities. It’s typically used when selling significant assets like businesses or real estate. Unlike direct installment sales, DSTs provide sellers with enhanced control over structuring their payment terms. This allows the seller to defer tax liabilities while strategically investing the entire proceeds of the asset sale.

How it Works

In a traditional installment sale, the asset owner typically sells directly to a buyer. However, in the DST model, the asset is first transferred to an irrevocable trust in exchange for an installment note; the trust then finalizes the sale with the buyer.
The trust reinvests the proceeds, and payments are distributed to the seller over time, as specified in the installment note. The seller incurs taxes only upon receipt of the payments.

Through this strategy, sellers not only sidestep direct buyer-seller interactions that pose credit risks, but they also can take advantage of the tax deferral benefit offered by an installment sale.

When Does a DST Make Sense?

Implementing a DST can be valuable under the right conditions. Here are some key motivations for considering a DST:

Mitigating Default Risk: DSTs effectively reduce and likely prevent the risk of payment defaults by eliminating direct transactions with the buyer. The trust serves as the intermediary, which helps preserve the financial integrity of the transactions.
Customized Control: Although ultimate control rests with an independent trustee, sellers can influence the investment direction by advising on asset allocation. This flexibility allows sellers to align investments with their overall financial objectives.
Tax Efficiency: Many clients appreciate the ability to determine the timing of their tax obligations. DSTs enable sellers to tailor the receipt of payments, potentially aligning themwith lower tax periods or strategic financial planning objectives.

Risks to Be Aware Of

Despite the enticing benefits, using a DST demands careful consideration of several risks:

Fees: The management fees and trustee fees associated with maintaining a DST can range significantly and should be weighed against potential tax savings.
Legitimacy Concerns: While a credible tax planning tool, the DST lacks explicit IRS endorsements, which may concern some clients. This opacity, compounded by nondisclosure agreements, requires trust in the credibility of promoters.
Investment Performance and Non-Recourse: The trust’s assumption of ownership means that poor investment choices could deplete funds, with sellers having limited recourse. Conversely, any surplus from successful investments remains with the trust.

Considering Alternatives

DSTs are not a one-size-fits-all solution. Clients should compare them with other strategies, such as:

1031 Exchanges and Delaware Statutory Trusts: These strategies offer investment continuity while deferring capital gains taxes, making them excellent for real estate-focused investments.
Structured Installment Sales: They provide tailored solutions for spreading income over time, simplifying tax obligations.
Opt to Sell and Pay the Tax: Some clients may prefer a straightforward sale if the projected tax liability fits within their financial planning framework.

Conclusion

Deferred Sales Trusts represent an innovative approach to managing tax obligations while maintaining investment potential. However, like all financial planning tools, they require a thorough analysis of the client’s financial situation and objectives. As a wealth manager, leveraging tools like DSTs can help ensure clients preserve their wealth and efficiently manage income taxes.

Disclosure and Source

Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any investment decisions. The information contained herein was compiled from sources believed to be reliable, but Robertson Stephens does not guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Performance may be compared to several indices. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. A complete list of Robertson Stephens Investment Office recommendations over the previous 12 months is available upon request. Past performance does not guarantee future results. Forward-looking performance objectives, targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are speculative and involve substantial risks including significant loss of principal, high illiquidity, long time horizons, uneven growth rates, high fees, onerous tax consequences, limited transparency and limited regulation. Alternative investments are not suitable for all investors and are only available to qualified investors. Please refer to the private placement memorandum for a complete listing and description of terms and risks. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2025 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.

Insights