What is a Deferred Sales Trust Plan?
A deferred sales trust is another option when considering your exit plan. A deferred sales trust allows you to defer capital gains tax when selling a business or other real estate that would be subject to a capital gains tax. Essentially with this, you take the sales money you would’ve received at closing and it is put into a trust. This money is only taxed as funds from the sale are received. This strategy allows you to reinvest the money from the sale into investments that aren’t allowed by other capital gains tax deferral strategies.
What is a Deferred Sales Trust Plan?
A deferred sales trust is another option when considering your exit plan. A deferred sales trust allows you to defer capital gains tax when selling a business or other real estate that would be subject to a capital gains tax. Essentially with this, you take the sales money you would’ve received at closing and it is put into a trust. This money is only taxed as funds from the sale are received. This strategy allows you to reinvest the money from the sale into investments that aren’t allowed by other capital gains tax deferral strategies.
How a Deferred Sales Trust Works
Deferred sales trust work with Internal Revenue Code 453. This is a tax law that stops you from having to pay taxes on funds they haven’t received on an installment sale. In short, a deferred sales trust allows you to sell your company to the trust with an installment sale. The trust then sells the company or property to the buyer. Ultimately leading to the funds ending up in the trust without you having to pay taxes on the capital gains.
The trust doesn’t end up having any capital gains taxes since it sold the company for the same price it paid for with the installment sales contract. The seller won’t pay any capital gains taxes yet either because you haven’t actually received any funds from the purchase. The installment contract can be set up in a variety of ways as well. You can start receiving installment payments immediately or defer them for a later point in time.
Once the trust has these funds, they can invest them on your behalf however you would like. You can earn interest on this income from the sell as long as it stays within the trust. You will only begin to pay capital gains taxes when you start receiving principal payments.
How a Deferred Sales Trust Works
Deferred sales trust work with Internal Revenue Code 453. This is a tax law that stops you from having to pay taxes on funds they haven’t received on an installment sale. In short, a deferred sales trust allows you to sell your company to the trust with an installment sale. The trust then sells the company or property to the buyer. Ultimately leading to the funds ending up in the trust without you having to pay taxes on the capital gains.
The trust doesn’t end up having any capital gains taxes since it sold the company for the same price it paid for with the installment sales contract. The seller won’t pay any capital gains taxes yet either because you haven’t actually received any funds from the purchase. The installment contract can be set up in a variety of ways as well. You can start receiving installment payments immediately or defer them for a later point in time.
Once the trust has these funds, they can invest them on your behalf however you would like. You can earn interest on this income from the sell as long as it stays within the trust. You will only begin to pay capital gains taxes when you start receiving principal payments.
The Rules to A Deferred Sales Trust
In order for a deferred sales trust work in your advantage, there are specific rules that need to be followed. The process should follow the below steps to ensure you reap the benefits:
- A third-party trust needs to be formed that will the third-party will also manage.
- The company or real estate asset is sold to the trust with an installment sales contract.
- The trust then sells the company or property to the buyer to receive the funds.
- The trustee will then invest the funds or distribute installment payments based on what the seller chooses.
- Capital gains taxes are paid on any principal amount the seller receives from installment payments.
Capital gains taxes are only paid when you profit off the sale of an investment property, real estate, or other business assets. Choosing a deferred sales trust doesn’t eliminate those taxes, but it allows you to defer them while you reinvest.
The Rules to A Deferred Sales Trust
In order for a deferred sales trust work in your advantage, there are specific rules that need to be followed. The process should follow the below steps to ensure you reap the benefits:
- A third-party trust needs to be formed that will the third-party will also manage.
- The company or real estate asset is sold to the trust with an installment sales contract.
- The trust then sells the company or property to the buyer to receive the funds.
- The trustee will then invest the funds or distribute installment payments based on what the seller chooses.
- Capital gains taxes are paid on any principal amount the seller receives from installment payments.
Capital gains taxes are only paid when you profit off the sale of an investment property, real estate, or other business assets. Choosing a deferred sales trust doesn’t eliminate those taxes, but it allows you to defer them while you reinvest.
The Benefits of a Deferred Sales Trust
The main benefit to a deferred sales trusts is that it allows you to defer taxes on capital gains while earning additional income from investing the proceeds from the sale. This enables you to invest more as you don’t pay taxes on those funds until you start collecting deferred payments.
Another great advantage of deferred sales trust is you can reinvest the funds into a number of different options. These include other real estate properties, stocks, REITs, Bonds, Mutual Funds, CDs, and Angel Investments.
With a deferred sales trust you can set up to receive payments as you need them. There are several different options you can choose from on this, it’s really just a matter of your preference.
The Benefits of a Deferred Sales Trust
The main benefit to a deferred sales trusts is that it allows you to defer taxes on capital gains while earning additional income from investing the proceeds from the sale. This enables you to invest more as you don’t pay taxes on those funds until you start collecting deferred payments.
Another great advantage of deferred sales trust is you can reinvest the funds into a number of different options. These include other real estate properties, stocks, REITs, Bonds, Mutual Funds, CDs, and Angel Investments.
With a deferred sales trust you can set up to receive payments as you need them. There are several different options you can choose from on this, it’s really just a matter of your preference.
