Monetized Installment Sales for Tax Deferral and Estate Planning

Monetized installment sales are one way for individuals or families to sell highly appreciated assets while minimizing the tax burden from the sale. In a monetized installment sale, a seller can defer capital gains taxes on the asset sale by spreading payment of the proceeds over several years. Using this method, sellers can defer taxes and obtain immediate access to funds through a third-party, non-recourse loan.

Monetized installment sales can play a significant role in estate planning strategies. In these cases, the seller places the asset in an irrevocable trust, and the trustee manages the sale, oversees the distribution of payments under the installment contract, and helps preserve or reinvest the trust’s assets while maintaining the tax deferral.

However, monetized installment sales must be structured carefully to avoid IRS scrutiny. If you’re considering this method during trust planning, seek guidance from an experienced attorney before making any decisions.

How a Monetized Installment Sale Works

In a monetized installment sale, a business or property owner transfers their asset to an intermediary entity in exchange for an installment contract, in accordance with Internal Revenue Code §453 rules for installment sales. The intermediary then sells the asset to the final buyer for cash, typically without recognizing gain on that transaction as long as the structure complies with IRS requirements. In some estate planning strategies, the asset may be held in a trust, allowing the trustee to manage the sale and installment contract while deferring taxes on behalf of the beneficiaries.

Independently, the owner may borrow money from a non-recourse, third-party lender, using the contract as collateral. This method allows the seller to access immediate liquidity and repay the loan over time using the installment payments. If the asset is held in a trust, the trust can use the loan proceeds to fund distributions to beneficiaries, reinvest assets, or support ongoing trust purposes, while maintaining the tax deferral.

Some sellers find this arrangement appealing because it offers immediate liquidity while deferring capital gains taxes. The seller can use the loan proceeds for reinvestment, business operations, or personal needs, while deferring tax liability until installment payments are received. This creates flexibility for individuals who need cash flow but want to avoid the full tax impact of an outright sale. Structured properly, monetized installment sales within a trust can be a powerful estate planning tool, providing liquidity, tax deferral, and long-term asset management for beneficiaries.

IRS Scrutiny and Potential Risks

The IRS has identified certain monetized installment sales as potentially abusive tax-deferral strategies because sellers get immediate liquidity from their sales. The agency has flagged these structures in its “Dirty Dozen” campaigns highlighting arrangements that warrant heightened scrutiny.

The Treasury Department and the IRS have proposed regulations to designate certain monetized installment sales as listed transactions, which would require taxpayers and advisors to disclose these arrangements or face penalties. Taxpayers who have participated in these structures may expect increased compliance activities, including audits. Legal responsibility for what appears on a tax return rests with the taxpayer, regardless of promoter promises or fees paid for arranging the transaction.

How Pennington Law, PLLC Can Help

Working with an Arizona trust attorney is crucial if you have highly appreciated assets that you wish to sell as part of a tax-efficient estate planning strategy and to potentially generate wealth for your beneficiaries. At Pennington Law PLLC, we help individuals and families identify potential structures that align with their estate planning goals. Contact us today to learn more about monetized installment sales in a free consultation.