Arizona Deferred Sales Trust - Pennington Law, PLLC

When you sell an asset that has significantly appreciated, you may incur tax liability on the capital gains you realize from the sale. Minimizing your tax liability is a key strategy to preserve your wealth, especially as you undertake estate planning. A deferred sales trust is (DST) one way to accomplish that goal.

Establishing a deferred sales trust can work to your advantage, but it needs to be set up correctly to avoid unintended tax liabilities. The Arizona estate planning attorneys at Pennington Law, PLLC can help.

Our attorneys assist clients with comprehensive estate planning and wealth management in Surprise, Sun West City, Peoria, and Buckeye. Contact our law firm today for a free initial consultation to learn more about deferred sales trusts and how we can help with your tax and estate planning goals.

The Basics of Deferred Sales Trusts

A deferred sales trust is a legal agreement between an investor/property owner and a trust controlled by a third-party trustee. Under this agreement, the owner transfers their property to the trust. The trustee sells the asset and pays the proceeds in installments to the property owner over time. The amount and frequency of the installments are governed by the deferred sales trust agreement.

Property owners can use DSTs with different types of assets, such as real estate, stocks, or business ownership interests. With a deferred sales trust, a property owner can delay — but not completely avoid — capital gains tax liability on the sale of the property.

Typically, an owner would use a DST to spread out capital gains tax liability throughout the installment purchase period. However, property owners can also use deferred sales trusts to defer capital gains tax indefinitely by having the trust reinvest the sale proceeds and distribute only the income generated by that investment. Because the owner never receives any of the principal proceeds of the original sale, they do not incur capital gains tax liability. However, they must pay income tax on any income received from the sale’s proceeds.

People may use deferred sales trusts as part of an estate planning strategy. For example, a person might use a DST as a means of preserving wealth and using that wealth to provide a steady stream of income to succeeding generations. Residents of Arizona can use deferred sales trusts as part of their tax or estate planning strategies.

Why Should I Consider a Deferred Sales Trust?

When you’ve invested in an asset that has increased in value, you might consider using a deferred sales trust for several reasons, including:

  • Tax savings – A deferred sales trust can spread the hit from capital gains tax over a long period, or you might use a trust to indefinitely defer capital gains taxes while continuing to benefit from the income generated by your assets.
  • Asset protection – As with other types of trusts, you can use a deferred sales trust to protect the wealth you generate from selling valuable assets by keeping sale proceeds in the trust out of the reach of creditors.
  • Long-term care planning – You might also use a deferred sales trust as part of a long-term care plan to provide an income stream while ensuring eligibility for means-tested government benefits you may need for long-term care.
  • Diversification – Deferred sales trusts provide an alternative to other means of deferring capital gains taxes that often restrict the type of assets involved. Conversely, with a DST, the trustee can diversify your wealth by reinvesting the sale proceeds into different investments.

How a Deferred Sales Trust Works

Using a deferred sales trust begins with transferring assets to a trust managed by a third party. The third party, as trustee, sells the asset, and the trust receives the sale proceeds. Because you do not receive any of the sale proceeds immediately following the sale, you do not have any capital gains tax liability.

The deferred sales trust may pay the sale proceeds according to the installment schedule written into the agreement. As you receive installments, you would pay capital gains tax based on the value of the installment payments each year.

Alternatively, the trust can reinvest the sale proceeds into another income-generating asset. For example, the trust might use the sale proceeds to purchase stock in a real estate investment trust (REIT), which must distribute a portion of its profits to shareholders. If the deferred asset trust only pays you the REIT distributions, you incur no capital gains tax liability because you have not received any portion of the proceeds from the original sale of the asset you placed in the trust.

Ensuring that a deferred sales trust meets the Internal Revenue Service (IRS) rules requires careful planning and attention to detail. Any error in the deferred sales trust process might expose you to unintended capital gains tax liabilities. You need experienced legal counsel to ensure you’ve set up your deferred sales trust correctly.

Steps to Set Up a DST in Arizona

Consult an asset protection attorney from Pennington Law, PLLC for advice on establishing a deferred sales trust in Arizona. Your lawyer will determine the suitability of a deferred sales trust for your financial goals and what your trust should look like. Your attorney can draft the trust agreement to complement your tax and financial planning goals.

Once you’ve established the trust, you must transfer the assets you intend to sell to the trust. The trustee will, in turn, sell the assets and manage the sale proceeds according to the trust document, which may involve paying the proceeds in installments or reinvesting the proceeds and distributing any income generated by the investment.

How Pennington Law, PLLC Can Help

If a deferred sales trust might help you achieve your tax and estate planning goals, an asset protection attorney from Pennington Law, PLLC can help. Our law firm prepares tailored wealth management strategies customized to meet each client’s unique needs and goals. Contact us today for a free consultation.