Maximize Wealth and Defer Taxes with a Deferred Sales Trust

Selling a highly appreciated asset—whether it’s a business, investment property, or even a primary residence—can trigger a painful tax bill. If your gain is large enough, the capital gains tax alone can eat up 20% (or more) of your profit in one stroke. But what if you could defer that tax, keep your full proceeds working for you, and strategically time when and how you pay taxes? That’s exactly what a Deferred Sales Trust (DST) offers—especially valuable for business owners planning an exit. If you’re selling an asset with at least $1 million in capital gain, the DST might be one of the most powerful (yet underused) strategies available.

What Is a Deferred Sales Trust (DST)?

A Deferred Sales Trust is a tax strategy based on Section 453 of the Internal Revenue Code, which governs installment sales. In simple terms, a DST lets you sell an asset indirectly through a trust, so that you don’t receive the sales proceeds right away—and therefore don’t owe taxes immediately. Here’s how it works in five steps:

You sell your asset to the trust in exchange for a secured installment note.
The trust sells the asset to the buyer and receives the proceeds.
You don’t receive the sale proceeds directly, which defers the capital gains tax.
You receive periodic payments from the trust over time.
The trust can invest the proceeds in assets like real estate, stocks, or insurance while you earn interest on the note.

This strategy doesn’t just eliminate taxes—it defers them. But that deferral can give you flexibility, lower your effective tax rate, and help grow your wealth with funds that would otherwise go to the IRS.

A Real Example: Jennifer’s Business Sale

Let’s say Jennifer sells her business for $2 million. Her original cost basis was $1 million, so she faces a $1 million capital gain.

Without a DST:

She immediately pays $200,000 in capital gains tax (assuming a 20% rate).
That’s $200,000 lost to taxes upfront.

With a DST:

The $200,000 tax bill is deferred.
The $1 million gain is recognized over 10 years ($100,000/year), possibly at lower tax brackets.
Jennifer earns 5% interest on the outstanding balance, generating $45,000 in year one alone.
The trust can reinvest the proceeds to generate even more income.

This deferral doesn’t just spread out her tax—it also puts the full value of the proceeds to work immediately.

Why Business Owners Should Pay Attention

For business owners planning an exit, the DST offers significant financial and strategic advantages:

Maximize Sale Proceeds: Keep your full sale amount working for you instead of handing over 20% (or more) to the IRS.
Control Your Income: Decide when and how much you receive in payments—managing your income and tax bracket.
Estate Planning Flexibility: Use the DST structure to support legacy planning and intergenerational wealth transfers.
Diversified Investment Options: The funds inside the trust can be allocated across various asset classes based on your risk profile.

If you’re selling a business or investment property, the DST can be a game-changer—especially if you’re not immediately reinvesting in a like-kind property (as required in a 1031 exchange).

Key Requirements

To qualify for a DST:

You must have net capital gains of at least $1 million.
The asset sold must be eligible (business, real estate, or primary residence with large gain).
The sale must be structured in advance—not after the deal closes.
You need a qualified legal and financial team to create and manage the trust.

DST Benefits at a Glance

Tax Deferral – Delay capital gains taxes over time through installment payments.
Interest Income – Earn interest on your installment note from the trust.
Diversified Investments – Allocate sale proceeds into investments aligned with your goals.
Estate Planning – Use the trust to transfer wealth and control distributions.

Risks and Considerations

Complexity – DSTs are legally and financially complex. Proper setup is essential.
Cost – There are setup and maintenance fees, which need to be weighed against potential tax savings.
Liquidity Limitations – Once in the trust, you have limited direct access to the funds.
Trustee Control – An independent trustee must manage the assets (you can’t control the trust yourself).

DSTs have passed IRS scrutiny and are not listed as abusive or “dirty dozen” tax schemes. Still, they must be executed with precision to stay in full compliance.

The Setup Process

If you’re considering a DST, here’s a typical implementation timeline:

Qualification: Confirm your gains exceed $1M and that the asset qualifies.
Education: Meet with advisors and DST professionals to understand the structure.
Plan the Sale: Coordinate closely with your tax advisor, legal counsel, and DST vendor before closing.
Create the Trust: Draft agreements, define payout terms, and establish the trust.
Close the Sale: Proceeds flow into the DST, and payments begin as scheduled.

Note: You must set up the DST before the sale closes. It’s not a strategy that can be applied retroactively.

Is a DST Right for You?

The DST is best suited for:

Business owners planning an exit with significant gain
Real estate investors with highly appreciated assets
Retirees looking to manage income and estate planning
Anyone with $1M+ in gains who wants to defer taxes and reinvest proceeds

If that’s you, the DST could be the missing piece in your tax and financial planning puzzle.

Final Thoughts

When selling a major asset, the tax impact can be as critical as the sales price itself. A Deferred Sales Trust offers a rare combination: legal tax deferral, income generation, and investment flexibility—all within a structured, compliant framework. It’s not for everyone, but for those who qualify, it can be one of the most valuable tools available.

Thinking about selling your business or investment property soon? Now is the time to explore whether a DST could make your sale more profitable. Contact us here!

Sell Smarter: How a Deferred Sales Trust Can Help You Defer Taxes and Grow Wealth