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DST vs. DST – Watch Out for the Deferred Sales Trust

Erin Crowley :

One of the things that I run into is someone will call me and ask if I have heard of a Delaware Statutory Trust and I say, “yes, it’s a replacement property option. Here’s more information on it and it would be something you want to talk to your financial advisor about.” However, they often hears o fa deferred sales trust, it has the same acronym and that is very confusing.

Wally Smith:

It is.

Erin Crowley :

Because it is not an exchange replacement property option.

Wally Smith:

No.

Erin Crowley :

And it is often touted as a fail safe and I don’t know that it is, and so it’s kind of confusing.

Wally Smith:

Well, let me address that.

I’ve bumped into that too many times if you Google DS. Instead of what we want you to look at, which is to learn all about Delaware Statutory Trusts and listen to our show–go onto our website, call us, we’ll talk your ear off about Delaware Statutory Trust. If what you come across by mistake is a ‘deferred sales trust,’ you’ll see it has a trademark, a ‘TM’ next to it often when you pull it up on Google, because it was a product that was created. It has not been blessed by the IRS. It’s not been blessed by the States. It is not a proven technique to be used. 

We at our firm, at Ridgegate Financial, we looked into those greatly, oh, about two years ago, because they were getting a lot of hype. We talked to the promoters–and that’s what I would call them, promoters of this particular technique– and it basically says you’re getting ready to sell out of your business or an asset, and you have somebody create a trust specifically to buy your property so then the trust will invest the proceeds, and then the trust will bleed that money back to you generally over a 10 year period (although they can put extensions in that). 

The whole point of it is to minimize taxes–and you see there’s this group called the IRS. They’ve got some pretty strong opinions–and again, we’re not attorneys, we’re not CPA’s, but we sure do work closely with them–and some of the brightest attorneys I’ve talked to when we were researching the validity of these, they said: 

“look at bottom line, is it form over substance? Why are you doing this? Is there a business reason? Is there genuinely a business reason for making this decision, for using this structure– the deferred sales trust–and if you can’t show that there’s a good solid business reason while you’re doing it, then it is very likely to be disallowed with penalties and a lot of problems that come with it.”

So that’s one big problem we see…and the business reason can’t be, “I want to save on taxes.” Okay? That’s not a valid business reason.

Erin Crowley :

No.

Wally Smith:

If it was going to provide you a way to facilitate ownership transferring efficiently to another generation or something that was actually a valid business reason, then it’s a much stronger case that might protect you in an audit, but the more important thing is: please don’t get suckered into pursuing something called a deferred sales trust, thinking that you’re going to have the benefits of a 1031. 

A 1031 exchange is very specific thing that allows you to perpetually put off paying the capital gains taxes and the depreciation recapture on those assets. As long as you keep that money characterized as a real estate in a 1031–and deferred sales trust is not. So I don’t want to beat my head against a dead horse too long there, but that’s really what that’s all about.

And I bring it up because we’ll probably put together what we call Impact Bites™–which are little bits, little pieces of informational nuggets if you will, from the show–but it has to be clarified what the deferred sales trust is or isn’t. From what I understand, they even quit using that name because they found that there was a lot of confusion. Anyway, just be very clear. That’s where getting a hold of professional– whether it’s us, registered investment advisor or a tax accountant or your tax lawyer. Be sure what you’re working with. You can spend an awful lot of time running down the wrong street there just from reading the wrong Google citation.