A Deferred Sales Trust, or DST for short, can be considered as a retirement option. This involves the sale of a business or a property but in such a way that the buyer will be providing a set income stream for the seller for a set period. The buyer also becomes responsible for the tax obligations of the said property or business. The process of a deferred sales trust begins when the owner of the property or business asset transfers it into a trust handled by a separate and independent legal entity that manages it for him. It could be that the revenue can be controlled by the trust either in cash, investment, or distribution according to the owner's contract stipulation.

The forewarning is that a DST can also be a means to get around taxes or at least lessen their impact on the purchase of the property or business because this method is always somehow used by people who face significant capital gains. DST is often used as a way to defer the payment of capital gains tax for the reason that the property is taken for the equivalent amount in which it was sold. The concept steps over and around the tax ruling, which says that the state does not enforce any payment on any of its taxes on capital gains unless the buying party starts receiving payments in increments that include portions for the principal amount.

Deferred sales trust has the power to delay the payment of the capital gains tax indefinitely, and as such, it is considered by many as underhanded and shady at best. An owner can arrange an interest-only contract and avoid the principal, thus avoiding paying the tax on capital gains for as long as possible. Because it is prone to abuse, there are specific guidelines that a DST needs to have in order to be eligible for the capital tax payment deferral.

Guidelines for legitimacy

Bonafide trustee independence

A genuine DST is required to prove that the mediator or trustee is indeed legitimate. This is one of the requirements for the capital gains tax deferral. Furthermore, the custodian that is employed must be genuinely separate from the owner or beneficiary of the trust. The IRS is very strict about this, and if the independence is not established, they would certainly be inclined to declare the legal documentation as a fraudulent attempt to circumnavigate the tax laws.

Asset transfer of ownership

Another telltale giveaway of a non-legitimate DST transaction is an instance where the property owner does not shift the ownership of the property or business to the executor and will still be gaining the rewards of ownership in the process. Before the owner can be shielded from any capital gain tax deferral, the purchase of the asset should be transferred to the third party that owns the trust. If such is not the case, the property will still be treated as though it was still owned by the seller and taxed accordingly.

The property or asset must remain in estate 

The previous owner must be precisely that, a former entity that the asset used to belong to. The trust’s beneficiary must be covered by the restraints of the legislation as it administers to trusts. If the proprietor still enjoys full rights and unrestricted control of the property, the IRS will again fall to the fraud conclusion and declare the trust to be a sham.

If the DST is improperly executed, the IRS would most probably not honor its legitimacy. It is therefore of utmost importance that these proceedings be handled by those with the expertise to make sure that the authorities would arrive at the favorable conclusion. The consequences can be grave for the parties as the sale would be taxed as if no trust has existed along with other adverse effects upon the parties.