Understanding Deferred Sales Trust Fees: What You Need to Know

Written By
Carl E. Sera, CMT
Published On
March 22, 2023

Deferred Sales TrustWould you rather pay capital gains taxes on a significant transaction all at once or put it on layaway and make tax payments over time if given the option? If there is no interest accruing while the tax payments are being deferred and you can invest the money, does it make sense to delay paying taxes vs. paying taxes now and reinvesting the proceeds?

This is precisely what a deferred sales trust can accomplish for many taxpayers.

The tax bill is a common concern when selling a home or other appreciated assets, but with a deferred sales trust, capital gains can be deferred over time through an installment sale. However, one of the common challenges newbie investors face doing DST for the first time is the cost associated with setting up a Deferred Sales Trust.

Keep reading to discover some of the fees associated with a typical Deferred Sales Trust and how Sera Capital's fee-only fiduciary works.

What Is a Deferred Sales Trust?

Deferred Sales Trusts (DSTs) are considered by many to be one of the most effective tax deferral strategies for large asset sales. A deferred sales trust (DST) allows for the deferral of capital gains tax when selling real estate or other qualified assets. Rather than a typical transaction where the seller would receive funds from the buyer, capital gains would be realized, and taxes would be owed, the funds would be redirected to a trust.

The seller sets up the trust agreement to receive funds on any schedule they choose. The trust manages the entire proceeds of the sale, pre-tax. This means that a more significant dollar amount can be invested, left to grow, and taxes will be paid later. This allows for the further potential for maximum appreciation and flexibility in managing an income stream and the ability to fine-tune a portfolio for tax efficiency. The greater the sales price, the greater the deferral.

Typical Costs Associated with Deferred Sales Trust

From time to time, a Seller of an appreciated business or property interested in the Deferred Sales Trust (DST) will comment that the legal costs associated with setting up the DST are too high. But are they?

While the cost of setting up a Deferred Sales Trust may seem expensive, it's essential to consider the long-term benefits. DSTs provide a way to defer taxes on asset sales, which can result in significant savings over time. It's also important to evaluate the value of the DST, not just the cost. DSTs can provide security, flexibility, and peace of mind when managing large assets. Ultimately, the decision to set up a DST should be based on its benefits rather than just the cost.

On average, setup fees and maintenance fees may be higher than other tax deferral strategies. An attorney usually charges a fee to set up the trust, often 1.5% of the asset’s value of the first $1 million and 1.25% of anything over $1 million. Additionally, the independent trustee’s fee may be 0.5%, and an additional investment advisor’s fee may range from 0.5% to 1% of assets under management, although these fees may be negotiable. Lastly, because of the nature of DSTs, there's usually an annuity component to guarantee the principal. This is a full-commission product, and due to insurance regulations, there is no way to reduce or credit commissions to clients.

While the surface cost of doing a Deferred Sales Trust may seem expensive, it is far more beneficial than paying taxes in a direct and taxed sale without tax deferral. The DST should also be evaluated not strictly on the cost but the value it can generate for you.

Understanding Sera Capital Fee Structure

Within the tax deferral industry, it is common for advisors to operate using a commission-based model. While there is nothing wrong with working with an advisor that operates such a model, you may not receive unbiased and objective investment advice.

Fortunately, at Sera Capital, we operate a fee-only fiduciary model, which has seen us stand out from companies even within the 1031 exchange niche. Our fee-only consulting practice in 1031 exchange properties emphasizes transparency and no conflict of interest. A client must understand that we have no financial incentive if we recommend one tax deferral strategy over another.

Because we’re fee-only fiduciaries, it’s our legal obligation to recommend the best investments for your tax plan– rather than steer clients toward deals with the highest commissions. If you’d like to know more about our unique billing structure, schedule your free 30-minute call to learn more about real estate investing and tax deferral strategies, and we’ll be happy to get back to you.

Carl E. Sera, CMT

Carl E. Sera, CMT

Managing Principal, Sera Capital
Carl Sera is a Chartered Market Technician and the Managing Principal at Sera Capital Management, LLC. He has over 16 years of experience in the financial services industry with a focus on investment management.

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