Published on
September 16, 2025
Deferred Sales Trusts vs. Other Tax Deferral Options
Explore tax deferral strategies like Deferred Sales Trusts, 1031 exchanges, and more to manage capital gains while preserving wealth.
Selling appreciated assets? Tax bills can be overwhelming, but deferral strategies can help you keep more of your wealth. Among these strategies, Deferred Sales Trusts (DSTs) offer flexibility, allowing you to defer capital gains taxes while managing your proceeds. Here's a quick breakdown:
- Deferred Sales Trusts (DSTs): Defer taxes by selling assets to a trust and receiving payments over time. Offers flexibility in payment schedules and investment options beyond real estate.
- 1031 Exchanges: Great for real estate investors but limited to like-kind property swaps under strict deadlines.
- Installment Sales: Spread tax liability over time but involve buyer risk and rigid terms.
- Delaware Statutory Trusts: Real estate-focused, allowing fractional ownership in high-value properties.
- Charitable Remainder Trusts: Combine tax savings with philanthropy, offering lifetime income but requiring asset donation.
Each option has unique benefits and limitations. Choosing the right one depends on your goals, asset type, and risk tolerance. Below, we’ll explore these strategies in detail and how they compare.
What Are Deferred Sales Trusts
A Deferred Sales Trust (DST) is a tax strategy designed to help business owners and investors sell appreciated assets without immediately triggering capital gains taxes. Instead of receiving the entire sale proceeds at once, the DST allows you to defer taxes and create a custom payment schedule.
How Deferred Sales Trusts Work
Here’s how it operates: You transfer your appreciated asset - whether it’s a business, real estate, stocks, or intellectual property - into an independent trust. The trust then sells the asset to a buyer and collects the proceeds. Instead of receiving the funds outright, you’re issued an installment note with a prearranged payment plan.
The trust invests the proceeds, and you only pay capital gains taxes as you receive payments. This approach not only helps spread your tax liability over time but also aligns with long-term financial planning goals. It’s a strategic move for managing taxes during major asset sales.
Benefits of Deferred Sales Trusts
A key advantage of DSTs is their flexibility in structuring income. You can opt for fixed monthly payments, interest-only payments, or even defer payments to a future date, allowing the assets to grow tax-deferred in the meantime. If payments are drawn solely from investment earnings, you can delay paying capital gains taxes on the principal indefinitely.
DSTs also offer diverse investment opportunities. Unlike 1031 exchanges, which limit you to reinvesting in like-kind real estate, DSTs let you invest in a variety of assets, including stocks and real estate. This not only broadens your options but also helps manage risk while generating consistent income to meet your financial needs.
These features make DSTs a versatile choice compared to other tax deferral strategies, offering more control and investment flexibility.
Comparing Tax Deferral Options
Other Tax Deferral Strategies
Deferred Sales Trusts stand out as a solid option, but they aren't the only game in town. Several other strategies are worth considering, depending on your specific circumstances. Here's a quick rundown of some popular alternatives and what makes them different.
1031 Exchanges are perhaps the best-known tax deferral tool, but they come with strict rules. They are limited to real estate transactions and require you to stick to tight deadlines: 45 days to identify a like-kind property and 180 days to close the deal.
Conventional Installment Sales, governed by Section 453 of the Internal Revenue Code, allow you to spread capital gains over time. However, they come with risks like buyer default and rigid payment schedules, which might not suit everyone.
Delaware Statutory Trusts (DSTs) offer a way to invest in institutional-grade real estate while qualifying for 1031 exchanges. They allow you to defer taxes, diversify your holdings, and avoid the hassles of direct property management.
Charitable Remainder Trusts let you donate appreciated assets to a charity while retaining income rights for a set period. While this strategy provides notable tax benefits, it requires you to relinquish ownership of the asset to the charitable organization eventually.
Each of these methods has its own strengths and trade-offs, which can influence how well they align with your financial goals. Understanding these differences is key to making the right choice.
Side-by-Side Comparison
To make the distinctions between these strategies more apparent, it's helpful to look at how they stack up in terms of asset eligibility, payment flexibility, risk management, and other factors.
Asset eligibility is one area where strategies diverge. Deferred Sales Trusts are versatile, accommodating real estate, businesses, stocks, and other appreciated assets. By contrast, 1031 exchanges are limited to "like-kind" real estate, and installment sales apply to any appreciated asset but require direct buyer involvement.
Payment flexibility is another critical factor. Deferred Sales Trusts offer highly adjustable schedules, while installment sales lock you into fixed terms. With 1031 exchanges, there are no payments, as the strategy relies on reinvesting proceeds into another property.
Risk management also sets these strategies apart. Deferred Sales Trusts reduce risk by holding sale proceeds in a trust that manages investments, shielding you from buyer default and enabling diversification. In contrast, 1031 exchanges tie your risk to specific properties, and installment sales depend on the buyer's financial reliability.
Here's a quick table to break it all down:
| Factor | Deferred Sales Trust | 1031 Exchange | Conventional Installment Sale |
|---|---|---|---|
| Asset Types | Real estate, businesses, stocks, appreciated assets | Like-kind real estate only | Any appreciated asset |
| Tax Deferral | Spreads capital gains over payment schedule | Defers gains through reinvestment | Spreads federal capital gains over time |
| Payment Control | High flexibility, adjustable schedules | No payments (reinvestment required) | Fixed schedule, limited flexibility |
| Setup Complexity | High (requires professional management) | Moderate (strict timelines) | Low (direct transaction) |
| Ongoing Costs | Higher administrative and investment fees | Transaction costs only | Lower setup costs |
| Risk Exposure | Reduced through trust structure | Property-specific risks | Subject to buyer default |
Complexity and costs vary widely. Deferred Sales Trusts require professional management and come with higher setup and ongoing fees, which might not make sense for smaller transactions. 1031 exchanges are moderately complex due to IRS regulations and deadlines. Conventional installment sales are the simplest option, with lower upfront costs but less flexibility.
Investment diversification is another area where these strategies differ. Deferred Sales Trusts allow you to spread proceeds across various asset classes, potentially balancing returns and risk better over time. On the other hand, 1031 exchanges keep you tied to real estate, and installment sales rely heavily on the buyer's financial stability and the performance of the single asset sold.
Choosing the right strategy depends on your unique situation - what you're selling, your income needs, how much risk you're comfortable with, and your long-term financial goals. Each option has its own set of advantages and challenges that can align differently based on individual circumstances.
Trustee Roles and Risk Management
The role of a trustee can vary widely depending on the tax deferral strategy in play. For some strategies, the trustee's involvement is minimal, while others - like Deferred Sales Trusts (DSTs) - require significant financial and legal expertise, along with constant oversight. Below, we’ll break down the key responsibilities of trustees in DSTs and share practical steps to manage associated risks.
Trustee Responsibilities
In a Deferred Sales Trust, trustees shoulder a wide range of duties, from managing trust assets and investing sales proceeds to ensuring distributions align with the terms of the installment note. Their responsibilities extend beyond day-to-day administration to include investment management and regulatory compliance.
Trustees must have a deep understanding of trust documents and relevant legal frameworks, such as the Prudent Investor Act and the Principal and Income Act. Their tasks include making sound investment decisions, filing tax returns, maintaining detailed financial records, and keeping beneficiaries informed about the trust’s performance and distributions.
"Trustees are held to the highest fiduciary duties under the law." - Wealthaven
This fiduciary duty requires trustees to act solely in the best interests of the trust and its beneficiaries. They must avoid personal conflicts of interest and manage the trust with the same - or greater - care than they would apply to their own assets.
Unlike other, less demanding strategies, DSTs require trustees to take a hands-on approach. This includes reviewing trust documents for any gaps, creating formal investment policies, and establishing clear, measurable metrics for making distribution decisions.
With these responsibilities in mind, adopting best practices is key to minimizing risks and safeguarding financial interests.
Risk Management Best Practices
Effective risk management starts with selecting a qualified trustee. Choosing the right person or professional isn’t just about filling a position - it’s about ensuring your financial interests are protected and risks are minimized. For DSTs, the trustee’s role is pivotal in maintaining IRS compliance and reducing financial risks for the seller.
"Selecting a suitable trustee is critical to the success of your DST strategy." - Pennington Law, PLLC
When evaluating potential trustees, prioritize their qualifications and experience. A strong candidate will have a solid financial background, a clear understanding of fiduciary duties, and expertise in legal, administrative, and tax-related obligations. Look for someone with prior experience managing similar trusts, as well as a reputation for objectivity and integrity.
It’s also essential to verify that trustees carry Errors & Omissions (E&O) insurance and, if applicable, Directors & Officers (D&O) coverage.
Beyond credentials, consider the trustee’s capacity and availability. They must have the time and resources to monitor investments consistently, prepare reports, and address any issues that arise.
Another hallmark of a professional trustee is meticulous record-keeping. Accurate records are crucial for compliance, beneficiary communication, and responding to potential IRS inquiries or disputes.
Clear and regular communication is equally important. The best trustees hold periodic meetings with beneficiaries, explaining trust decisions in a transparent manner. This not only builds trust but also helps prevent misunderstandings.
For more complex tax deferral strategies, independent trustees can provide added value through their professional objectivity. Alternatively, some may opt for a blended approach, combining the insights of family members with external expertise.
Given the complexities and high stakes involved, seeking professional guidance is a smart move. Working with experienced estate planning attorneys and financial advisors can help you identify qualified trustees, establish oversight mechanisms, and set clear performance benchmarks. Regular reviews, defined investment return goals, and structured processes for addressing concerns ensure your trustee remains accountable and effective throughout the trust’s duration.
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Recommendations for Growth-Stage Businesses
When it comes to growth-stage businesses, aligning tax strategies with your business goals is a critical step. Whether you're planning for an exit, managing estate considerations, or balancing risk and liquidity needs, choosing the right tax deferral strategy can make a big difference. Here's how you can tailor your approach to fit your unique situation.
Matching Strategies with Business Goals
Exit Planning and Liquidity Needs
If you're thinking about selling your business in the next couple of years, a Deferred Sales Trust (DST) might be the right fit. DSTs allow you to manage the timing and structure of your tax payments while also giving you access to funds through distributions. Unlike 1031 exchanges, which require reinvesting in similar properties right away, DSTs offer more flexibility and portfolio diversification.
Estate Planning Considerations
As your business grows in value, estate planning becomes more important. DSTs can be a useful tool for transferring wealth to future generations while reducing estate taxes. They can also provide an added layer of protection against creditors and legal claims.
Philanthropic Goals
If giving back is a priority, your strategy will depend on how much control you want to maintain. Charitable Remainder Trusts (CRTs) are great for immediate tax deductions and significant charitable contributions. On the other hand, DSTs offer more control over how and when distributions are made, making them ideal if your focus is wealth preservation.
Risk Tolerance
Your comfort level with risk can also guide your choice. For those who prefer predictability, installment sales might be the way to go. Others may lean toward DSTs, which provide diversified returns that can align with a more balanced investment approach.
Complex Business Structures
If your business involves multiple owners, diverse equity arrangements, or international operations, DSTs can handle these complexities. Their flexibility makes them a good choice for businesses with varied asset types and ownership setups.
These strategies highlight the importance of expert guidance when planning your exit and aligning your financial goals with the right tax deferral approach.
How Phoenix Strategy Group Can Help
Navigating these decisions can be challenging without the right expertise. That’s where Phoenix Strategy Group comes in. They specialize in helping growth-stage businesses tackle complex financial decisions, including tax deferral strategies, with a holistic and hands-on approach.
Strategic Financial Planning
Through their fractional CFO services, Phoenix Strategy Group models the long-term effects of different tax deferral strategies, helping you choose the most effective option for your business.
Exit Preparation and M&A Advisory
Their team focuses on optimizing your financial structure and operational metrics while crafting exit strategies that maximize value. They seamlessly integrate tax deferral mechanisms into your overall plan.
Cash Flow Forecasting and Financial Modeling
Using their Integrated Financial Model, Phoenix Strategy Group provides real-time insights into how tax deferral strategies affect your cash flow. This allows you to make informed decisions about distributions and investments.
Data Engineering and Analytics
Their technology-driven approach ensures accurate financial tracking and compliance with regulatory requirements, making it easier to manage sophisticated tax deferral setups.
Fundraising Support
Tax deferral strategies often tie into broader growth and succession plans. Phoenix Strategy Group provides expertise in investor relations and capital raising, ensuring your tax planning aligns with future funding needs and investor expectations.
Monday Morning Metrics
With their Monday Morning Metrics system, you’ll have real-time visibility into key performance indicators. This helps you fine-tune your tax deferral strategy based on how your business is performing.
Phoenix Strategy Group doesn’t work in isolation - they collaborate with your tax advisors, estate planning attorneys, and other professionals to ensure a smooth implementation. Their experience with DSTs and other complex structures means they can provide the ongoing support needed for long-term success.
For growth-stage companies, Phoenix Strategy Group offers tailored advice to navigate the unique challenges of tax deferral planning and achieve better outcomes for your business.
Conclusion
Deferred Sales Trusts (DSTs) offer a level of flexibility and control that stands out - allowing you to defer tax payments while enjoying the freedom to make diversified, professionally managed investment decisions. This contrasts sharply with the rigid reinvestment rules of 1031 exchanges or the limited terms of installment sales.
When comparing options, your specific needs make all the difference. For instance, if immediate liquidity and tax benefits are your priorities, Charitable Remainder Trusts might be appealing due to their upfront deductions, though they limit control over distributions. Opportunity Zone investments, on the other hand, provide tax advantages but require a long-term commitment to specific geographic areas. DSTs strike a balance, offering tax deferral, investment flexibility, and control over your assets. These unique benefits make DSTs a compelling choice when evaluating your options.
Another critical factor is risk management. DSTs help mitigate risk by spreading investments across diversified portfolios managed by seasoned trustees, whereas strategies like installment sales concentrate risk on the buyer's ability to fulfill payments. With DSTs, experienced trustees actively oversee investments and ensure compliance, adding an extra layer of security.
Whether you're planning a business exit, addressing estate concerns, or managing liquidity, the right strategy ultimately depends on your unique circumstances. For businesses with complex ownership structures or diverse asset types, DSTs often emerge as a well-rounded solution.
Expert advice plays a pivotal role in successfully implementing a DST. The Phoenix Strategy Group offers a comprehensive approach to financial advisory services, ensuring your tax deferral strategy aligns seamlessly with your broader business goals, from exit planning to maintaining steady cash flow.
FAQs
What are the main differences between Deferred Sales Trusts and 1031 Exchanges in terms of asset types and flexibility?
Deferred Sales Trusts (DSTs) stand out for their flexibility, especially when compared to the more rigid framework of 1031 Exchanges. While 1031 Exchanges are restricted to like-kind real estate transactions, DSTs can accommodate a broader range of assets. This includes businesses, stocks, and even personal property, making them a versatile option for tax deferral.
Another advantage of DSTs is the freedom they provide in timing and investment choices. They let you defer taxes at your own pace and reinvest across different asset classes in alignment with your financial objectives. On the other hand, 1031 Exchanges come with strict rules, requiring reinvestment in like-kind properties within tight deadlines. For those looking for greater control and flexibility in managing their tax deferral strategies, DSTs can be an attractive alternative.
What role does a trustee play in managing risk and investments in a Deferred Sales Trust?
In a Deferred Sales Trust (DST), the role of the trustee is central to managing risk and making smart investment choices. They are responsible for overseeing the trust’s assets, ensuring that all investment decisions align with the trust's goals, and minimizing potential risks like market volatility.
The trustee’s independence and knowledge play a key role in staying compliant with IRS regulations, which is vital for protecting the tax deferral benefits. By carefully handling the trust’s portfolio, they aim to preserve and grow its value over time, helping the trust achieve its financial objectives for the beneficiaries.
What should growth-stage businesses consider when evaluating a Deferred Sales Trust for tax deferral?
When considering a Deferred Sales Trust (DST) for tax deferral, growth-stage businesses need to carefully balance its flexibility and range of asset options with the potential downsides. Unlike strategies like 1031 exchanges, DSTs can handle a variety of assets - such as businesses, stocks, and personal property - offering a broader scope for portfolio management.
That said, DSTs come with a key consideration: transferring control of the proceeds to a third-party trustee. This step introduces a degree of risk, making it essential to collaborate with trusted advisors who can ensure the trust is managed responsibly and aligns with your long-term objectives. Additionally, businesses should evaluate the complexity of the DST structure to confirm it effectively supports their growth plans, funding needs, and exit strategies.
