A Deferred Sales Trust is a legal, IRS-recognized strategy that allows you to defer capital gains tax on the sale of a business, real estate, or other highly appreciated asset. It works by structuring the sale as an installment note through a third-party trust—meaning instead of receiving the sale proceeds directly (and triggering tax), the trust receives them, and you get paid out over time.
It’s not a loophole. It’s not offshore. It’s not magic. It’s a deferral tool – one piece of a larger financial strategy. If someone is pitching it like a silver bullet, walk away.
Used correctly, a DST can solve real problems for business owners and investors facing massive tax hits after an exit. Used carelessly, it can create more complexity than it’s worth.
Let’s break down how and when to use it, and when to look elsewhere.
Why Business Owners and Real Estate Investors Look to DSTs at Exit
Most DSTs show up when someone’s sitting on a big, taxable event.
- Selling a business for $10M? You could owe $2–$3 million in capital gains taxes.
- Offloading a $5M rental portfolio with low basis? Same problem.
- Unwinding a concentrated stock position or valuable asset? Tax time.
That’s where the DST steps in: it lets you defer those taxes by not taking the full proceeds upfront. Instead, you receive payments over time—structured through the trust—spreading your tax liability and keeping your liquidity intact.
For founders, real estate investors, or legacy family businesses, it can mean the difference between reinvesting for growth—or handing a third of your profit to the IRS on Day 1.
The Capital Gains Problem Deferred Sales Trusts Aim to Solve
When you sell a highly appreciated asset, the IRS wants its cut. And they don’t care how much time or risk it took to build that value.
Here’s the trap:
- You sell a $10M business you built over 15 years.
- Your cost basis is $1M.
- That $9M in gain gets taxed—federal, state, and potentially Medicare surtax—easily 20–35% combined.
- That’s $2M+ evaporated before the check clears.
Installment sales can help. 1031 exchanges can help—if you’re in real estate. But both have limits. That’s why DSTs were designed: to offer a flexible way to legally defer tax while still allowing the seller to reinvest and maintain a stream of income.
How a Deferred Sales Trust Works (In Plain English)
Let’s say you’re selling a business or property for $5M.
- You don’t sell directly to the buyer. Instead, a DST (set up by a third-party trustee) buys the asset from you in exchange for a promissory note.
- Then the DST sells the asset to the final buyer at the same price.
- The proceeds stay in the trust. You’re not taxed yet because technically, you haven’t received the funds.
- You get paid out over time. The DST pays you on a schedule—monthly, quarterly, annually—based on the installment note terms.
You control the payout structure. And the trust can invest the proceeds in a diversified portfolio during that time, creating income and appreciation inside the trust.
Important: this isn’t a shell game. You’re deferring—not avoiding—taxes. You’ll pay capital gains as you receive distributions.
When to Use a Deferred Sales Trust—and When Not To
A DST isn’t a universal fix. It’s a fit for specific outcomes:
Good use cases:
- You’re selling an asset over $1M and want to avoid a massive upfront tax hit
- You want to reinvest proceeds into diversified assets (not just more real estate)
- You’re retiring or exiting a business and want stable income
- You want time to plan legacy, estate, or charitable giving strategies
Not good use cases:
- Sale proceeds are under $1M (the fees won’t justify the benefit)
- You want immediate control over all the cash
- You don’t trust third-party fiduciaries (the DST must be independently managed)
- You want tax-free—DSTs aren’t that. They’re tax-deferral.
Pros of a Deferred Sales Trust
- Defers Capital Gains Taxes: Instead of handing over 20–35% right away, you spread the liability over time.
- Keeps Liquidity Investable: The trust can invest sale proceeds while you draw income—keeping your capital working.
- Adds Flexibility to Estate Planning: DSTs can be layered into charitable giving, legacy transfers, or tax-minimized inheritances.
- Avoids Like-Kind Restrictions: Unlike 1031 exchanges, you’re not locked into the same asset class.
Cons of a Deferred Sales Trust
- Setup Costs and Ongoing Fees: Typically $5,000–$15,000 upfront, with ongoing trustee and investment advisory fees.
- Complex Structure: DSTs require legal, tax, and trustee coordination—if done wrong, the whole structure collapses.
- Third-Party Control: You don’t directly control the trust—you influence distributions, but it’s managed independently.
- IRS Scrutiny: While DSTs are legal, they’ve been marketed aggressively. Bad actors have led to more oversight. Your structure must follow IRS guidelines precisely.
What the IRS Actually Says About Deferred Sales Trusts
The IRS hasn’t outlawed DSTs, but they have signaled concern.
They’ve published memos and court cases warning against “abusive” versions of these transactions, especially when the trust:
- Isn’t independently managed
- Doesn’t carry real economic substance
- Appears to be a sham or backdoor to immediate control of funds
That’s why DSTs must be set up with third-party trustees, documented carefully, and managed transparently.
Used properly, the IRS has no issue with deferring gains via legitimate installment methods. Used sloppily, you’re inviting an audit.
How We Use Deferred Sales Trusts at Bennett Financials (When It Makes Sense)
At Bennett, DSTs are never the starting point.
We start with the sale timeline, the size of the gain, and your long-term goals—liquidity, income, reinvestment, legacy. If a DST helps serve that plan, we bring it in.
But we’ve turned down DSTs just as often as we’ve implemented them.
For example:
- One client sold his $3.8M business. The DST allowed him to receive income over 15 years while reinvesting the bulk into an asset-backed portfolio. It lowered his first-year tax exposure by $700K—and gave him cash to fund the next business.
- Another client wanted full control of the funds and didn’t like third-party oversight. We structured a charitable remainder trust instead.
This isn’t plug-and-play. It’s strategy-first, structure-second. That’s the difference between a DST promoter and a strategic finance team.
Alternatives to a Deferred Sales Trust
A DST is one tool. But here are others we use depending on your goals:
- 1031 Exchange: Great for real estate—but you’re locked into reinvestment rules.
- Installment Sale: Simple, but risky. If the buyer defaults, you’re on the hook.
- Qualified Opportunity Zone (QOZ): Potential for tax deferral and exclusion—but only for certain real estate or business investments.
- Charitable Remainder Trust (CRT): Defer taxes and support causes you care about—especially for philanthropic legacy plans.
Smart strategies often blend these. A layered approach allows you to defer, reduce, and redirect taxes to where they build wealth—not just avoid pain.
Deferred Sales Trust FAQs
Can I use a DST on the sale of a business? Yes, especially if the business is held in an entity (like an LLC or S-Corp). The sale needs to be structured correctly.
Do I still control the money? You receive payments, but the trust controls the invested assets. You help design the investment strategy, but a third-party trustee manages the funds.
How long can I defer taxes using a DST? As long as the installment note specifies. Some stretch out for decades. Tax is paid only as you receive funds.
Is this legal? Yes—but only if done right. DSTs must follow IRS rules around installment sales and third-party trust management.
Will using a DST increase my audit risk? It can if set up improperly. That’s why structure, documentation, and trustee independence matter.
Final Take: A Deferred Sales Trust Is a Tool, Not a Strategy
If you’re thinking about using a Deferred Sales Trust, ask this first:
“Is this the best way to hit my real financial goal?”
Not just reduce taxes. Not just defer pain. Build wealth. Keep liquidity. Exit clean. That’s the target.
A DST can be part of the answer, but it’s never the whole plan. At Bennett Financials, we use it when it fits, ignore it when it doesn’t, and always wrap it inside a full tax and exit strategy.
If you’re selling a business, offloading property, or facing a big tax hit, find out how we can help you build a real plan to walk you through the numbers, map the exit, and show you exactly what’s possible.