A WAY OUT KOLBIN
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The document discusses how a Deferred Sales Trust (DST) can help clients defer capital gains taxes and reduce their overall tax burden when selling highly appreciated assets like homes, businesses, or real estate. A DST allows the seller to defer capital gains taxes until they receive payments from the trust over a chosen period of time. It converts the illiquid asset into a stream of monthly payments that can provide retirement income or be passed down to heirs. Key benefits include tax deferral, estate tax benefits, maintaining family wealth, estate liquidity, and probate avoidance. The DST purchases the asset from the seller via an installment sales agreement, then sells the asset and invests the proceeds to generate the cash flow needed to make payments to
A WAY OUT KOLBIN
- 1. | 1 Helping Clients Preserve their Estate and Protect Their Wealth “A Way Out” By: Robert Binkele, CEO Estate Planning Team, Inc How many times have you heard, or made these comments? “If I sell my property I am going to get killed with taxes?” Those of us who own highly appreciated assets such as homes, commercial real estate and businesses, are often reluctant to sell that asset because of the capital gain tax and depreciation recapture costs associated with the sale. There is a perfectly legal way to defer capital gains tax and reduce your overall tax burden. The Deferred Sales Trust™ can provide a way out. “I do not want to continue to hold or manage the asset or investment, in order for my kids to inherit my assets at a stepped up value when I pass away.” Sound too familiar? Most people don’t realize estate taxes are almost 50% above varying exemptions, and that“step-up”values are set to cap at $5.25M in 2013! There is a smart, functional, and legal way to address these issues. The answer may lay with a powerful tax tool called the Deferred Sales Trust. If you own a business or real estate with a large amount of gain and are not selling your property because of capital gain taxes, or can’t find suitable, qualified Strategic Management of Tax Liability Robert Binkele Estate PlanningTeam (866) 779-5339 Founder, CEO rbinkele@myept.com www.mydstplan.com/rbinkele Presented By: ¡ ¢ £ ¤ ¥ ¦ § ¨ © ! # $ % ' ( ( ) 0 1 2 3 4 2 3 5 4 1 6 2 7 8 9 % @ A 9 % 0 B C D ¨ ¤ E § F G B H I E P © Q R S T U V W X S Y ` a T S R T b c R S T U ` d e R
- 2. |2 Helping Clients Preserve their Estate and Protect Their Wealth property exchanges, then you may want to consider a Deferred SalesTrust™ (DST). The DST utilizes a legal and established method that allows the seller of the property to defer capital gain taxes due at the time of sale over a period of time that is selected by the Seller/Taxpayer in advance. Deferring taxes, legally, is not new. Some commonly used tax deferral methods include 1031 exchanges, charitable trusts and traditional seller carry-back installment sale contracts. Trust law predates the formation of the U.S. law and tax law. Various types of trusts are used by millions of Americans in order to protect and preserve their wealth for themselves and their heirs. The DST can be used with any kind of entity, e.g., LLCs, S or C election corporations, as well as individuals who own real estate , rental properties, vacation homes, commercial properties, hotels, land, industrial complexes, retail developments, and raw land, to name a few. What are LongTerm Capital GainsTaxes? Long-term capital gains tax is simply defined as the tax we pay on the profit we make when we sell a capital asset we’ve held for a year or more. Capital GainsTax is calculated by subtracting what you paid for the asset from the net selling price.The current long term Capital GainsTax rate for a capital asset owned for one year or longer is typically 15%- 20% for Federal taxes. Starting in 2013, there is an additional federal tax on income, known as the Investment Income Tax (funding Medicare). This investment IncomeTax has an applicable rate of 3.8% on some (but not all) income from interest, dividends, rents (less expenses) and capital gains (less capital losses). Most states charge 5% to 10% on top of that (CA is as high as 13.3%), making the total tax run as high as 37.1%. If there was depreciation taken on the asset, the cost basis is lowered by that amount, thus increasing the taxable gain! Even with your primary residence, factoring in your tax exemption of $250,000 each for husband and wife, you may still have a hefty tax surprise when you sell your property and in the form of Capital GainsTaxes. That isn’t the end of the story for the total tax effect though. Capital gain is added to the taxpayer’s adjusted gross income (AGI).This may raise the“floor”above which one can take a number of itemized deductions and affect, consequently, the Alternative MinimumTax. This could result in a large decrease or total loss of those deductions.This makes the effective, but hidden capital gain rate much larger than the stated federal and state rates. And, of course, tax payment obligations would begin immediately. Tomakemattersworsethecapitalgainanddepreciation recapturetaxesmustbepaidinthefollowingtaxquarter afterthesaleoftheasset. How does the Deferred SalesTrust work? The process starts with initial due diligence and prospective marketing and market research. If the transaction is viable, theTrust and property owner will negotiate to reach terms with regard to the asset(s). If the transaction is feasible, the property owner (“Seller/Taxpayer”), selling ownership of the property/capital asset to a dedicated trust (the“Trust”) that is set up specifically for the Seller/Taxpayer and the contemplated transaction. Next, theTrustee (must be DSTTrained and Approved) of the trust pays the Seller/Taxpayer for the property/capital asset.The payment isn’t in cash, but with a special payment contract called an“installment sales contract”. It is strictly a private arrangement between the trust and the Seller/ Taxpayer.The term of payments are established in advance and pursuant to the sale contract negotiated by and between the Seller/Taxpayer and theTrustee. The payments may begin immediately or they may be deferred for some period of months or years. TheTrust then sells the property.There are generally minimal Capital GainsTaxes due from theTrust on the sale since theTrust often purchases the property for a price and value similar to what it may get sold to a third party Buyer.
- 3. | 3 Helping Clients Preserve their Estate and Protect Their Wealth The Seller/Taxpayer is not taxed on the sale since he has not yet received any cash for the sale. Often Seller/ Taxpayers will choose deferral because they have other income and don’t need the payments right away. Of course, the payments may begin immediately. Deferral is strictly an option. It is important to understand that payment of the capital gain tax to the IRS is done with an “easy installment plan”as the Seller/Taxpayer receives the payments. Part of the payment received is tax free return of basis, part is return of gain which is taxed at capital gain rates, and part is interest. On top of that, the tax payments will be made with depreciated dollars.The tax dollars will likely be worth less than they are today due to inflation. If invested properly, the money in the trust could potentially grow at a greater rate than that of inflation and even the distribution rate and ensures the necessary liquidity to pay back the note due to the Seller/Taxpayer. (The interest rate in the note to you is dictated by the IRS to be a fair and arm’s length or competitive rate, i.e., 6% to 8%.) While we have primarily focused on Capital Gains Tax, the amount of gain due to straight line depreciation is also deferred with a DST. But if you have taken accelerated depreciation in excess over straight line, this amount is not deferrable. There is proper diversification by the DSTTrained and ApprovedTrustee in investing the DST’s funds.The DST Trained and ApprovedTrustee may invest in REIT’s, bonds, annuities, securities or other“prudent investments”that are suitable to help assure theTrustee’s performance in repaying the Seller/Taxpayer pursuant to the held installment sales note.The DSTTrained and Approved Trustee’s reinvestment of the proceeds may result in more or less risk depending on the nature of where the proceeds are reinvested. An inherent goal of the trust’s investment objective is simply to produce the cash flow necessary for the scheduled installment sales note payments to the Seller/Taxpayer. There are significant benefits to a Seller/Taxpayer in electing to use the DST when selling their property/capital asset: 1. Tax Deferral: When appreciated property/capital assets are sold, capital gains tax on said sale is generally deferred until the Seller/Taxpayer actually receives the payments. 2. EstateTax Benefits: May accomplish an“estate tax freeze”for estate tax purposes. 3. Maintains FamilyWealth: When properly structured, the principal inside the subject installment sales note can be preserved with“interest only”or partial principal payments creating the potential to pass on a large portion of the note principal to your legal heirs with proper estate planning. 4. Estate Liquidity: Converts an illiquid asset into monthly payments. 5. Retirement Income: Provides a stream of income that can be used as retirement income. 6. Probate Avoidance: With proper estate planning. 7. Eliminates Risks Associated with Ownership: By utilizing the DST, you have taken an asset that is otherwise“exposed”or liability prone and converted it to a“no-liability”asset. Nothing is required to be given away to charity, as happens with the competing strategy known as a Charitable RemainderTrust. The DST allows all due principal and accrued interest to be paid to the Seller/Taxpayer via a custom prepared installment sales agreement, whereas the Charitable RemainderTrust often pays income (interest) only.The DST has the potential and likelihood to yield more bottom line dollars to the property/capital asset Seller/Taxpayer than a Charitable RemainderTrust. The DST has the ability to generate substantially more wealth over the long run than a direct and taxed sale. It may be superior to the Charitable RemainderTrust,It may be superior to the Charitable RemainderTrust, installment sale or like-kind property exchange ininstallment sale or like-kind property exchange in many respects.many respects. Consult your tax advisor to ascertain the potential benefits of this option.
- 4. |4 Helping Clients Preserve their Estate and Protect Their Wealth How can I know the amount of my payments from the trustee? A.Thepaymentsarebasedonwhatyou,theSeller/Taxpayer, arrange andpre-negotiatewiththeDSTTrainedand ApprovedTrustee.Dependingonyourincomegoalsandother objectives,theamountandlengthoftermoftheinstallment salesnoteareyourchoiceandsubjecttoyour100% agreement. What happens if I die? A.Withproperestateplanning(i.e.,bycreatingaLivingTrust) scheduledinstallmentnotepaymentsotherwiseduetoyou cancontinuetopaytoyourlegalheirspursuanttothenote termthatyouhavechosen. Are there any flexibilities or variability in the payment stream, such as increasing the payments over time? A.Yes.TheDSTTrainedandApprovedTrustee,inhis/herab- solutediscretion,mayallowyoutorefinanceyourinstallment salesnoteinordertoextendorshortenthenotetermorto provideyouwithpayments(orgreaterpayments)ofprincipal (andshouldyoudecidetotakean“interestonly”noteinitially). Can I cancel the whole deal after a few years and get my money? A.IftheDSTTrainedandApprovedTrusteedeemsappropriate, He/Shemayelecttoterminatetheinstallmentsalescontract. However,youwouldimmediatelyoweallthetaxes,including allunpaidcapitalgainsduefromtheoriginalsaleofthe property/capitalasset. What happens if capital gain tax rates are changed after I set up the DST? A. Politicians,fromtimetotime,discusschangingcapitalgain rates.Ifthathappensyouwouldpaythenewrateonthecapital gainsportionofyourinstallmentnotepayment.However,there isusuallyadequatenoticetomakeasoundfinancialdecision priortoanysuchchangeintaxationortaxrates. Can I use my installment sales note to get back into real estate? A.Yes,pleasecontacttheEstatePlanningTeamoraduly qualifiedDSTtaxprofessionaltodiscussthisoption. WerecommendthatyouworkwithEstatePlanningTeam’sWerecommendthatyouworkwithEstatePlanningTeam’s ProfessionalAdvisorswhoareexperiencedintrustlaw,trustProfessionalAdvisorswhoareexperiencedintrustlaw,trust assetmanagementandtaxlawassetmanagementandtaxlaw When the trust sells the property may I keep some of the cash from the sale? A.Yes,inthatcaseyouwouldpaytaxesonlyonthecapital gainportionofthemoneywhichyoukeptforyourselfoutside thetrust. How can I have my tax advisor or attorney analyze the DST strategy? A.Fordetailedtechnicalinformation,haveyourCPAcontact EPTforafulllegalandtaxcitepackage.ThenamesDeferred SaleTrust™andDSTarecommonlawtrademarkednamesand arenotfoundinthecode.Allofthelegalandtaxauthorityused intheDSTareinthetaxcode,treasuryregulations,cases,or rulingsbased uponthefoundationsfoundwithinthetaxlaw. I’m interested in finding out if this works for me. What should I do next? A.It’sveryeasy. Yournextstepistocompletea“freeillustrationrequest” on-lineat: www.mydstplan.com/rbinkele Or,youcancallandrequesta“freeDSTillustration”which willillustrateyourparticularfactsandcircumstancessur-willillustrateyourparticularfactsandcircumstancessurwillillustrateyourparticularfactsandcircumstancessur roundingyourpotentialsaleasitrelatestoutilizingtheDST. Onceyouhavereceivedtheillustrationsummary,youcanthen reviewthisinformationwithatrustcasemanagerandshare thisinformationwithyourCPAortaxattorneyforfurtherreview. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Frequently Asked Questions: Robert Binkele Estate PlanningTeam Founder, CEO (866) 779-5339 rbinkele@myept.com www.mydstplan.com/rbinkele f g h i p q r s t u v w f x y w r € t ¡ ¢ £ ¤ ¥ ¦ § ¨ © ! # $ % ' ( ( ) 0 1 2 3 4 2 3 5 4 1 6 2 7 8 9 % @ A 9 % 0 B C D ¨ ¤ E § F G B H I E P ©