Financial Benefits of a Deferred Sales Trust: Running the Numbers

To illustrate the potential financial upside of a Deferred Sales Trust (DST) in layman's terms, I'll use a realistic example based on common scenarios from tax experts. We'll compare a direct sale (where you sell the asset, pay taxes upfront, and invest what's left) to a DST (where taxes are deferred and spread out, with the trust potentially growing the funds). The key "end benefit" here is your total after-tax wealth after 10 years, assuming you invest any net cash you receive along the way at a moderate 7% annual return (like a balanced stock/bond portfolio).

I'll "run the numbers" using calculations inspired by detailed examples from financial analyses. These show how DSTs can shine when spreading out payments keeps you in lower tax brackets, reducing your effective tax rate. However, results vary based on your income, state taxes, and market returns—always run your own numbers with a tax pro.

Key Assumptions for Our Example

  • Asset Details: You sell a business or property for $1,000,000 (fair market value). You originally bought it for $250,000 (your "basis"), so your capital gain is $750,000.

  • Tax Rates:

    • Capital gains: Progressive federal brackets (0% on low income, up to 20% on high). Plus a potential 3.8% Net Investment Income Tax (NIIT) if income exceeds ~$250,000 for married filers.

    • Ordinary income (like interest): Progressive brackets (up to 37%).

    • In direct sale: High one-time gain pushes you into higher brackets (effective ~16% on the gain including NIIT).

    • In DST: Spreading income assumes low other income (e.g., retirement), keeping capital gains at 0% and ordinary taxes minimal after deductions.

  • DST Structure: You transfer to the trust, which sells for $1M cash. Trust pays you via a 10-year promissory note at 5% interest (a common safe rate). Annual payments: ~$129,505 (calculated via amortization formula—part principal, part interest).

  • Investment Return: 7% annual on net cash you receive (your investments) and on the trust's funds.

  • Time Period: 10 years.

  • Other Notes: Ignores state taxes, inflation, and DST setup fees (~$10k–$50k upfront + 1–2% annual management). Assumes no other income for max deferral benefit. Gain portion of principal: 75% ($750k gain / $1M sale price).

Scenario 1: Direct Sale (Pay Taxes Upfront)

You sell directly, pay the full tax bill immediately, and invest the net proceeds.

  • Upfront Tax Calculation:

    • Capital gains tax: ~$100,865 (blended 0%/15%/20% brackets on $750k gain, after ~$29k standard deduction for married filers).

    • NIIT: $19,000 (3.8% on gain above threshold).

    • Total Tax: $119,865.

  • Net Proceeds: $1,000,000 - $119,865 = $880,135.

  • Invest at 7% for 10 Years: $880,135 grows to ~$1,731,000 (using compound interest: principal × (1 + 0.07)^10 ≈ ×1.967).

End Benefit: You have ~$1.73 million in after-tax wealth after 10 years. But you lost the chance to grow the ~$120k tax money—you paid it to the IRS day one.

Scenario 2: Using a Deferred Sales Trust (Defer and Spread Taxes)

The trust gets the full $1M, invests it, and pays you ~$129,505/year for 10 years. You pay taxes only on each payment's gain portion (pro-rated at 75%) and interest (taxed as ordinary income). Spreading keeps taxes ultra-low here.

  • Annual Payment Breakdown (Amortization Example):

    • Year 1: Interest ~$50,000 (taxed ordinary), principal ~$79,505 (75% gain = ~$59,629, taxed capital).

    • Taxes: Minimal—capital gains at 0% (low bracket), ordinary after deduction (~$5,318 total over 10 years, or ~$532/year average, mostly on early interest).

    • Net per year: ~$129,505 - $532 = ~$128,973.

    • This decreases slightly as interest drops, but averages out.

  • Total Received Over 10 Years: $1,295,050 (includes ~$295,050 interest—extra income the direct sale doesn't have!).

  • Total Taxes Paid: Just $5,318 (huge savings vs. $119,865 upfront!).

  • Net Received: $1,295,050 - $5,318 = $1,289,732.

  • Compound Your Net Payments at 7%: Since payments come annually, we calculate the future value of this "annuity" stream at year 10: ~$128,973/year × [((1+0.07)^10 - 1)/0.07] ≈ ×13.814 = ~$1,781,000.

  • Bonus: Trust's Investment Growth: The trust earns 7% (higher than the 5% note rate), so after all payments, there's a remainder (~$178,000 gross, based on simulations). Assume taxed at 20% capital gains when distributed: Net ~$142,000 added to your wealth.

End Benefit: ~$1,781,000 (from payments) + $142,000 (remainder) = ~$1,923,000 in after-tax wealth after 10 years.

Comparison Table: Direct Sale vs. DST

AspectDirect SaleDeferred Sales Trust (DST)Difference (DST Benefit)Upfront Net Cash$880,135$0 (spread over time)N/ATotal Taxes Paid$119,865$5,318+$114,547 savedTotal Received (Pre-Tax)$1,000,000$1,295,050 (incl. interest)+$295,050 extraAfter-Tax Wealth at Year 10~$1,731,000~$1,923,000+$192,000Effective Tax Rate on Gain~16%<1%Much lower

Potential Benefit: In this scenario, the DST could boost your end wealth by ~$192,000 (11% more than direct). The magic comes from:

  • Tax Savings (~$114,000): Deferral + lower brackets = paying almost nothing on the $750k gain.

  • Extra Interest Income (~$295,000 pre-tax): The note adds income the direct sale misses.

  • Growth on Deferred Taxes: The IRS doesn't get $120k upfront—you grow it instead (worth ~$236,000 after 10 years at 7%, though offset by some interest taxes).

  • Trust Leverage (~$142,000 net): Higher returns in the trust create a "bonus" pot.

A More Conservative Scenario (If Brackets Don't Help As Much)

Suppose you have higher income, so capital gains tax stays at 15–20% even in DST (no "zero bracket" magic). Using flat rates (20% on gains, 37% on interest, 3.8% NIIT if applicable):

  • Direct: Same ~$1,731,000 end wealth.

  • DST: Taxes ~$304,000 total (same gain tax + high interest tax), but deferred. Net payments compound to ~$1,565,000 + $142,000 remainder = ~$1,707,000.

  • Benefit: Only ~-$24,000 (slightly worse due to high interest taxes offsetting deferral gains).

This shows DST's "potential" shines brightest for retirees or low-income years, where spreading slashes rates. In high-income cases, it might break even or lag after fees.

Real-World Example from a Case Study

Take "Dave's" apartment sale: $7.6M value, ~$1.1M potential tax. Using DST, he deferred the $1.1M, got steady payments, and kept ~16% more capital working (potentially growing to millions extra over time). Without DST, that $1.1M goes to taxes day one—no growth.

Caveats and Risks

  • Not Always a Win: If markets tank (trust earns <5%), payments could falter—riskier than direct.

  • Fees Eat Benefits: $20k setup + $5k–10k/year management could shave $70k+ off gains.

  • IRS Risks: Must be structured perfectly; critics say DSTs are just fancy installment sales with extra hype and credit risk.

  • Liquidity Trade-Off: No big lump sum upfront—great for income, bad if you need cash now.

In summary, a DST's end benefit could add $100k–$200k+ to your wealth over 10 years in ideal cases, mainly from tax magic and growth on untaxed funds. But it's not guaranteed—depends on your taxes and returns. If this matches your situation, chat with an advisor for personalized math!