On What Is The Deferred Sales Trust and Why Is it So Important

[Brett P Swarts]

Ricardo Matos:

Tell us about the Deferred Sales Trust or what we call DST. Why is it so important?

Brett Swarts:

Yes. So most again, clients, start with capital gains tax. But more than that, they also want to give them what's called a transformational exit plan. I'll talk about the difference between them. And just like a transactional exit plan. So most folks, when they think about selling their business, they're thinking about a couple of options. And the first one is what I call a transactional exit plan, which is just carrying paper for the buyer, right. In other words, you come with a down payment, I will become the bank and I will lend you my equity on the deal, therefore are to first some tax is called a seller carry-back or owner financing. That's probably the most traditional way folks have done things. But the challenge with that is you're tied to that buyer Ricardo. So it's nice it has as well-intentioned as you may be if I'm selling you my business, I may have to foreclose on you, I might have to take the business back, the market could fall apart, you may not be able to pay your bills, COVID-19 could happen. In other words, you're not diversified. You're counting on one person or one group who's buying your property or your business. And you're putting 100% or a lot of your blood, sweat, and tears, you're carrying back that equity. And that person may foreclose on you, right. And I like to call that the transactional exit planner, also known as a kind of like the blockbuster way of doing things, Ricardo.

Do you remember back in the blockbuster old days, about 10 years ago, you'd show up on a Friday night, you want to get that favorite movie, you see the movie, at the end of the store, you'd walk over to it, but guess what someone out there before you and so that movie that you want, they get and so you're frustrated that you grab another movie and you got your first choice, but that's okay, you're still gonna make the best of it, right? But then you go home and you have to rewind it. Also, you're waiting another five or six minutes to rewind it. And then fast forward, two days go by and you forget whether you don't re-send it back. And now you get a fee after three days. This is the transactional type of plan that most people do, they're stuck in these really small windows with no diversification, no liquidity, they might have to take it back. Whereas you now have that Netflix, which is known as the deferred sales trust. It's a better way of doing things, right. There are no timing restrictions. You don't have to find someone 100% You don't have to find someone, anyone at all, you just have to finance the trust. And then you can invest it whenever you want stocks, bonds, mutual funds, you can use it to fund your next business venture.

In fact, we just had a business owner, he sold a $2.6 million business in Alabama. He was faced with $600,000 of tax Ricardo, he sees his partners they didn't want to sell but he did and there are three people total. So his partner said, We'll buy you out. And so they bought him out. But he's looking at the $600,000 tax liability. So that was his brick wall. He was like, I don't know what I'm going to do. And he also wants to go start a new business afterward. And how am I gonna get funding for all this? Who am I going to borrow from? Yeah, so into the deferred sales trust, he gets connected with us. He has his CPA, his legal team goes through it. We go through it all with him. For the first time, he sells for all this tax and then puts a big to go start his next real estate company, which he's doing right now development business of multifamily investments in Tennessee. You see it became transformational for him because he could separate from this big partnership issue. He could defer his tax, but then he can use it to launch his next business dream, without having to count on venture capitalists or hard money lenders or a bank over there. In fact, no he could use his trust to fund his leverage for this venture.

Learn more about Deferred Sales Trust:
Visit: www.capitalgainstaxsolutions.com