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  • Writer's pictureBenjamin Dyches

Maximizing Wealth: How to Use Tax Deferral Trusts to Mitigate Capital Gains

Introduction:

Assume a healthcare practice is sold for a profit of $5 million, which qualifies as a long-term capital gain. Proceeds are received directly by the practice seller and all are taxed in the year received. 

The taxes due on the sale are $1,190,000 

(20% long-term capital gains rate plus 3.8% net investment tax x $5 million).


Now assume instead The Aegis Lion Tax Deferral Trust is used. The practice seller will realize $262,966 in savings, just in years 1-3 of the 12-year plan.


Deferred Sales Trusts (DSTs) have been gaining popularity in recent years as a powerful tool for deferring capital gains taxes on the sale of appreciated assets, such as a business, real estate, or stocks. If you're considering selling an appreciated asset and want to defer capital gains taxes, a DST might be the perfect solution.


In this blog post, we will explore the benefits of a DST and provide an example of how an orthodontist sold his practice using a DST.




What is a Deferred Sales Trust?

A Deferred Sales Trust is a financial vehicle that allows the seller of an appreciated asset to defer capital gains taxes by redirecting the sale proceeds into a trust, rather than receiving the proceeds directly. The trust is managed by a third-party trustee, who invests the funds in a diversified portfolio of assets, generating income for the seller.


The Aegis Lion Tax Deferral Trust establishes an irrevocable trust with an independent trustee. The practice is sold to the trust in an installment sale and then resold immediately for the same price to the ultimate purchaser in a cash sale. You decide how you want the installment payments made to you by the trust, but assume for this example that no payments are made from the trust for 2 years, and then equal payments are made to you over 10 years. The trust invests all proceeds it holds.


The seller can choose to receive regular payments from the trust or defer the payments to a later date. By deferring the payments, the seller can reduce their tax liability by spreading out the income over a longer period, potentially reducing their tax bracket and tax rate.


Orthodontist Example:


Let's take the example of an orthodontist who sold his practice for $5,000,000. If the orthodontist received the full amount of the sale proceeds, he would owe significant capital gains taxes. However, by using a Deferred Sales Trust, the orthodontist could defer the taxes and spread the income over a more extended period.


The practice seller is taxed on the profit from the sale only when he receives an installment payment from the trust. Thus, in years 1 and 2, no taxes are due on the profit from the sale. The $1,190,000 in taxes that would have gone to the federal government are invested by the trustee on behalf of the practice seller.  If a 10% annual return is realized on this amount and distributed to the practice owner each of the 2 years, the tax savings produce an investment return of $238,000 ($119,000 per year). This investment return is taxed as any investment return is taxed. Thus, a 20% long-term capital gains rate plus 3.8% net investment tax applies.  


By using the Aegis Lion Tax Deferral Trust, the practice seller realizes a net investment gain after tax of $181,356, compared to an outright sale, and those savings are just for the first two years of the 12-year plan in this example.


$500,000 in profits from the sale would be distributed annually by the trustee to the practice seller in years 3-12 in this example. Savings would continue to be realized in those 10 years when distributions were made. Year 3 savings would be as follows:


$1,071,000 in taxes (20% long-term capital gains rate plus 3.8% net investment tax x 4.5 million) that would have gone to the federal government would be invested by the trustee on behalf of the practice seller. If a 10% return is realized on this amount and distributed to the practice owner, the tax savings produce an investment return of $107,100. A 20% long-term capital gains rate plus a 3.8% net investment tax applies to this investment return. The practice seller realizes an additional net gain in year 3 after tax of $81,610 compared to an outright sale.


By deferring the payments, the orthodontist could potentially reduce his tax bracket and tax rate, resulting in significant tax savings. Additionally, the orthodontist could use the trust funds to purchase additional assets, such as real estate or stocks, further diversifying his portfolio.


Why Choose Aegis Lion Law:

If you're considering a Deferred Sales Trust, you want to work with a firm that has the experience and expertise to ensure the trust is structured correctly and meets all IRS regulations. Aegis Lion Law is the premier DST firm, with a team of experienced attorneys who specialize in DST planning and implementation.


Our team will work with you to develop a personalized DST plan that meets your specific needs and objectives. We will guide you through the entire process, from establishing the trust to investing the funds and managing the income. Our commitment to delivering exceptional service and support has earned us a reputation as a trusted DST firm.


Conclusion:

Deferred Sales Trusts are a powerful tool for deferring capital gains taxes on the sale of appreciated assets. By redirecting the sale proceeds into a trust, rather than receiving the proceeds directly, sellers can potentially reduce their tax liability and spread out the income over a more extended period. If you're considering a DST, you want to work with a firm that has the experience and expertise to ensure the trust is structured correctly and meets all IRS regulations. Aegis Lion Law is the premier DST firm, with a team of experienced attorneys who specialize in DST planning and implementation. Contact us today to learn more about how we can help you defer your capital gains taxes and achieve your financial goals.

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