Deferred Sales Trust vs a Monetized Installment Sale

At Albiron Capital, we specialize in several form of Code Section 453 alternatives, all of which let you sell your property, real or personal, for cash while deferring your capital gains for up to 30 years.

A "Deferred Sales Trust" is a term used to describe a sale and investment arrangement in which an appreciated asset is sold in an installment sale by a trust which the owner of the asset causes to be formed. The sales proceeds then are invested and managed by the trust. Distributions to the seller from the trust are taxable to the extent that they include return of principal.

A "Monetized Installment Sale" includes the sale of an appreciated asset in exchange for an installment agreement and note, which defers capital gains tax. The note is then monetized in a tax-free borrowing, providing cash at closing equivalent to up to 95% of the net sales proceeds, less lenders fees.

Often a complaint about Deferred Sales Trusts is that they are more expensive, require more effort and expense to maintain and is based on a weaker legal precedent than the Monetized Installment Sales. The main differences between these two tax strategies are explained below:

Length of Contract

With Albiron, we allow the seller to dictate the terms of repayment of the installment sales, which may be regular payments, deferred, or some combination. The terms allow for periods between 7 and 30 years and are renewable. The arrangement can be for an amortizing note, which pays a combination of principal and interest or a delay of principal with a balloon at the end. Capital gains tax is deferred via the installment sales, and tax deferral decreases with any return of principal.

Under the Monetized Installment Sale, there is again, no payment of capital gains until the negotiated end of the contract, between 10 and 30 years, again renewable.

Liquidity

If the seller wants liquidity in the form of return of principal from the Deferred Sales Trust, they must sacrifice tax deferral.

Under a Monetized Installment Sale, a loan is provided up front allowing for the deferral of capital gains, creating a much more liquid solution.

Upfront Costs

Albiron does not charge any up-front costs for our trust. Additionally, we do not charge any annual maintenance fees.

Under a Monetized Installment Sale, there is normally a 6.5% fee (including lenders), with minimum ongoing fees.

Ongoing Administration and Compliance Burden

Both options are bound by the current rules regarding Tax Code Section 453. The main difference is that under an Albiron Deferred Sales Trust, a fiduciary must be in control of the Trust. A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. While both options require a Qualified Intermediary (QI) be involved, Albiron includes this service at no extra charge.

Ongoing Third-Party Involvement

The Albiron Deferred Sales Trust requires professional management. The Monetized Installment Sale does not require any professional to be involved.

Control Over Investments

With an Albiron Deferred Sales Trust, the trust manager is responsible for oversight of the trust's investments. Under a Monetized Installment Sale, the participant is completely in control of their loan.

Legal Precedent

Deferred Sales Trusts adhere to Tax Code Section 453. There has not been a need for additional rulings from the IRS.

Monetized Installment Sales also adhere to Tax Code Section 453. We know of no adverse rulings to these plans. According to one attorney, (not associated with our firm), "The rules which Congress put into place allow sellers of agricultural properties and homes to sell on installment contracts and at the same time borrow money, with the loan being secured by the installment contract. In the case of installment sales of business or investment property, Congress said that the installment seller could enjoy tax deferral and still borrow money elsewhere at the same time, as long as the loan which the seller takes out is not "directly secured" by the installment contract or the lender does not take the installment obligation in satisfaction of part or all of the loan to the seller." Their view is a resounding yes. However, other attorney's have questioned the use of Chief Counsel Memorandum 20123401F stating the document refers to agricultural ground and this type of Memorandum is the lowest rung of IRS rulings.