A Deferred Sales Trust can defer capital gains — but it lives in a tax gray zone the IRS has been circling. Here's an honest look at the risk, and the IRS-recognized §453 alternative that does the same job without the asterisk.
If you're selling an appreciated asset and someone has pitched you a Deferred Sales Trust (DST), you've probably also Googled some version of "is this actually legal?" Good instinct. Here's a straight answer from someone who places deferral structures for a living — including the honest part most DST promoters skip.
A DST uses a third-party trust to "buy" your asset and resell it, then pay you over time — deferring the gain. The concept relies on installment-sale principles, but the specific structure has never been blessed by an IRS revenue ruling. It works by analogy, not by a clear green light.
Because the IRS has been paying attention. Related "monetized installment sale" arrangements landed on the IRS Dirty Dozen list, the DOJ has pursued promoters of sham-trust arrangements, and court cases have tested the edges. A legitimate DST can be defensible — but you're relying on facts, promoters, and trustees you don't control, in an area without a definitive IRS ruling.
A Structured Installment Sale (SIS) achieves the same goal — spreading your gain over years to lower the tax — but it's built directly on IRC §453, the installment-sale statute Congress wrote, with the future payments backed by a highly rated life-insurance-company annuity. There's no exotic trust, no promoter, and no reliance on an untested theory. It's the deferral structure you can explain to your CPA without either of you wincing.
If the appeal of a DST is "spread the tax and get reliable income," a structured installment sale usually gets you there with far less tax risk. The DST's extra flexibility rarely justifies sitting in a gray zone on a once-in-a-lifetime sale. Get a second opinion before you sign anything.
A Deferred Sales Trust relies on installment-sale principles, but the specific structure has never been validated by an IRS revenue ruling, so it operates in a legal gray area. It is not automatically illegal, but its defensibility depends entirely on how it is structured and administered.
The IRS has scrutinized closely related arrangements such as monetized installment sales (which appeared on its Dirty Dozen list), and the DOJ has pursued promoters of certain sham-trust arrangements. A properly run DST may be defensible, but the category has drawn enforcement attention.
A Structured Installment Sale under IRC §453 achieves similar tax deferral — spreading the gain over years — but is built on the installment-sale statute itself, with payments backed by an A-rated insurance carrier. It avoids the untested-trust risk of a DST.
A DST uses a third-party trust without a specific IRS ruling; a structured installment sale uses the §453 installment method directly, with a carrier-funded payment stream. The SIS is generally considered the more conservative, IRS-recognized option.
Yes. The future payments in a structured installment sale are funded through a highly rated life-insurance-company annuity, providing a predictable, guaranteed income stream that does not depend on a trustee's investment decisions.
Before you sign anything, run your numbers with someone who structures the deal to be tax-smart and audit-ready from day one.
Call 213-414-2808 Run the Numbers →