Is a Deferred Sales Trust Legal? What the IRS Has and Hasn't Ruled
A Deferred Sales Trust is legal to use, but the IRS has never approved it. There is no revenue ruling, revenue procedure, regulation or court decision approving the deferred sales trust by name, and none banning it. It rests on the general §453 installment rules, so each one stands or falls on its own facts: trustee independence, seller control, and constructive receipt.
What the IRS has actually said about Deferred Sales Trusts
"Not illegal" and "IRS-approved" are different tests. Many positions are legal to take on a return and still carry audit risk if examined. The deferred sales trust sits in that zone. If a promoter tells you a deferred sales trust is "IRS-approved," ask for the published ruling. There is not one.
Go deeper: where the deferred sales trust stands and whether it holds up on Big Sale Tax.
Where the IRS can challenge a deferred sales trust
- Constructive receipt and economic benefit. If the seller had the right to the cash, or the trust is effectively the seller's own account, the IRS can treat the full price as received at closing and tax the whole gain in year one, with interest and possible penalties.
- Sham or agency. If the trustee is not genuinely independent, or the trust exists only to hold the seller's money and pay it back, the trust can be disregarded.
- Step transaction. If the transfer to the trust and the trust's resale are really one sale to the end buyer, the intermediate step can be collapsed.
- Economic substance. A structure whose only purpose is the tax result is exposed under IRC §7701(o).
What is the tax bill on your sale going to be?
Send me the sale price and rough basis. Within one business day I'll email you the actual number and the Seller's Guide to §453. If it doesn't fit your deal, I'll tell you that plainly.
No retainer · no obligation. Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
None of these is unique to deferred sales trusts; they are the ordinary tools the IRS uses on any installment arrangement that routes a sale through a related or controlled party. See Deferred sales trust audit risk, the sham trust doctrine and how an IRS examination of a deferred sales trust unfolds.
How a structured installment sale differs
A structured installment sale uses the same §453 installment method, but the buyer's payment obligation is assigned to a third-party assignment company and funded with an annuity from a life insurance carrier. There is no seller-related trust to challenge and no portfolio at market risk.
Neither structure has a ruling with its name on it. The difference is how many facts have to go right for the deferral to hold.
What an opinion letter should cover
A real deferred sales trust opinion letter from independent tax counsel addresses:
- Sham-trust and agency risk, and the specific facts that mitigate it
- Constructive receipt and the arguments that the installment sale is bona fide
- Economic substance and the trust's investment activity
- Step transaction risk
- The specific authorities the position relies on
If the only authority offered is a private letter ruling issued to someone else, that is marketing, not an opinion.
When deferred sales trust might genuinely be the right call
It can be, in a few cases:
- Deferred balance $15M+ with sophisticated investment goals
- Estate-planning structure that benefits from the trust wrapper
- Specific facts that mitigate the audit risks
For median $1M-$10M sellers, the §453 alternative is the clearer legal position, with a better audit posture, better math, and lower cost.
How I work
Hans Goldstein, EA, IRC §453 specialist. Admitted to practice before the IRS. If you have a deferred sales trust quote, bring it. I'll show you the §453 alternative on identical numbers and explain the legal-posture difference in plain English.
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Frequently asked
Q: Is there an IRS ruling on Deferred Sales Trusts? A: No. The IRS has not issued a revenue ruling, revenue procedure, notice or regulation that approves or prohibits the Deferred Sales Trust by name. Private letter rulings cited by promoters were issued to other taxpayers and cannot be used as precedent.
Q: Is a Deferred Sales Trust IRS-approved? A: No. The IRS does not approve tax structures in advance except through rulings to specific taxpayers. A deferred sales trust relies on the general installment-sale rules of IRC §453, and whether a given deferred sales trust holds up depends on its facts.
Q: Has the IRS ever shut down a deferred sales trust entirely? A: The IRS has not issued formal guidance shutting down deferred sales trusts as a category. Any individual deferred sales trust can be examined and recharacterized under constructive receipt, sham or step-transaction theories.
Q: My CPA is fine with a deferred sales trust. Why second-guess? A: CPAs vary. Some have done deferred sales trusts successfully; some refuse them. The §453 alternative removes the disagreement.
Q: Can I just structure both? A: They're alternatives, not complements. Same dollars, different mechanic. Pick one.
Q: I already signed a deferred sales trust. Can I undo it? A: If the sale hasn't closed, often yes. If the sale has closed and the trust holds proceeds, much harder.
Sources: 26 U.S.C. §453 (Cornell LII), 26 U.S.C. §6110(k)(3), IRS Publication 537, IRS listed transactions.
Find out what your sale is really going to cost you in tax, and what you can do about it
No retainer. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans’s share is about 2.4%; no trail). It is built into the annuity pricing, not a separate fee.
Find out what your tax bill actually looks like before you sell, including the parts your CPA may not raise until the return is already being prepared.
Most people find out what they owe after the sale closes, when nothing can be changed. A short conversation now tells you the number, which layers apply to your situation, and which options are still open while the sale is still in front of you.
- What you will actually owe: federal, the 3.8% surtax, recapture and your state
- Which of those layers you can still do something about
- Whether spreading the sale changes the number in your case
Hans Goldstein · 213-414-2808 · Hans Goldstein: Tax & Exit Planning · This is an educational conversation, not tax advice. Bring your CPA in before you file.
Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Educational. Not tax or legal advice. Get an independent legal opinion on deferred sales trust risk before signing.
New to the structure itself? Start with how a Deferred Sales Trust works, what it risks, and the §453 alternative.
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