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Protecting Their Future: How Deferred Sales Trusts Allow You to Bequeath an Asset Without Stepped-Up

When taking important steps towards safeguarding your family's financial future, you want to pass on as much as you can. This article will outline how a deferred sales trust allows you to bequeath property without worrying about stepped up value.

While working to secure the financial future of your children or loved ones, it’s natural to worry about what will happen to their inheritance. Many do, and this understandable fear often has two roots: in stepped up value, and in capital gains tax. Both these things can work separately or together to sap whatever inheritance is left to your loved ones, but there’s a way to protect your inheritors from these confusing pitfalls.

Understanding a Deferred Sales Trust

First, some terms. What is "stepped up" value? A property’s value becomes stepped up when it is passed on as an inheritance and has appreciated in value. The IRS then reassess the value of the appreciated property and applies capital gains tax accordingly. This can inflate the value of the property far beyond what may have been expected, and any plans made for the recipients of your will might need to be drastically readjusted in light of the new taxes owed.

A Deferred Sales Trust is a trust you establish with a legitimate third-company party for the purpose of conferring your highly appreciated assets in a way designed by you and your advisors to control capital gains tax. It is important that the third-party is legitimate, meaning it can be under the control of a family member of someone with a financial stake in the trust’s success, or else the IRS will declare it a sham trust and leave your will recipients with the full capital gains tax to pay.

The Deferred Sales Trust can distribute payments using an agreed upon installment contract calculated to control capital gains tax. Some of the income from the installment contract payments is taxable, but not all of it. A Deferred Sales Trust can control money or property. It can direct the sale of a property, invest money in other properties, or make monthly payments.

When exploring your options for leaving your assets to your children and loved ones, make sure you’ve made all the calculations. Capital gains tax can take anywhere from 15-30 percent of your money, and this is before calculating the loss from estate tax! If you’re not going to consider establishing a Deferred Sales Trust, make sure you’re taking those large percentages into account, otherwise, a financial plan for the recipients of your will might leave them with significantly less money than intended, and significantly more taxes to pay than desired.

A Deferred Sales Trust is a perfectly legal, sensible, and flexible method of transferring money to your children and loved ones after your passing. Legal methods of deferring taxes are nothing new and come in a variety of options, like a 1031 or 721 exchange. However, the Deferred Sales Trust is the safest for you and your children, and gives you and, eventually, them, the most control over how the funds are allocated and disbursed.

We hope this article has been helpful in informing you how a Deferred Sales Trust could be a valuable tool in making sure as much of your financial legacy as possible is passed on to your children and loved ones. When you consider how you’re planning for their future, make sure you’re taking all the options into account so you can know you’ve done the best for them you can.

To learn more contact Adam Ausloos 414-269-2600 or Email him at

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