Beyond the 1031 Exchange: How Deferred Sales Trusts Protect Your Wealth

Ryan Hawk, CFP®

11/25/2025

Are You Facing a Massive Tax Bill After Years of Building Your Business?

You’ve spent decades building your company from the ground up. Now, as you prepare to sell and finally reap the rewards of your hard work, you’re staring down a sobering reality: federal capital gains taxes of up to 20%, plus the 3.8% Net Investment Income Tax, plus state taxes.¹ For high-net-worth individuals selling businesses valued in the millions, that could mean losing nearly a quarter of your proceeds to immediate taxation.

Consider this scenario: You’re selling your business for $5 million with a $1 million cost basis. Without strategic planning, you could face approximately $800,000 to $950,000 in combined federal and state capital gains taxes—money that could have funded your retirement, supported your family’s future, or been reinvested to grow your wealth.² The frustration isn’t just about the tax bill itself. It’s about the lack of control, the feeling that after years of sacrifice and smart business decisions, you’re forced to hand over a disproportionate amount to taxes all at once, with no flexibility to manage the timing or reduce the impact.

You deserve better than watching decades of wealth-building evaporate in a single tax year. You deserve strategies that give you control over your financial future while staying fully compliant with IRS regulations.

We Understand the Complexity of Large Asset Sales

At HBKS Wealth Advisors, we understand the frustration high-net-worth individuals face when selling appreciated assets. We’ve guided countless business owners, investors, and families through the complex landscape of capital gains tax planning, helping them preserve more of their hard-earned wealth while maintaining peace of mind about their tax compliance.

Recognized Expertise in Advanced Tax Strategies

HBKS brings decades of experience in sophisticated wealth management and tax planning strategies. Our holistic approach ensures that every tax decision aligns with your broader financial goals, retirement plans, and legacy objectives.

Understanding Deferred Sales Trusts: A Flexible Tax Deferral Strategy

A Deferred Sales Trust (DST) is a legal and financial arrangement designed to defer capital gains taxes on the sale of highly appreciated assets. Grounded in Internal Revenue Code Section 453, which governs installment sales, DSTs allow sellers to spread tax liability over time rather than paying it all upfront.⁴

How DSTs Work

Unlike a 1031 exchange—which applies only to like-kind real estate transactions—DSTs can be used for a broader range of assets, including:

Business sales
Real estate in certain scenarios
Stocks and securities
Artwork and collectibles
Intellectual property

The structure involves creating an irrevocable trust that acts as an intermediary in the sale process:

Step 1: Asset Transfer The seller transfers the appreciated asset to the DST before the sale is finalized.

Step 2: Sale by the Trust The trust sells the asset to a third-party buyer and receives the proceeds.

Step 3: Installment Payments The trust holds the proceeds and distributes them to the seller over an agreed-upon period (often 10-20 years or more) in the form of installment payments. Capital gains taxes are only due as these payments are received.³

This setup effectively converts a lump-sum sale into an installment sale, deferring taxes and allowing the seller to invest the proceeds in a diversified portfolio managed by the trust. The deferred taxes can potentially be managed or even reduced through estate planning, charitable contributions, or other advanced techniques.⁴

Key Players in a DST Structure

Trustee: An independent third party who manages the trust and ensures IRS compliance Seller (Beneficiary): Receives installment payments according to the trust agreement Investment Advisor: Often involved to grow the trust’s assets and generate returns

Important Compliance Note: DSTs must adhere to strict IRS guidelines to avoid being classified as a sham transaction. The trust must be irrevocable, and the seller cannot maintain direct control over the assets.⁵

DST vs. 1031 Exchange: Understanding Your Options

While both strategies defer capital gains taxes, they have significant differences:

Deferred Sales Trust Advantages:

Works for various asset types beyond real estate
No strict identification or closing timelines
Flexibility in payment structures
Investment diversification opportunities

1031 Exchange Limitations:

Limited to like-kind real estate only
Must identify replacement property within 45 days
Must close on new property within 180 days
Continues real estate ownership responsibilities⁶

The Benefits: Strategic Tax Management and Wealth Growth

Tax Deferral and Potential Reduction

By spreading capital gains over multiple years, sellers can potentially lower their effective tax rate, especially if they move to a lower tax bracket after the sale. For 2025, long-term capital gains tax rates are 0%, 15%, or 20%, depending on taxable income and filing status.⁷

Liquidity and Investment Flexibility

Rather than facing an immediate massive tax bill, sellers gain controlled access to cash flow while maintaining the ability to reinvest in a diversified portfolio. The trust can invest in stocks, bonds, real estate investment trusts, and other assets to generate returns that may outpace inflation and grow wealth during the deferral period.⁸

Estate Planning Integration

DSTs can integrate with comprehensive estate planning strategies. By deferring gains until after the seller’s death, heirs may receive a step-up in basis, potentially eliminating the deferred tax liability entirely. This makes DSTs particularly valuable for older sellers focused on legacy planning.¹⁰

Real-World Impact

Consider a tech entrepreneur who sold her startup for $10 million in 2024. By utilizing a DST, she deferred the immediate tax burden and structured $600,000 in annual payments. The trust invested the proceeds in a balanced portfolio of equities and fixed income, generating returns while providing steady retirement income. Over time, this strategy allowed her to maintain greater control over her tax timing and wealth management.¹¹

Understanding the Risks and Considerations

While DSTs offer compelling benefits, they require careful evaluation and aren’t suitable for everyone.

IRS Scrutiny and Compliance Risks

The IRS closely examines DST structures to ensure they’re legitimate installment sales rather than tax avoidance schemes. If the IRS determines the seller retained too much control or the structure doesn’t meet installment sale criteria, the entire gain could be reclassified as immediate income, triggering penalties and interest.¹²

Costs and Fees

Setting up and maintaining a DST involves significant expenses:

Legal and setup fees: typically 1.5% of the first $1 million, 1.25% of amounts above
Independent trustee fees: approximately 0.5% annually
Investment advisory fees: 0.5-1% annually

These costs can reduce overall returns, and it’s crucial to model whether the tax deferral benefits outweigh the fees.¹³

Market and Investment Risks

Trust investments are subject to market volatility. If the trust’s investments underperform, the seller’s income stream and principal may be affected. Unlike bank deposits, trust investments are not FDIC-insured.

Irrevocability and Reduced Liquidity

Once established, a DST cannot be easily modified or dissolved. Sellers who need immediate access to large lump sums may find this lack of liquidity problematic. The installment structure that creates the tax benefit also limits financial flexibility.¹⁴

Your Path Forward: Strategic Decision-Making

A Deferred Sales Trust can be a powerful wealth preservation tool—but only when it aligns with your specific financial situation, risk tolerance, and long-term objectives.

DSTs may be most suitable for:

Sellers of highly appreciated assets facing significant capital gains
Individuals who don’t need immediate access to all sale proceeds
Those seeking tax efficiency over maximum liquidity
Sellers interested in estate planning benefits
Business owners or investors with diversification goals

DSTs may not be appropriate for:

Sellers needing immediate lump-sum liquidity
Those with low-basis assets or minimal capital gains
Individuals uncomfortable with market investment risks
Sellers unwilling or unable to pay substantial setup and management fees

Take Control of Your Tax Strategy Today

With significant tax law changes potentially on the horizon and capital gains rates subject to future increases, now is an opportune time to explore advanced tax planning strategies like Deferred Sales Trusts. Don’t let uncertainty about your options cost you hundreds of thousands in preventable taxes.

Schedule a consultation with HBKS Wealth Advisors to discover whether a DST aligns with your financial strategy. Our experienced team will provide personalized guidance based on your unique situation, ensuring you make informed decisions that protect and grow your wealth.

Imagine Financial Freedom Without the Tax Burden

Picture yourself moving forward from your business sale with confidence—not anxiety. With a well-structured Deferred Sales Trust, you could enjoy:

A steady, predictable income stream tailored to your retirement needs
Significantly reduced annual tax burdens compared to a lump-sum sale
Investment diversification that protects and grows your wealth
Estate planning benefits that maximize your legacy for future generations
Complete peace of mind knowing your strategy is IRS-compliant and expertly managed

You deserve to experience the rewards of your life’s work without watching them disappear to taxes. A strategic approach to capital gains management can transform your financial future.

The Cost of Inaction: What’s at Stake?

Without strategic tax planning, you could face:

Immediate tax liabilities consuming 25-40% of your sale proceeds
Missed opportunities for wealth growth during the deferral period
Reduced inheritance for your beneficiaries due to preventable tax erosion
Lost flexibility in managing your income and tax brackets
Unnecessary financial stress during what should be a rewarding transition

The difference between acting strategically and accepting the default tax consequences could amount to hundreds of thousands—or even millions—of dollars over your lifetime.

From Tax Burden to Tax Strategy: Your Transformation

The journey from feeling overwhelmed by capital gains taxes to confidently managing your wealth through strategic planning represents more than just financial gain. It’s about reclaiming control, making informed decisions, and securing the future you’ve worked so hard to build.

HBKS Wealth Advisors is here to guide you from confusion to confidence, helping you navigate complex tax strategies with clarity and expertise.

Ready to explore your options? Contact us today to begin your strategic tax planning consultation.

Important Disclosure:

The information and examples included in this document are for general, educational, and informational purposes only. It does not contain any financial or investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any financial or investment advice. If you would like financial or investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy, or allocation (including those recommended by HBKS Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy, or allocation may not be indicative of future results.

The historical and current information as to rules, laws, guidelines, or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified but was obtained from sources believed to be reliable. HBKS Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.

HBKS Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.

The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

Investment Advisory Services offered through HBK Sorce Advisory LLC, d.b.a. HBKS Wealth Advisors. Not FDIC Insured – Not Bank Guaranteed – May Lose Value, Including Loss of Principal – Not Insured By Any State or Federal Agency.

FOOTNOTES

¹ Internal Revenue Service, “Topic No. 409, Capital Gains and Losses,” irs.gov, accessed November 2025. Long-term capital gains are taxed at 0%, 15%, or 20% depending on income level. High-income taxpayers may also owe the 3.8% Net Investment Income Tax (NIIT).

² Example calculation based on a $5 million sale with a $1 million cost basis: ($5M – $1M) × 20% federal long-term capital gains tax = $800,000, plus 3.8% NIIT on the $4M gain = $152,000, totaling $952,000 in federal taxes before any state taxes. Actual tax liability varies by filing status, other income, and state of residence.

³ Internal Revenue Code Section 453, “Installment Method.” Section 453 governs the tax treatment of installment sales. Deferred Sales Trusts (DSTs) are structured to rely on these installment-sale rules for deferring recognition of gain.

⁴ SmartAsset, “Deferred Sales Trust: What It Is, Examples, Pros and Cons,” smartasset.com, updated 2025, accessed November 2025. DSTs allow sellers to defer capital gains taxes by using an installment-sale structure and receiving payments over time rather than a lump sum.

⁵ Dominion, “Deferred Sales Trust: Here’s a Complete Overview,” dominion.com, 2024, accessed November 2025. Overview of DST structure, funding mechanics, trustee role, and tax-deferred reinvestment considerations.

⁶ Kitces.com, Michael Kitces, “Why ‘Deferred Sales Trusts’ Can Be a Risky Way to Defer Taxes on a Business Sale,” May 29, 2024. DSTs rely on installment-sale rules but lack explicit IRS approval as a recognized trust type; improper structuring may result in IRS challenge.

⁷ Realized1031, “Deferred Sales Trust: What It Is and How It Works,” realized1031.com, 2024, accessed November 2025. DSTs offer broader asset applicability than §1031 exchanges and are not constrained by like-kind requirements or strict identification timelines.

⁸ Internal Revenue Service, “Revenue Procedure 2024-40,” irs.gov, October 2024. Provides inflation-adjusted tax parameters and income thresholds for tax year 2025, including brackets applicable to capital gains.

⁹ Nasdaq, “Deferred Sales Trust: What It Is, Examples, Pros and Cons,” nasdaq.com, October 23, 2024 (SmartAsset syndication), accessed November 2025. Explains DST mechanics, tax deferral strategy, and key advantages and risks.

¹⁰ Capital Gains Tax Solutions, “Understanding How a Deferred Sales Trust Works,” capitalgainstaxsolutions.com, June 2024, accessed November 2025. DSTs function as an installment-sale strategy and may be incorporated into broader tax and estate planning; actual estate outcomes depend on trust structure and current law.

¹¹ Example for illustrative purposes only. Actual investment results, tax outcomes, and trust performance vary based on market conditions, trust design, and client circumstances.

¹² The Real Estate CPA, “Various Aspects of Deferred Sales Trusts with Greg Reese,” therealestatecpa.com, originally published August 20, 2019; updated 2025; accessed November 2025. Discusses DST process, typical fee structures, trustee oversight, and risks.

¹³ SmartAsset, “Deferred Sales Trust: What It Is, Examples, Pros and Cons,” smartasset.com, updated 2025, accessed November 2025. DST suitability depends on liquidity needs, investment timelines, and long-term financial planning considerations.

¹⁴ SmartAsset, “Deferred Sales Trust: What It Is, Examples, Pros and Cons,” smartasset.com, updated 2025, accessed November 2025. DSTs allow sellers to defer capital gains taxes by using an installment-sale structure and receiving payments over time rather than a lump sum.