Episode Transcript
Speaker 1 00:00:05 This is annuity straight talk since 2008. Your host Brian Anderson has helped clients nationwide navigate the complex market for annuities with Brian's assistance. Hundreds of clients have achieved a profitable and secure retirement. I would know because Brian has answered many of my questions concerning annuities and retirement planning so that you can benefit as well. Let's get started. Here's Brian
Speaker 2 00:00:48 Hello and welcome everyone to the annuity straight talk podcast, episode number 23. My name is Brian Anderson, founder and creator of all things, annuity straight talk. If you didn't know that you must be new to this podcast, feel free to sign up on YouTube or any of your favorite podcast platforms to be notified. When the next episode comes back, we've got 22 previous episodes. You can also search either of those platforms, YouTube or the podcast pages for anything previous answers to your questions. Are there, if you don't have one comment, give us a call. My number is 804 3 8 5 1 2 1. Suggest a topic, ask a question. We'd be happy to address your situation. Once again, by popular demand I have from Southern California, the one and only John Balmer for a third time. And he's already given me a fourth episode. Hey John,
Speaker 3 00:01:38 Uh, Brian, how are you? Thanks for having me back. I appreciate.
Speaker 2 00:01:41 Yeah, well, you've got good ideas and you've kind of grasped the concept of this. I need help creating content and this one's a really good one for a specific subset of people out there. It's not specific to annuities, but general financial topics. It's something I think could help a lot of people. What do you say?
Speaker 3 00:01:58 I think so, too, you know, in terms of personal finance, you know, you're going to want to hit every angle. So the more you're informed, you know, knowledge is power. I think that's definitely something that, uh, some people can take something away from learn something new and see if they can apply it to their own situation with whether it be working with us or working with their own advisor.
Speaker 2 00:02:19 That's what we're doing. So again, the subject today is a deferring capital gains tax, which for anybody with a highly appreciated asset that might be kind of a tag word or a light bulb will go on and you say, whoa, really? I didn't know. We could do that. And it is something that your firm works with specifically. It's a specialty you guys have, right? John. So why don't you, uh, tell us that it's called the deferred sales trust? Why don't you just give us a little background? Tell us about the nature of that.
Speaker 3 00:02:46 Yeah, that's right. So one of our niche markets here at DST wealth management is the deferred sales trust. It's offered by the estate planning team it's been around for about 24 years. And it was actually a structure that was created or co-created by the founder of our firm. He's become a mentor to me. And, and that's kind of really what we've built our firm on. So the divert sales trust is our trade name or the estate planning team's trade name. It's really a section 4 53 installment sale. But the way that we've structured it is to take a legal, proven and tested exit strategy for not only 10 31 exchanges, but also it can be an alternative to a 10 31 failing 10 31 rescue, or just an outright deferral of capital gains on highly appreciated assets, such as maybe the sale of a business, primary residence, investment property, a highly concentrated stock positions who are, you know, we've even seen art collections be applied to the structure. Okay.
Speaker 2 00:03:48 Yeah. You mentioned 10 31 exchange and anybody that's heavily into real estate real estate investment understands the 10 31 exchange allows you to defer capital gains. But how is this different?
Speaker 3 00:03:57 Yeah, it's actually different because the 10 31 I'll be at a great structure for the real estate investors out there. It's really, it's something that's actually been on the table as something that might be eliminated by Congress in the future. But it's also, it's really time constraint. You know, you have a lot of, a lot of issues with the 10 31. So you have the different timing rules. So 45 days to identify a new property to exchange into in 180 days to close that. And in this given, you know, in this real estate market, that's just boomed in the last, you know, 10 or so years since the great recession, you know, it's buying high, selling high and buying higher. Sometimes it just doesn't make sense for people. You know, they don't want to go into an asset just to continue to defer the capital gains. So timing is an issue 45 days to identify 180 days to close. If you're looking at a large transaction, which is a lot of the clients that we work with, sometimes it can be really difficult. So you see a lot of failed 10 31. So that's where we can step in and know not only outright, you know, replace the 10 31, but also rescue a failing 10 31 exchange.
Speaker 2 00:05:09 Okay. So if you're in the middle of one right now, you could say, Hey, wait, maybe there's a different strategy. So one thing a lot of people are going to ask, it's not an elimination of capital gains. So that's kind of a disclaimer, uh, correct. It's it's more a deferral of that.
Speaker 3 00:05:21 That's right. That's right. It's, that's why it's called the deferred sales trust. So how it works is, you know, quite simply it's the trust you enter into a specialized installment sale with the trust, the trust, then simultaneously sales, your asset to a designated buyer, receiving the sales, proceeds you, the seller are not taking constructive receipt of any, of any proceeds from that sale. And you're entering into, into an installment agreement where the proceeds from the sale are secured by the, uh, note that are negotiated between you and the trust on a secured basis.
Speaker 2 00:05:58 Okay. So you don't take, you don't take active receipt of any of it, but you do have discretion over what happens with the trust,
Speaker 3 00:06:04 Right? Absolutely. Absolutely. The trust is managed by a third party, trustee Bluetooth. So that helps to secure your assets, make sure that they're safe, that no one's going to be running off with them. And then you enter it into an installment note with the trust based on the terms that you have, you know, whether it be five, six, 8%, and then those trust proceeds can be invested in the other real estate down the road. If you find the right opportunity, it can be invested in a diversified pool of investments, securities stocks, bonds, cash, whatever you and your deferred sales trust advisory or wealth advisor determined is, is right and proper for the note of which you have assigned yourself
Speaker 2 00:06:47 The way I put a way I see it and kind of one of the ways we got together, as you know, we use annuity straight talk, obviously a focus on annuities. That's also a part of your business when it comes to retirement planning. So you can, I mean, essentially within that trust, you can go back out and purchase any type of asset with it, right? Whether it be, you know, a balanced portfolio or another piece of real estate, or even another business or a new painting, like the one behind you, the Picasso you got there.
Speaker 3 00:07:14 Yeah, that's right. That's right. You can actually, you know, the investment options are unlimited for those people who are super conservative and they want to invest the proceeds into, into an annuity like structure or life insurance. That can be an option. That's something that you're going to have to discuss with your individual wealth advisor on, on what the proper asset allocation is. You obviously want to meet the terms of the note, so it performs over time, but you want to make sure that you're comfortable with the investments within the,
Speaker 2 00:07:46 I'm just going to break it down to super simple terms to make sure I understand. And everybody else does as well. So you sell the asset for gross value, gross value lives in the trust, right? Correct. And then the note is certain distribution schedule from that trust, correct?
Speaker 3 00:08:00 Yes, absolutely. So it allows you to pay your taxes over an extended period of time. Well, utilizing the benefits of the, the entire proceeds of the sale to live off of. So you're obviously you're not running a huge check to the IRS within, you know, the next six to 12 months for those capital gains that are due, you're actually stretching the payment of those over a period of time. And that period of time on average is typically 10 years, but it could be sooner. It could be longer. It just really depends on how you negotiate the structure of your note with the trust.
Speaker 2 00:08:35 Yeah. So essentially instead of your, I guess you're recapturing the lost opportunity cost of a big chunk of capital gains taxes, right? Absolutely. And so further compounding on that, you just get, you make more money, you'll still pay the tax, but you have a little more discretion over it when you do it right.
Speaker 3 00:08:51 You do further compounding of those assets. You also have the ability to use the income from those assets to maybe mitigate some of those taxes in the future. Uh, you also have the opportunity to utilize those proceeds, you know, to live off of, to create an income for just invest even more conservatively because you have a larger pool of assets for which to draw the income from.
Speaker 2 00:09:17 Very interesting. I think it's very applicable to retirement income and obviously other investments or just, uh, you know, staying on top of it really leveraging all opportunities for maximum accumulation over time. Sounds. I mean, it sounds realistic to me. So now here's the question. I've got a friend, you know, one of my best buddies he's firmly entrenched in the real estate market in Western Montana. I was talking to him right before we pulled this podcast. He's done 10 31 exchanges in his rental properties and all that stuff. And you know, the question being where like a guy like him, you know, he might not be able to identify a property if he switches out, but he could actually utilize the structure to delay the sale or maybe purchase real estate, go back into real estate at more favorable conditions in a couple of years or so. Is that fair?
Speaker 3 00:10:02 Yeah, he sure can. So how it works is, you know, it all has to do with the timing of the 10 31. Obviously, if, if you're in a peak market, you sell that asset. Do you really want to go into something that, uh, is the same type of value? Do you really want to go into something that has, you know, cap rates where they are? So what, what it allows us for ultimate flexibility in your purchasing options. So you can utilize the proceeds from the sale placed in the trust. And if you're a real estate investor, particularly where I'm from in Southern California, it's almost like a religion people who usually buy and sell real estate. So they're always looking for the best opportunity in the marketplace. Well, if everything is up, you know, you might want to sit on the sidelines for a period of time, wait for that next market cycle to go through and buy it at a more opportunity time that deferred sales trust gives you the flexibility to do that.
Speaker 3 00:10:57 Whereas a 10 31, just that, you know, based on the timing constraints, just doesn't offer that. It also offers you the ability to actually reset your depreciation schedule. When you go out repurchase real estate, that's one advantage of this structure of this. So it gives you a ton of flexibility in order to go out and rebuy real estate. If that's your thing, you know, most of our clients they've owned real estate for a very long time. They want to get out of it. There, maybe it's a mom and pop and they own several, several properties or they're selling a business that has real estate attached to it. They don't want to necessarily have to manage that property throughout the kids don't want it. They want the cash. So it allows them the opportunity to have just a ton more flexibility. So it really gets you away from that tenants, toilets and trash, and allows you to have the similar type of income without having to actually manage the physical of real estate or managing the business. Just gives you a ton of flexibility.
Speaker 2 00:11:58 You know, in my business, I've talked to hundreds and hundreds of people since I've been online for the last 12 years or so. And I know a fair number of people have been really successful in real estate. And that's kind of a big one for this. I would assume business and real estate are probably two, the, the two biggest areas. I'm just kind of guessing, but you know, there's a lot of people that have real estate and maybe they're not getting out of it entirely, but there's places where, you know, the value of the property kind of outstripped the rents they were getting. What do you say, toilets trash and whatever else they kind of get tired of, or maybe you want to pair back their holdings. I mean, a lot of, a lot of people come and say, Hey, I want to sell this property.
Speaker 2 00:12:32 They've got depreciated, they've depreciated the value of it. So their capital gains hit is higher. That's brings up a good question. Something, I think you mentioned, but you know, they think, well, what can I do with an annuity and an annuity doesn't have to be part of it. But you know, they look at saying, well, I'm going to pay 20, 30% depending on their income tax bracket, their state, you know, capital gains bracket. So they could be paying a lot. And that, you know, kind of gives them an opportunity to do that. Where if you look at it and say, wow, if all you're going to do is generate income from this. Anyway, why don't you start with a bigger chunk of money? Kind of makes sense for a lot of people. I think,
Speaker 3 00:13:06 I think it does, you know, it allows them to have that diversified pool of assets. And whether that be income from that trust come from, we do have clients that have diversified portfolio of stocks, bonds, and cash, along with the annuities that certainly an appropriate structure, as long as it performs for the note. It's definitely an option when you're talking about the investment of the proceeds within the trust to pay that income stream per the terms of the note
Speaker 2 00:13:34 Side note, I didn't say real estate, you brought something up. So somebody has a piece of real estate that they've depreciated down to zero. So what happens is, you know, you buy a piece of real estate for $250,000. Maybe it's a rental property and you get to depreciate the value of that over time. But what it does is if you sell that now for $500,000, the actual cost basis is lower because of the depreciation. That's fair. Correct. So if you, if you enter into a deferred sales trust with the proceeds of that sale, and then maybe enter into another property with that, what happens to the debris depreciation schedule,
Speaker 3 00:14:12 What you you're able to do, because it's a brand new transaction. You're able to get a brand new depreciation schedule on that property. So let's say you've depreciated, you know, your former property all the way down. You're having to deal with issues of depreciation, recapture, things like that. You can actually take this as an investment, move it into the trust and then actually go out and purchase a new piece of property at the opportune time, without the constraints of the 10 31, and then actually enter, have a new depreciation schedule on that piece of property altogether.
Speaker 2 00:14:47 And so, I mean, that, that creates an even bigger benefit for anybody who has been running rental properties for a long time. I think most of the people I talked to that are wanting to get out of a rental property, might've been, you know, maybe they're in their seventies, uh, they made more money by, you know, managing themselves. Some people hire a manager for that, but you know, they get tired, but if you, you basically regain that depreciation as well and creates a better basis to plan for and draw in the future.
Speaker 3 00:15:18 Yeah, for sure. Yeah. And you know, more often than not, we see people who do sell these properties, they realize that, you know, maybe they want to go back into real estate, but more often than not, they don't, it's, you know, a real estates and illiquid asset, you know, they're maybe older, maybe they're in retirement and they just want to raise the cash. So in having the liquidity of a diversified portfolio of assets within the trust gives them a lot more flexibility and a lot more options. So, or often not, you know, we enter into these discussions about maybe purchasing real estate down the line, through the structure of the trust. But you know, I'd say, you know, in my circumstance that's never happened again, people just don't buy real estate again, they're generating their rental income or something similar through the investments within the trust, that's in a diversified portfolio, they, uh, they're, they seem satisfied.
Speaker 3 00:16:13 And so they don't want the hassle of going through of purchasing that new piece of property. So oftentimes people just don't end up going back into real estate. Um, there's other types of real estate that you can go into institutionally managed real estate in, in some sort of a fund structure, but buying actual a physical asset. It's, it's something that I don't see very often now that they've gotten out of it. And they kind of realized the freedom of the income stream that they have, they have access to capital if they actually need it. Obviously they have to pay the taxes on any withdrawals or any income stream, but it's stretched out over time. So it's a lot more advantageous to the, to the seller, to the note holder.
Speaker 2 00:16:52 No, that makes, it makes a whole lot of sense. So, you know, the first question when I brought it up to my buddy, he said, I've never heard of it before. What's one of the reasons you would see why people, maybe an accountant or an advisor of some sort, uh, may not have told, told someone about this.
Speaker 3 00:17:09 Sure. Well, you know, I mean, there's a lot of circumstances where, you know, when you're talking about the real estate advisor, when let's take a look at our real estate agents work, most of them work on commission or they eat what they kill, so to speak. And so the ability for them to not only get the sale of that transaction or that piece of property, but also the buy commission, you know, we're talking about straight commission is very lucrative for some agents and real estate agents are great, but their incentive structure is, is a little bit out of line versus, you know, a lot of the money that we manage at our firm is on a, a fiduciary basis on a fee-based business model. So whether, you know, we just want to be able to see the best transaction of the best pool of assets for the client we have to do.
Speaker 3 00:17:59 What's what's in their best interest, the commissioned real estate agent, so to speak sometimes sees a lot of money on the table if they sell a piece of property and they buy it within a 10 31, their incentive is much more so for themselves and not to take away from their, their business model. But that's just kind of how that is. So, yeah, w what we found is the real estate agents or the real estate advisors that we've educated, actually get more listings by utilizing our structure, because they're actually bringing something more to the table, to their client than just a buy and a sell of a piece of property. So typically if a, if an investor has one property, they have more than they might have a portfolio. And, you know, to differentiate themselves, bringing that advantage of the T you know, the, the capital gains, because everyone is bringing a 10 31 to the table. Uh, every real estate advisor is touting 10 30 ones or a Delaware statutory trust, which we can get into, but really having a real estate advisor that understands what we do and understands that they can get the other side of that sale down the road, just brings a lot of, a lot of value to their clients as well, to their practice and increases their listings. You know, more often than not
Speaker 2 00:19:16 Real estate agents are no different than investment managers or, you know, insurance, product salespeople. I mean, there's really good ones that do good stuff. And there's, there's some people that are just in it to make a buck and at whatever cost. I mean, it's not, you know, so yeah, we can't paint any one business with the broad brush, a lot of different types of people out there.
Speaker 3 00:19:37 No, absolutely. And real estate agents are really the lifeblood of our business. They bring us a lot of these deals, but it's an educational process and showing them how they can increase their business and increase their listings by utilizing our structure, the deferred sales trust, rather than just continually doing 10 31 exchanges. So I didn't want to paint them in a bad light. I just kind of wanted to, you know, it's an educational process that we take them through and, you know, those that get it are wildly successful. Those that don't, they don't utilize the structure and then miss out on different opportunities.
Speaker 2 00:20:12 I may not be the most successful agents in the first place. So it seems like, you know, the, the guys that are doing a lot of volume would probably want to use a little bit of everything. You want to have another tool, I would say. So
Speaker 3 00:20:24 Absolutely just provides another arrow in your quiver.
Speaker 2 00:20:27 Right? So very interesting stuff. This is the big question. A lot of people are gonna want to know what are the costs involved in doing this
Speaker 3 00:20:33 First sales trust is obviously there's a li there's a cost for legal upfront. It's typically negotiated it's one, one and a half percent on the sales price up to the first million dollars. And then it drops down to a certain percentage on, on any dollar thereafter. So let's say you had a million dollar piece of property. You're looking at setting up a one-time legal fee to set up the structure. It's about $15,000, 1.5%. That fee indemnifies the note holder for any IRS audits in the future ongoing. So there's no, you know, we're the structure to ever be, been, be challenged by the IRS that allows the tax attorneys that set up the structure to defend that in federal court,
Speaker 2 00:21:22 The attorney's retain the liability. So it could seem like a lot, but that well, and as things do, I mean, rules change all the time. Typically tax rules, there's a grandfather clause to most all of them, but you never know if you don't work with the right guys, you don't set up the note and all the assets correctly, you might want to have that insurance. That's why you call John. That's why he called John, make sure it's done, right.
Speaker 3 00:21:46 It's definitely something that you it's worth. The cost that money can come out of. Escrow doesn't have to be paid out of pocket necessarily. And then you do have, what's called, you know, you were hiring a third party trustee to make sure your assets are safe and secure. And that the investment advisor that brought this structure to you is doing their job and performing to the notes obligation to you, making sure that all the taxes are paid, making sure that all the reporting is in line. So there's no hiccups. So there's an ongoing fee with a trustee. That's an annual fee that's paid directly out of the trust. And then there is an investment advisory fee, depending upon how you negotiate that fee with your investment advisor, the, the total all-in structure upfront for the trust can, is typically one and a half percent on the first million. And then there's typically an ongoing fee of about one to one and a half percent ongoing, which is not any more than you might pay your investment advisor to manage your IRA or your 401k, or your own diversified portfolio of assets.
Speaker 2 00:22:56 But that's going to depend on what you purchase with those assets, right?
Speaker 3 00:23:01 Absolutely. Absolutely. You know, the way we look at it as the cost benefit analysis of doing the deferred sales trust far outweighs the taxes that you would pay to the IRS in one lump sum. So, you know, it generally pays for itself and then some
Speaker 2 00:23:19 Well that's where, I mean, again, that, that question is just for disclosure, right? I mean, everybody's going to look, oh, wow, that sounds great. But I bet it costs an arm and a leg. And like you said, cost benefit. You figure out what, you know, whether, you know, the math supports the deferred sales trust over just an open sale. So that's a decision you've got to make, and you just have to have everything disclosed to you up front. And then obviously there's probably a little bit of negotiation that goes into all those things.
Speaker 3 00:23:45 Absolutely. And having that transparency of price, uh, is something that's advantageous to the client, to the end user, they know upfront in the example of, uh, of how we use utilize the deferred sales trust to rescue a 10 31, let's say you're already in a 10 31 exchange transaction, and you're dead set on buying another piece of property. You've identified those. And for some reason, you know, you find out about the divert Salesforce. We can actually at no costs set up the structure for you. And unless that 10 31 exchange fails and you defaulted to our structure, there's no cost to do that. So a lot of people who their full intention is to go into a 10 31 and purchase another piece of property. Sometimes they know, Hey, you know, we've done this before 10 30 ones. Don't always go so smoothly. We want to have options. We're able to set up the deferred sales trust at no cost to that client. And we don't charge them that legal fee or setup fee to utilize that. But in case they need that parachute it's there, it's available. And if they happen to, if the 10 31 happens to fail well, they happen to not be able to identify the three properties within the 45 day limit. They can always default bail the exchange, roll back into our structure, continue the tax deferral, and then we charge them that they go fee. So that's one of the advantages of using our firm
Speaker 2 00:25:10 To do that. Just like a little insurance policy is
Speaker 3 00:25:12 Absolutely insurance policy.
Speaker 2 00:25:14 Very interesting. So, final question I've got for you, I've got a lot of different ideas, but I'm not going to put you on the spot. You know, I'm a thinker, I'm a dreamer. So I like always looking for different angles, but we'll save that for a case by case basis. So how does somebody, if they're interested, learn more about the deferred sales trust?
Speaker 3 00:25:31 Sure. Well then can either contact you Brian, uh, and you can get them in touch with me, or they could reach out to me directly. My phone number here is (949) 478-2256. Or they can actually go look up my eight. You know, that I sing about being part of the estate planning team and DST wealth is actually I have a website and we'll provide you an illustration on the comparison of doing a, you know, an outright sale versus utilizing the deferred sales trust. We can run an illustration for you. It's a really helpful tool and showing you what type of taxes you're going to be able to save by doing one over the other. That's got to make sense for the client, but they can go to my website. That's www.mydstplan.com forward slash ClearSight. That's a useful website that you can use, or it can just get in touch with me and I can run you an illustration and show you exactly how your situation was.
Speaker 2 00:26:26 It sounds like a pretty quick, easy process for just kind of an initial, uh, you know, exploratory question. Right? Okay. Awesome. Well, Hey, thank you, John. I love good ideas. That's what we're all about. Whether we're talking about retirement income planning or just tax advantage strategies. Again, this is not advice. We're not telling you to do one thing or another. This is the information is general in nature. Just trying to seed ideas for people. So we can start thinking about how, how to play on offense in retirement. Uh, instead of playing defense, all, everybody talks about taxes and it's like real defensive, oh, taxes puts you on all fence, put the ball in your hands and, uh, drive it to the hoop. So thanks, John. I appreciate your input today. And it was a great topic and I think a lot of people will get some value out of it.
Speaker 3 00:27:12 Brian, thanks for having me again. I appreciate it. I look forward to seeing you soon.
Speaker 2 00:27:16 You bet. Well, again, this has been annuity straight talk podcast, episode 23. How to defer capital gains tax. My name is Brian Anderson. Thank you, John bomber for joining us. And if you want to subscribe to the YouTube channel or the podcast platform, you will be notified when a new episode is released. Contact annuity straight talk for more information or contacts to a specific professional that can handle this for you. The number is 804 3 8 5 1 2 1 or hit the green schedule, a call button on any page of the website. I would be happy to connect you with John and his team, and we'll look forward to another great topic for me. You got something good for us next time. Don't you?
Speaker 3 00:27:55 I think I have something in the box. All
Speaker 2 00:27:57 Right. I like ammo boxes and by popular quest, I might have the rifle back in the corner. So I got a couple of people say, where'd the rifle go? Well, I left it in my horse trailer. So I'm not, I'm not a total Savage, but all right. Awesome. Thanks John. Thanks Brian. Thank you everybody for joining us and we'll see you next week for episode number 24, have a great day. Goodbye.
Speaker 1 00:28:33 You've been listening to annuity straight talk. The proceeding is for informational and educational purposes only and does not represent tax legal investment in the views expressed by guests on this program are their own and do not necessarily reflect the views of a nerdy straight talk or its partners. No information presented today should be acted upon without meeting with a licensed professional. It is important that you read all insurance contract disclosures, carefully making a purchase decision guarantees are based on the financial strength and claims paying ability of the insurance company.
