DST Fee Structure
The Basics Of The Deferred Sales Trust Fee Structure
A Deferred Sales Trust (DST) is a tax-deferred and flexible structure that allows investors to defer capital gains taxes and earn interest rates on the trust’s investments. The seller transfers their assets to the trust in exchange for a promissory note that outlines interest payments over a certain period of time. As with any investment or financial tool, there are fees associated with using a DST.
A Brief Background of the DST
Estate Planning Team has successfully implemented DSTs for more than 25 years. In 2006, 2008, and in 2019, the DST structure was reviewed by the IRS. In all three instances, there were no findings that required any changes.
The Deferred Sales Trust requires the services of at least three distinct and independent professionals: The Tax Attorney, a Trustee, and a Registered Investment Advisor. Because of the proprietary nature of the Deferred Sales Trust Strategy and the absolute requirement to create and manage every DST within strict IRS rules and guidelines, each of these independent professionals is vetted and trained on all aspects of the DST.
Upfront Legal Fees
The standard legal fees involved in creating the DST are 1.5% of the first $1M of the transaction value and 1.25% of the transaction value in excess of $1M. The fees are one-time (not ongoing) and include defense of any possible future audit of your DST Transaction in any federal, state, IRS Court, or IRS Audit at no additional cost to the client. Your engagement with the law firm is the first concrete step in establishing a DST Trust for you. The engagement is entered into on a conditional basis, meaning that no upfront payment is required, and the legal fees will only be due and payable (typically at the close of escrow) if and only if you use the DST Structure created for you. For example, if you elected to take the property off the market any time before the sale closes, or you should decide, for example, to pursue and complete a 1031 exchange, or simply to sell and pay your taxes up front, then no fees or obligations would be imposed. We all merely close our files and focus on the next client needing our assistance.
Trustee Fees and Ongoing Maintenance Fees
Greg Reese of Reef Point LLC will be your Authorized DST Trustee. The responsibilities of the Trustee are as follows:
- Holding discussions with the client
- Educating the client and any personal advisors about DSTs
- Coordinating parties and conference calls
- Monitoring activities necessary to complete the DST Trust
- Working with the client to structure the pay-back structure (including the term, interest rate, and desired payment schedule)
- Reviewing investment recommendations with the client
- Overseeing the investment advisor
- Conduct periodic reviews with the client and advisor regarding the trust’s performance.
Trustee fees are assessed annually and start at 0.5% of assets held in the DST. The percentage can be decreased for more significant transactions. Estate Planning Team also receives an annual administrative fee of 0.35% or less for its services.
Registered Investment Advisor Fees
A highly qualified Investment Advisor will manage the trust’s investment needs. This advisor has passed a DST exam and understands DSTs and various investment strategies that work well for our clients.
The advisor’s role involves reviewing the results of a risk tolerance questionnaire that you’ll be asked to complete. Based on this information, as well as the terms of repayment for the note principal and interest, which you will approve, the advisor will provide recommendations for portfolio investments that aim to secure your interests and repayments.
The advisor will continuously monitor and review the portfolio, looking for signs of rebalancing, and communicate with the seller/taxpayer and the Trustee at regular intervals, such as two to four times per year or as needed. Investment advisors charge fees for their advisory and money management services, which typically range from 0.65% to less per year based on the value of the managed assets.
In Summary, the Total Fees for a DST
To summarize the fees associated with completing a DST, there is a one-time non-recurring fee of 1.25% to 1.5% for legal and setup costs, including lifetime audit defense protection. After that, on an annual basis, there is usually 1.5% in fees covering the Estate Planning Team, your independent Trustee, and the Professional Investment Advisor retained for the Trust. Fees are generally reduced at certain band breaks for assets the DST maintains.
The investment allocation is designed to pay for the recurring fees without reducing the overall rate of return sought by the client and the Trust.
What is the Next Step?
If you feel that the Deferred Sales Trust provides valuable tax deferral and income-generating opportunities that are superior to holding on to your asset or selling and paying all your taxes in the year of the sale, the next step would be for me to coordinate a conference call to review your scenario and assess your compatibility with a Deferred Sales Trust.
Suppose the numbers make sense, and you decide to move forward. In that case, we will begin by having the attorney send you a conditional engagement agreement for execution so that he may legally represent you and your interests.
While the legal work is being done, we will begin discussing your desired pay-back structure and ask you to complete a risk tolerance questionnaire. After that, we will work up investment recommendations for your (and the Trustee’s) approval, designed to meet the income and other obligations under the terms of the note.
Please direct any questions you may have to me. If the question more appropriately falls under the expertise of another team member, I will ask them to weigh in to give you the best answers.