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Installment Sale Trust vs. Reverse Mortgage

Structured Installment Sale Trust vs. Reverse Mortgage

November 09, 20235 min read

Navigating the landscape of retirement and tax planning can be complex. For those exploring options that afford flexibility and tax efficiency, the Installment Sale Trust (IST) and reverse mortgages are great tax-efficient strategies. Here's a dive into what they are and how they compare.

Structured Installment Sale Trust (IST) Explained

An IST is a trust arrangement that leverages IRS tax code 453 to defer capital gains tax, typically used in property and business sales. Established by Ernst & Young in 1971, ISTs offer a way to grow wealth within a trust structure by deferring taxes at the point of sale and taxing income upon distribution.

Key Benefits of ISTs:

  • Tax deferral on asset sales, excluding publicly traded stocks or bonds.

  • A structured payout that can guarantee a 6% income, alongside potential trust growth.

  • Liquidity through loans from the trust assets for other investments.

  • Flexibility with a revocable trust structure, allowing alterations or reversals if needed.

  • Ability to exit the trust at any time.

How Does an IST Work?

  1. Tax on the Way In: The sale proceeds go into the trust, deferring the taxable event.

  2. Growth: The trust can grow from the entire principal amount sold into it.

  3. Tax on the Way Out: Income is taxed when it's distributed, not at the point of sale.

This structure enables continued growth within the trust, potentially increasing overall trust payments and deferring taxable proceeds for generations.

Reverse Mortgages: Immediate Liquidity for Homeowners

A reverse mortgage is a financial tool for homeowners 62 and older, allowing them to access their home equity without selling. The funds from a reverse mortgage are not considered taxable income by the IRS, providing a tax-free stream of income to the borrower.

Key Benefits of Reverse Mortgages:

  • No Monthly Mortgage Payments: Borrowers are not required to make monthly payments, as the loan is repaid when the home is sold or the borrower no longer uses it as their primary residence.

  • Stay in Home: Borrowers can continue living in their homes while accessing their equity, maintaining the comfort and stability of home ownership.

  • Flexible Payment Options: Offers a variety of disbursement options to suit different financial needs, including lump sum, monthly payments, or a line of credit.

  • Non-Recourse Loan: The borrower or heirs will never owe more than the home is worth, providing protection against fluctuating housing markets.

How Does a Reverse Mortgage Work?

  1. Check Eligibility: You must be 62 or older, have enough home equity, and the home must be your primary residence.

  2. Counseling: Undergo mandatory counseling from a HUD-approved advisor to understand the product.

  3. Apply: Complete an application with a reverse mortgage lender who assesses your home and finances.

  4. Choose Payment: Decide if you want the loan in a lump sum, monthly payments, a line of credit, or a mix.

  5. Closing: If approved, you close the loan, which may involve paying fees and paying off any existing mortgage with the loan proceeds.

  6. Receive Funds: Start receiving the money as per the chosen payment method.

  7. Live On: Stay in your home without making monthly mortgage payments, but continue paying for taxes, insurance, and upkeep.

  8. Repay Loan: The loan is repaid when you move out, sell the home, or pass away. The repayment can't exceed the home's value.

  9. After Loan Repayment: Any remaining home equity after repaying the loan goes to you or your heirs.

Who Might Choose an Installment Sale Trust (IST) Over a Reverse Mortgage?

An Installment Sale Trust may be the preferred choice for individuals who:

  • Own Highly Valued Assets: Those with significant capital gains from assets like real estate or a business, which are not publicly traded stocks or bonds.

  • Seek Tax Deferral: Individuals looking to defer capital gains taxes and potentially reduce their overall tax burden over time.

  • Not Tied Down: People that are looking to move or short term rent while maintaining an income stream from a paying asset.

  • Want Control and Flexibility: People who value having control over their assets and the flexibility to make changes to their investment strategy with a revocable trust.

  • Plan for Legacy: Those looking to structure their financial legacy to benefit from deferred taxes potentially for generations.

For such individuals, the IST offers a strategic way to manage the sale of an asset with beneficial tax implications and a steady income, while also maintaining the ability to access funds through loans against the trust.

Who Might Choose a Reverse Mortgage Over an Installment Sale Trust?

Conversely, a reverse mortgage might be more suitable for individuals over 62 years old who:

  • Need Immediate Funds: Those in need of immediate liquidity to cover living expenses, medical costs, home improvements, or to pay off existing mortgage debts.

  • Wish to Remain in Their Home: Homeowners who want to stay in their homes and do not wish to sell their property to access cash.

  • Do Not Have Large Capital Gains: Individuals without significant capital gains from the sale of assets, for whom the tax advantages of an IST are not applicable.

  • Are Not Concerned About Estate Size: Those who are less concerned about the size of the estate they leave behind or have other means to provide for heirs.

A reverse mortgage is often more about accessing the equity built up in a home rather than managing the sale of an asset, making it a valuable tool for seniors seeking financial comfort in their retirement years without leaving their home.

Getting Started with an Installment Sale Trust

To leverage the benefits of an IST, one should:

  1. Assess: Determine the suitability of your asset for an IST.

  2. Structure: Collaborate with financial experts to set up the trust.

  3. Consult: Contact us at for personalized assistance and to initiate the process.

In summary, both ISTs and reverse mortgages offer unique benefits in financial and tax planning. An IST is an excellent choice for those with valuable assets looking to manage tax liabilities and plan for long-term growth. For homeowners seeking immediate cash flow without selling their homes, reverse mortgages could be the answer. If you're considering an IST, Q-Financial can help you navigate the process, ensuring a solution that aligns with your financial goals.


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