What is an Installment Sale Trust (IST)?

An Installment Sale Trust (IST) is a trust arrangement that combines special-purpose vehicles with installment sales. This financial strategy is commonly used in property transactions, especially for business sales, to defer capital gains tax over time. When structured correctly, assets can grow from the entire principal amount sold to the trust, growing from the returns earned on taxes you deferred. This deferral can go on for generations.

Income is the primary goal of the IST. We can maximize income by deferring the tax, then compounding growth and return from the deferred taxes. With this strategy, we can yield additional returns from cash that would have otherwise been subject to capital gains tax.

First used by Ernst & Ernst (Ernst & Young) for internal clients, in 1971, the IST method has been around for decades. The Installment Sale Trust strategy is 100% IRS Compliant:

  1. Untaxed on the way in

  2. Investment Growth

  3. Taxed as Income, Gains, or Basis on the way out

The Installment Sale Trust uses IRS Code Section 453, with assets secured in a Business Purpose Trust. The idea behind this strategy is to defer the taxes. Since proceeds go into the trust instead of your bank account, there is no constructive receipt. Thus no 'taxable event'.

Additionally, cash within the trust is invested for a return, and cash liquidity for other investments without the complexities and timelines of a 1031 Exchange. For this reason, it poses a great alternative to a 1031 Exchange.

Additional IST Uses for Capital Gains Tax Deferral

Some of the Key Benefits of the IST Include:

NOTE: This is NOT a Deferred Sale Trust or Monetized Installment Sale,

as those programs are on the IRS Dirty Dozen List for fraud and non-compliance with the rules.

Please, talk to a professional from Q-1031.com for accurate, up-to-date, and reliable information regarding ISTs.

What is a Structured Installment Sale?

The Internal Revenue Code (IRC), specifically Section 453, lays out the rules for an "installment sale."

So what's an installment sale? Well, imagine you sell a piece of property, but instead of getting all the money upfront, you'll get paid in installments over time, with some of these payments coming in following tax years.

Usually, when you make a gain, you have to pay taxes on it right away. But with installment sales, you only owe tax on the money you've received. This is called the "installment method" of accounting.

Simply put, this method allows you to push the recognition of your gains from the sale into future tax years, when you receive the payments. If you sold a property that increased in value over time. You only report and pay tax on the gains you received in the current tax year.

This method can also be used instead of a Section 1031 Tax-Deferred Exchange. 1031 is the rule for exchanging one property for another without paying taxes immediately; deferring them. What if you plan to do this swap, but it fails in the next tax year? Safety nets, called "safe harbors", allow you to use the IST or installment method.

There are specific rules about when you can access the gains from the sale and what happens if you can't find a replacement property. If you stick to these rules, you can still report your income using the installment method even if the exchange fails or goes into the next tax year. For this reason, ISTs are an excellent way to save a failing 1031 exchange.

How Does a Installment Sale Trust Work?

Step 1: Seller SELLS the asset to the Trust in exchange for a Secured Note

Step 2: The Trust sells the assets to a buyer, and the proceeds come back to the Trust

Step 3: Trustee invests proceeds for a significant return

Step 4: The note pays out quarterly income

Step 5: At the end of the Note term, the Trust pays out the proceeds and growth returns or the Note Holder renews for another 10 years (Like a refinance). This can continue for generations if you choose.

How does an Installment Sale Trust (IST) work?

Fully IRS Compliant

The IST defers the Capital Gains Taxes from the transaction. When you receive income from the trust, you pay income tax based on your tax bracket, like any other income. If you keep the trust for generations, the IRS will make more money from the IST payouts in the long run from the income tax than they would have from the capital gain at sale. This is because you will be more profitable in the long run by gaining interest on the taxes deferred.

We ensure compliance by using a third-party trustee service, IST Admin Services, or CB Admin Services.

The assets within the trust can not be directly under your name to avoid constructive receipt, causing taxes owed immediately. This can be unsettling for IST users since the assets are under a different name; however, the Secured Note and Fiduciary Trustee Service protects your interest. With the Secured Note granted to you at the sale, the Note collateralizes the Trust Assets, providing your security.

We are fully transparent about the process and are happy to talk to your CPA or Attorney about any specific questions.

We have trained hundreds of CPAs in this area and will happily talk to yours, too! We are not hiding any cards and are more than willing to answer any additional questions you, your lawyer, or your accountant may have.

For additional legal questions, please contact us at +1 (800) 345-9808.

Liquidity / Income / Withdrawals

The most unsettling part about most tax-deferring transactions is the loss of liquidity. With the IST you can withdraw or take an income stream from the principal invested.

Therefore, if you want to leave the IST and simply place all the funds in your bank account, you are allowed to do so. Or you can Refinance the Note and make a withdrawal of a portion of the assets. We do not charge extra for those services. This is one of the most appealing parts of the IST because it gives you more options.

Trust Investments Require Your Approval

Upon selling your asset to the IST, you receive a Secured Note. According to Investopedia.com, “A Secured Note is a type of loan or corporate bond that is backed by the borrower's assets as a form of collateral.” This means that the Trust assets are tied to your Secured Note.

For example, the bank receives a secured note against your house (mortgage) or car (auto loan), which states that you are to give your asset to the bank if you don't pay. This works similarly with the IST.

So, how is this secured?

You approve the investments that are collateral for your Note. For example, if you do not want to use our investing strategy, you can choose other investments as collateral. However, if you choose to do this, you may lose some or all guarantees.

The Trustees generally use principally insured investments combined with proven investment strategies to ensure guaranteed payment to the Secured Note.

Profit/Gains from Deferred Taxes

Here's how it works:

When you sell an asset through an IST, the proceeds from the sale are invested by the Trustee. The gains in the Trust are not taxed until withdrawn, which allows growth over time without the immediate loss of taxation. This offers three distinct levels of compounding interest.

1. Interest on Principal: This is the most straightforward level of compounding. The principal is invested. The returns or interest from this investment are added back to the principal, thus increasing the total amount of money that can earn interest.

2. Interest on Interest: As the interest from the principal is reinvested and generates its own interest, a second layer of compounding. Over time, this can significantly increase the growth of the investment.

3. Interest on Taxes Saved: Finally, because the money in the IST is not immediately taxed, the amount that would have gone towards taxes is instead earning interest. This is effectively another layer of compounding, allowing the funds that would have been lost to taxes to contribute to the overall growth of the Trust.

By utilizing these three layers of compounding interest, as Installment Sale Trust can help the proceeds from a sale grow significantly over time, maximizing the benefit of tax deferral.

3 types of interest from an Installment Sale Trust (IST)

Ongoing Income & Generational Income Planning

The IST may be passed on to heirs. When the promissory note is passed on, there may be a step up in basis. This calculation is complex and unique for each situation, we can discuss this with you specifically.

This allows your heir to either take the cash or receive an income stream. This makes the IST an excellent generational wealth tool for succession and estate planning.

Where Does the Tax Go?

It's crucial to note that the deferred tax liability does not disappear. The IST just defers the ‘taxable event.’ The capital gains tax is then paid as the seller receives the IST income. The key benefit lies in the deferral and potential for the overall tax burden to be spread out. With asset appreciation combined with specific, proper management, the Trust's growth will outperform the income tax rate, allowing much more income.

All that being said, using financial strategies we will provide, it is possible to greatly reduce or completely eliminate the effective capital gains tax from the sale, over time.

We would like to note that you cannot monetize the secured note itself or else this turns into a monetized installment sale, which is NOT IRS compliant and will result in paying penalties in addition to capital gains tax. The monetized installment sale is only allowed for farm or agriculture related transactions. You can learn more about the monetized installment sale through our partner company, CB Farmer's Trust.

Who Benefits From an IST?

Anyone who owns a business, commercial real estate, investment real estate, or most highly appreciated assets, may qualify for an Installment Sale Trust. Homeowners looking to downsize, landlords, investors, and business owners typically benefit the most. An Installment Sale Trust is the ONLY option that allows you to have a steady guaranteed income for years after selling your asset. The next generation can also inherit this income, so your investments will live on.


Can I do this with my own trust?

No, you cannot use this for your own trust. Additionally, you cannot be the Trustee of the Trust. This would violate the necessary Arms Length and Related Party Doctrine of the tax code. You have rights and security as owner of the promissory note, which fully protects your assets in the Trust.

Do I have to put all of my gain inside the trust?

No. We generally recommend, if possible, only putting the taxable gain portion of the sale inside the trust. There are methods to take your basis out, untaxed. But, if you want a larger, passive income, and do not require a large sum of cash, you can accomplish this by putting the entire sale proceeds inside the trust.

What are the downsides?

- You cannot be the trustee. Interestingly though, this gives you better asset protection. So not really a 'downside'. The Note you hold which Collateralizes the assets of the Trust gives you every right to control what investments you accept as collateral for your note and security on those assets.

- The Trustee cannot allocate more than 50% of Trust money into one investment. With management of money inside a Trust, the Trustee is held to a higher level of responsibility. Allocating more than half of the principle in one investment is a risk factor that is too high for the Fiduciary Standard.

- There has to be a business purpose for the trust other than deferring taxes. To comply with this rule, there is a profit sharing agreement on the additional upside after payouts (never effecting principal).

What is a Monetized Installment Sale? (We do not do this)

Monetizing is the act of taking a loan from the Trust after it is established. This collateralizes the Trust in your name, which violates the rules since the Trust is the "Owner" of the assets. Any loans taken from the Trust without separate collateral are subject to taxation and penalties; therefore, we do not allow them. Monetized Installment Sales are on the IRS Dirty Dozed List and are NOT analogous to Installment Sales. Avoid these arrangements or programs. Note: There are tax law-compliant ways to do what you need. Discuss this with us.

What If I want Out of the Trust?

The Trust will liquidate 100% of its holdings and pay you, up to the face amount of the Promissory Note (“Note”), plus 90% (your portion) of any gains above the face amount of the Note.

Can I pass the IST to my heirs?

Yes, the IST Note and its Guarantees can be passed down from generation to generation.

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