Deferred sales trust

What it is

What the structure requires

• Establishment before the seller is contractually committed to sell to the ultimate buyer.
• A genuinely independent trustee, not the seller or a party under the seller's control.
• Properly drafted trust and installment note documents prepared by qualified counsel.
• Ongoing trust administration, tax filings and associated fees for the life of the note.
• Acceptance that the seller does not have unrestricted access to the proceeds.

Risks and criticisms sellers should weigh

• These structures have drawn scrutiny, and outcomes can depend heavily on the specific facts and quality of implementation.
• The seller becomes an unsecured creditor of the trust with respect to future payments.
• Investment performance inside the trust affects the ability to make note payments, and that risk sits with the seller.
• Setup and ongoing costs are substantial and continue for the life of the arrangement.
• Reversing or unwinding the arrangement is difficult and may itself trigger consequences.
• Promoters are sometimes compensated on assets placed into the structure, which is a conflict worth surfacing directly.

Situations where it is generally a poor fit

• When the seller needs full liquidity soon after closing.
• When the gain is modest relative to the setup and administrative costs.
• When a simpler approach, including simply paying the tax, produces a comparable after cost result.
• When the seller's own CPA and attorney are not comfortable supporting it in writing.
• When a qualifying like kind exchange or ordinary installment sale would accomplish the same objective.