Introduction

When it comes to selling a highly appreciated asset — a business, real estate, or other investment — smart planning can save you millions in taxes. Two popular strategies are often discussed: the Deferred Sales Trust (DST) and the Structured Installment Sale (SIS). But not all strategies are created equal. Today, we'll give you a side-by-side comparison, real-world examples, legal citations, and a simple breakdown anyone can understand.

Spoiler: There have been real problems with the DST that sellers should be aware of — and the Structured Installment Sale often offers a cleaner, safer, and IRS-approved pathway.

Part 1: What Is a Deferred Sales Trust (DST)?

A Deferred Sales Trust is a method where the seller transfers an asset to a third-party trust before selling it. The trust sells the asset, and the proceeds stay inside the trust. The seller receives installment payments over time, deferring immediate capital gains taxes.

Sounds good, right?

However, here are the risks:

• IRS Concerns: DSTs often rely on aggressive interpretations of Internal Revenue Code §453 (installment sale rules). In some cases, the IRS may view the structure as a "disguised sale."
• Case Issues: DST promoters were subpoenaed in investigations, and the IRS issued warnings about structures that resemble DSTs.
• Tax Court Case: In Est. of Bartlett v. Commissioner, T.C. Memo. 2004-276, the IRS disallowed installment sale treatment because the seller had too much control over the proceeds. Although not a direct DST case, it reflects the vulnerability when seller control exists.
• Kaylor Case: In United States v. Kaylor DST Services, LLC et al., the IRS filed a petition to enforce summonses against Kaylor DST Services, LLC and Michael Kaylor. The agency alleged that Kaylor and his affiliates promoted a potentially abusive tax shelter disguised as a Deferred Sales Trust. The IRS contended that these transactions did not qualify under IRC §453 as legitimate installment sales and may instead be listed transactions subject to penalties and reporting. The IRS requested detailed records, including agreements, client lists, escrow instructions, and trust documents, signaling a significant enforcement initiative. While no criminal conviction was made, the investigation underscores how DSTs can unravel under regulatory scrutiny and result in disqualification, immediate taxation, and penalties.

• Complicated Setup: DSTs require a third-party trustee and sometimes specialized firms that charge hefty fees.

Code Reference: IRC §453 (Installment Sales) and IRC §7712 (related to constructive receipt and disguised sales).

Real Problem: In some DST structures, because the seller indirectly controls the trust or its investments, the IRS may claim the gain is immediately taxable.

Part 2: What Is a Structured Installment Sale (SIS)?

A Structured Installment Sale is much simpler. Here's how it works:

• You sell your asset directly to a third party.
• Rather than receiving a lump sum, you arrange to receive payments over time, using a structured settlement annuity or assignment company to guarantee the payments.
• Because you receive payments over time, you only pay taxes on each payment when you actually receive it.

Key Advantages:

• IRS Approved: Structured installment sales are explicitly allowed under IRC §453.
• No Constructive Receipt Issues: You don't control the funds.
• Simple Documentation: Fewer moving parts and far fewer chances for an IRS challenge.
• Lower Fees: Typically, costs are much lower than DSTs.
• Security: Payments are often backed by major insurance companies with strong credit ratings.

Code Reference: Internal Revenue Code §453.

Real Example:

Imagine selling a property for $5 million. Rather than receiving the full $5 million at once (and paying taxes upfront), you set up a Structured Installment Sale:

• Receive $500,000 per year for 10 years.
• You pay taxes only on $500,000 each year.
• The remainder grows, often earning interest inside the structured arrangement.

Past Client Illustration:

A business owner in California sold a dental practice for $3.5 million. Instead of taking the full amount up front, he chose to receive $350,000 annually over 10 years. The payments were funded by a structured annuity through a major insurer. He reported only the annual payments for income tax, gained interest on deferred balances, and avoided triggering a massive one-time tax event. The deal closed cleanly with no IRS scrutiny, and the annuity payments continue without interruption.

Part 3: Key Differences at a Glance

Feature	Deferred Sales Trust (DST)	Structured Installment Sale (SIS)
IRS Acceptance	Risky — IRS has challenged similar structures	Fully recognized under IRC §453
Complexity	High — requires trust, trustee, complex agreements	Low — simple direct agreements
Seller Control Risk	High	Very Low
Fees	High (setup, trustee fees, admin fees)	Much Lower
Funding Security	Variable, depends on trust investments	Often guaranteed by major insurers
Best For	Very large deals requiring custom investment plans (still risky)	Almost anyone selling real estate, businesses, or high-value assets

Part 4: Where Deferred Sales Trusts Go Wrong

Several issues have arisen:

• IRS Attention: DSTs caught the eye of the IRS and other regulators starting around 2008-2010.
• Subpoenas: Some DST promoters were subpoenaed (not convicted necessarily, but it shows concern).
• Control Problems: If the seller is seen to have too much influence over the trust assets, the IRS can say taxes are due immediately.
• Examples of Challenges:
• Est. of Bartlett v. Commissioner (T.C. Memo. 2004-276) — shows risks when seller has control.
• Kaylor case — public case disallowing DST treatment due to IRS viewing it as a disguised sale.
• IRS Memorandum 20123401F — discusses concerns over "disguised sales."

Important: No DST has been formally declared illegal… but the legal landscape is risky and evolving.

Translation: Even if one DST works, another could fail based on slight differences in setup or enforcement focus.

Part 5: Why Structured Installment Sales Are Safer

1. Clear IRS Rules: IRC §453 allows sellers to recognize gain only as they receive payments. No trust tricks needed.

2. No "Middleman" Needed: You're not transferring your asset to a third party before the sale. You're directly structuring your payment terms with the buyer and assignment company.

3. Solid Payment Security: Insurance companies with A+ ratings (or better) back the payments.

4. Simple, Transparent Setup: No complicated trustee agreements. No tax-uncertain "workarounds."

Diagram 

Part 6: Real-World Examples

DST Example (Complicated, Risky): Jane owns a business worth $8 million. She sets up a DST. She indirectly influences how the trust invests proceeds. IRS audits, challenges DST, claims Jane had constructive receipt. Jane must pay $3 million in taxes immediately — plus penalties and interest.

Structured Installment Sale Example (Clean, Safe): Bob owns a $3 million rental property that he's looking to sell after years of appreciation. If he sells it outright, he'll owe a substantial amount in capital gains taxes immediately. Instead, he uses a Structured Installment Sale strategy. Here's how it works:

·         Bob sells the property to a buyer, but instead of taking a $3 million lump sum, he arranges to receive $300,000 annually for 10 years.

·         These payments are secured through a structured annuity issued by a highly rated insurance company, ensuring long-term reliability.

·         Each year, Bob only pays income tax on the $300,000 he receives, rather than being taxed on the full $3 million upfront.

·         The remaining balance continues to grow tax-deferred inside the annuity structure, providing interest income and long-term stability.

·         There is no need for a third-party trust, no risk of constructive receipt, and no complex IRS red flags.

This structure gave Bob financial peace of mind, predictable retirement income, and avoided the audit exposure often triggered by more aggressive tax deferral techniques like the DST.

Part 7: FAQs

Q: Can anyone use a Structured Installment Sale? A: Generally, yes. Anyone selling appreciated real estate, a business, or high-value assets can use this strategy.

Q: Are the payments guaranteed? A: Yes, when structured with a major insurance carrier through an assignment company, your payments are contractually guaranteed.

Q: Is this only for multimillion-dollar deals? A: No. Even $500,000 sales can benefit from the tax deferral and structured payouts.

Q: Do I lose access to my money? A: No. You receive your payments over time, and the rest earns interest while you wait.

Q: How do I know if this is better than a DST? A: We offer consultations to compare both strategies to your specific situation. For most clients, SIS is the simpler and safer route.

Conclusion & Application for High-Tax Sellers

If you're facing a potential 37.1% capital gains tax on the sale of your real estate or business — a reality for many high-income Californians after layering in federal, state, and net investment income tax — then your exit strategy matters more than ever.

A poorly structured sale could wipe out millions of your net proceeds overnight.

The Structured Installment Sale offers a proven, IRS-sanctioned method to defer those taxes and create a long-term, interest-bearing income stream without the audit risk, costs, or legal headaches of more complex workarounds like Deferred Sales Trusts.

Additionally, many sellers don't realize that if they take the full lump sum and pay the 37.1% capital gains tax upfront, those extra proceeds could also push them into a higher income tax bracket that same year. This is because the gain is treated as additional income on top of their regular earnings. For example, someone earning $400,000 annually who realizes a $2 million gain could see much of their income taxed at the highest marginal rates — both federally and in California. This compounding effect often surprises sellers and can drastically reduce net proceeds.

Call to Action

If you're planning to sell a business, real estate, or another appreciated asset, don't leave your financial future to chance.

The Law Office of James Burns has guided high-net-worth individuals, professionals, and business owners through structured installment sales and tax-deferred strategies with precision and care.

Schedule a strategy session today at www.jamesburnslaw.com or call (949) 305-8642.

Disclaimer: This blog is for informational purposes only and should not be considered legal or tax advice. Consult with a qualified advisor to determine what strategy is best for your situation. The Law Office of James Burns is based in California and serves clients nationwide with advanced wealth protection strategies.