WS209: What You Need To Know About Deferred Sales Trust with Greg Reese

RES 209 | Deferred Sales Trust

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Deferred Sales Trust (DST) is a strategy that’s been around for about 22 years. However, it’s not that well known because it’s proprietary in nature. Greg Reese, the Founder, President, and CEO of AmeriEstate Legal Plan Incorporated and Principal of Reef Point LLC, shares his expertise about Deferred Sales Trust. According to Greg, it is a specialized form of an installment sale which is a way for you to defer capital gains. It is a great vehicle when the investor partners want to go their own direction. Greg also touches on the advantages and opportunities of DST while comparing it with the 1031 exchange.

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What You Need To Know About Deferred Sales Trust with Greg Reese

Our guest is Greg Reese. Thanks for being on the show, Greg.

Thanks, Whitney. Good to be here.

I’m thankful to have you on the show. Greg is the Founder, President and CEO of AmeriEstate Legal Plan, Inc. and Reef Point, LLC. Both based out of Costa Mesa, California, where he focuses on estate planning and asset protection planning, which became an emerging need for his clients. He has more than 25 years of experience in estate planning combined with his prior experience of fifteen years in the real estate and financial services industry. As a DST Trustee, he brings a unique multidisciplinary approach to helping owners analyze their exit strategies while considering their tax estate and investment objectives and options. In case the readers have never heard of you, tell them a little about yourself and what your focus is. I want us to get into this thing called the Deferred Sales Trust or DST.

My background was I started out as a realtor. It was a family business. My father was a broker. My mother was involved in the business. My sister and I both ended up getting involved in the real estate business. I work primarily in residential and some commercial investment arena. Partly that ended up becoming securities and insurance license and I was operating as a financial advisor, with a real estate practice as well, which is unusual in the investment advisor arena. I was involved deeply in that for about fifteen years. I got involved and learning about estate planning, succession planning and how that applied to my clients’ needs as a function of what services I was offering. I became fascinated with it. I’m a student of knowledge. I love to learn. It fascinated me. I became enthralled with it. I got to the point where I was so busy. I was either going to have to start hiring additional salespeople and other advisors to work in my practice or I was going to go in a different direction.

I ended up working, while I was still a financial advisor part-time, as what amounted to a Senior Paralegal role with a high volume estate planning legal practice. I learned the back office side of estate planning and what goes into it. The consultations, the documents, the laws and everything about that. I was fascinated with that when I was younger. I could work 70 hours a week like you do when you’re in your 30s. It evolved into, “How can we develop a better way to deliver these important services to clients who are generally underserved in this area, make it affordable, still provide high quality and do it over a larger geographic area?” I created a legal plan specializing in estate and asset protection planning and rolled that out.

We’re currently in six different states, including Virginia and Maryland, which is close to where you are. We’ve been operating for over many years. We have over 40,000 clients now that we’ve helped in those areas. We’re growing and growing. We’re adding new states, attorneys and people that want to be able to offer these services to their own clients, as well as people that come to us for a referral. Then I became involved as a trustee to a Deferred Sales Trust, which is an interesting companion to what I’ve been doing for the last few years. Our focus has always been on helping individuals and families protect what’s important to them, whether it’d be protecting their legacy, their assets and their children’s future.

What about clients protecting themselves from onerous taxation? That’s where the Deferred Sales Trust comes into place. I’ve been involved with Deferred Sales Trust for several years now. It’s a strategy that’s been around for about many years. It’s not that well-known yet because it’s proprietary in nature. There are only thirteen trustees nationwide that had been approved to act as an independent trustee for the Deferred Sales Trust. They’re looking for certain types of individuals with a certain level of experience. I was fortunate enough to be asked and lucky enough to pass all of the background checks and vetting that had to go on as part of that process. Here we are. I’ve worked with numerous clients, tens of millions of dollars in completed close transactions personally and helping to enrich the lives of people. Who found a different way to either retire or reposition into another asset or saved them from a tax scenario that they were hoping they wouldn’t have to face and we’re able to provide a lifeline or a safety net for them. I hope that’s good. That’s the big picture background.

[bctt tweet=”We’d love to sell high and buy low.” username=””]

You and I were talking about the Deferred Sales Trust. I’d never heard of it before. I know the readers are the same way. I’d love for us to go into that a little bit and explain what that is. We’ll get into some benefits of a Deferred Sales Trust and we’ll go from there.

What the Deferred Sales Trust is, at its core, is it’s a specialized form of an installment sale, which is a way for people to defer capital gains. Installment sales had been around for 90 years. They’re governed and regulated under Internal Revenue Code Section 453, used tens of thousands of times a year. A lot of people think in terms of seller carry back when they sell a piece of property and carry the paper or carry some of the purchase price for the buyer. Small and medium-sized businesses almost always have some installment component whereby instead of receiving the entire lump sum of the sale up front, which would usually mean you’ve got to pay all the taxes up front too, they will defer some of those proceeds to a later time.

The core of what an installment sale does is it allows you to tax engineer or manage the payment of the taxes that you might owe over a longer period of time. The resulting benefit is that you can generate personal income on money you otherwise would’ve paid in taxes or you can take the sales proceeds from the sale of that asset. Redeploy them back into another capital asset like starting or buying or building a business or investing back into investment real estate of some sort all while using the tax-deferred proceeds of the prior sale and without having to adhere to the rigorous narrow rules associated with 1031 exchanges.

It was going to be one of my questions comparing that to 1031. That’s what people are thinking of, our readers are thinking of and the benefits, pros and cons to doing a DST compared to 1031.

The DST, first and foremost, as an installment sale in terms of seller carry back to set the stage a little bit. In a traditional installment sale between a seller and a buyer, the buyer always has the leverage at the end of the transaction because there’s not much the seller can do but hope to get their checks and their payments. The buyer could walk away causing foreclosure. The buyer could come back and try to renegotiate something to their advantage and not yours. They could go and refinance out from under you. Unexpectedly, you’re realizing a lump sum and paying taxes and you weren’t planning for that. One of the benefits of the DST is to remove all of those disadvantages that a seller would have in that type of a transaction and return that control back to the hands of the seller.

Having set the stage for that, the differences between a Deferred Sales Trust and a 1031 exchange are that the Deferred Sales Trust allows you to sell an asset on a tax-deferred basis in exchange for an installment note. Being able to reallocate or reposition the sales proceeds into assets other than but also including more real estate. If we know about 1031 exchanges, we know that in order to have a complete tax-deferred exchange, you have to exchange for real property. If you sell real estate, you can only reinvest in real estate. If a DST is involved on the tax deferral side, you could reinvest the proceeds in real estate. You could reinvest the proceeds in diversified marketable securities. You could re-diversify into a business. There are a number of things you could do. You’re not limited such as the 1031 exchange. That’s one.

The problem sometimes with 1031 exchanges are the narrow windows of being able to identify a piece of property. The Deferred Sales Trust has three basic horizon opportunities to look at. One is a pure exit strategy. I’ve built a business. I want to sell it. I’m going to pay a lot of taxes at the time. I want to reinvest to generate income that I was getting while I ran a business. I want the passive income coming my way. The Deferred Sales Trust is perfect for an exit strategy. It’s the same thing with the real estate investor owner. They may be tired of the midnight calls for the water heater breaking or dealing with all of the issue surrounding property management.

RES 209 | Deferred Sales Trust
Deferred Sales Trust: The difference between DST and 1031 exchange is that DST allows you to sell an asset and reposition it.

It may be time to exit and enjoy life a little bit more. They could use DST to exit out of that. It could also be used as a 1031 alternative or a 1031 exchange rescue. I’ll take the rescue first. The 1031s don’t always succeed. You have 45 days to identify your replacement property and a total of six months to close on an identified property in order to complete successfully your exchange. Nationwide, 20 to 30% of exchanges either outright fail or they fail to fully defer the capital gains from the sale of the first property. That can be problematic for folks. Another problem is that since you only have 45 days to identify your replacement property, you’re going to buy-in to the same market you sold out of.

What do we all want to do as investors? We’d love to sell high and buy low. You can never do that in a 1031 exchange. It’s almost impossible because markets don’t change in a 45-day window. What if you wanted to reposition back into investment real estate? You’re getting out of one and you want to get back in. You think the market’s about to correct or it’s on its way down. You think there’s going to be better opportunities nine months from now, a year from now, two years from now or what have you. You essentially could use the Deferred Sales Trust or we’ll use the acronym DST to park the money, invest it in more liquid financial investments until you find the right opportunity, not just the one that’s available in 45 days. Redeploy into that next investment that you’re looking at. From an alternative standpoint, that’s one of the key features.

From the rescue standpoint, I don’t have a lot of leverage when I go into my exchange because once I make an offer, the seller has me over a barrel. Now, I’ve got to close on that or I’m going to pay a boatload of taxes. For example, I was in real estate for years and I dealt with this all the time. What if we discover something about the property we got an accepted offer on? We want to go back to the table and renegotiate some things. We need to realize that there were some problems or some damage or some compliance issues. We want to renegotiate some of those issues with the seller. The seller is looking at me saying, “You’ve got two months left to close this transaction. You can’t close on any other transaction because we’re already here. We’re past the 45-day mark. You’re either buying my property or you’re paying tax. I’m not that interested in giving back too much to you.” It’s a leverage problem. Those are some of the key, high-level advantages of using this.

Does it work for any amount of gain? Is there any kind of minimum transaction amount?

The DST involves a legal fee and it involves some costs associated with doing this. We have found that a seller that’s facing a taxable gain, which could be capital gain or capital gain plus depreciation recapture of about $250,000 or more, would be a very good candidate to take a look at the DST. I’m not talking about paying $250,000 in taxes, although that would be outstanding, as far as using this as an alternative. If you’re going to be paying a tax of $80,000 or more on an outright sale, then the DST is worth a look.

Are there any legal things that we should know about if we’re going to try to look into something like this or myths or anything that we should be thinking about?

There are some professional advisors out there, sometimes CPAs, sometimes other attorneys that are introduced to this through their client and they haven’t heard of it. Sometimes the approach is, “If I haven’t heard of it, it must not exist,” but that’s ego talking most of the time. The fact of the matter is they don’t know about it all the time yet, even though it’s growing in awareness and understanding by geometric proportions, but it’s because it’s a proprietary strategy. The strategy was developed by a fellow named Todd Campbell who’s a CPA and a tax attorney based out of Kansas. He started putting the strategy together several years ago.

[bctt tweet=”Each individual can pursue the best goal and path for themselves.” username=””]

His firm has successfully completed over 3,000 transactions, totaling in hundreds of millions of dollars. Every one of them has performed beautifully. They’ve had fourteen separate field audits over that period of time. Every one of them resulting in a “no change” letter, which is the gold standard of what you’re looking for. After that series of audits, the IRS invited them to come in for a four-day long chat. Anybody who’s been through that, you can imagine how fun those are. The IRS did a deep dive. They did not have to change any element of what they were doing in the strategy as a result of that audit.

In addition to that, there’s been numerous national, prestigious tax law firms and CPA firms as well as hundreds of other CPAs, middle and smaller sized firms that have taken deep dives and looked at the DST. We can also provide CVs and information on some of the more prestigious firms around the country that have reviewed this comprehensively to make sure that it’s suitable for their own clients who might need a tax deferral into their planning structure. We will prove it and test it and we back it up.

What about fees that are involved for the seller or any typical fees we should know about?

This is a subject that I find a lot of people don’t like to talk about. They like to say, “Call me and we’ll talk about it.” There shouldn’t be any mystery because whether I’m your trustee or whether you’re coming in through a different trustee or an advisor who has access to provide the Deferred Sales Trust with you. There are really three sets of fees that are involved in the DST. One is the legal fee and it’s always a one-time fee. It’s always a conditional fee based on an engagement with the law firm that will do all the legal work and create the structure for the client. If the client does not complete their transaction and use the DST for their tax deferral needs, there will be no fee. There is no upfront fee. It will not be charged or obligated to the client unless they actually use it. The attorneys typically charge 1.5% of the first $1 million in a given sales transaction. If the transaction is higher than $1 million, the legal fee is 1.25% of that excess. It’s a onetime fee.

What I particularly like about this having worked with attorneys for twenty plus years is, they actually stand behind what they do more than most attorneys that I have seen and worked with. They will provide audit defense protection for the life of the seller’s trust at no additional cost, which is a huge thing. As you may know or any of your audience out there who have been through it, audits are not cheap. It’s a lot of money involved if you get that letter or that call from the IRS. The second fee is a trustee fee. The third fee is the investment advisory fee.

The core professionals involved in managing a given DST transaction are going to be one of the tax attorneys from Campbell Law. It’s going to be an independent approved trustee such as myself. There’s going to be a vetted, trained, experienced, independent investment advisor, who has gone through the process of becoming approved to manage funds that might be contained within a given DST trust. The trustee fee is typically going to be 50 basis points, which is 0.5% annually of the assets that are actually in the trust. The investment advisor fee is typically going to be 0.5% to 1% of the assets that they’re actively managing.

If the client wanted to redeploy into another real estate, for example, there’s still a trustee fee involved, but there’s no investment advisory fee because the client effectively is the advisor for those assets that are invested in his real estate project, for example or in his business that he starts or buys. What we would like to compare this to is a one-time legal fee of around 1.25% to 1.5%. Offset that against 35% to 45% is what you would pay in taxes on the gains that you’re facing. That’s a pretty low price. It’s a very good deal. The trustee fee and the advisory fees are typically designed so that the portfolio of investments that are made are going to be covered by the performance. The client still gets the stipulated rate of return that they have requested within a narrow frame in negotiation trying to figure out what that proper rates should be. The fees that go along with managing all this typically are covered pretty well by the investments.

RES 209 | Deferred Sales Trust
Deferred Sales Trust: Audits are not cheap. It’s a lot of money involved if you get that letter or call from the IRS.

You and I were briefly talking about it. You mentioned the benefit of partners being able to split up the benefit. Could you elaborate on that a little bit?

Probably the two most viable assets that we deal with are investment real estate of any stripe and businesses, any form of entity. If you were thinking about a business, for example, it’s more common. You could have partners or other shareholders that are involved. In real estate, you can have partnerships, syndications, limited partnerships, LLCs. You can have people working together towards that common good. When it’s time to exit that business, there are individual and sometimes different needs of each member. The DST is a great vehicle when the investor partners want to go their own direction.

If somebody has a large taxable event on a gain on the sale and they want to avail themselves of using the DST. Another partner, maybe it’s a real estate business, they may have the opportunity to continue to do a 1031 exchange if that’s what they want. While their other partner wants to go about doing a DST and deferring their sales proceeds or a third partner in the business might say, “I’m just going to pay my taxes and move on. I don’t want to do anything else.” It’s very effective at helping to break apart the partnership interests so that each individual can pursue the best goal and path for themselves.

Is there a way you can tell the audience how they can learn more about the Deferred Sales Trust specifically?

Probably the best way you can learn about it is to go to my website. It is I’ve got a number of blogs on the topic that I’ve written there. You can reach out and request some additional information. There are a ton of ways to get involved. If you’re interested in having a specific transaction looked at and an illustration provided to see what the benefits of selling with or without the DST, then go to that website. Put it in the contact box information and say, “I’m interested in an illustration on my particular transaction. Can you direct me to the website so I can get my illustration?” We’ll be happy to do that. That’s probably the easiest way.

Greg, is there some way that you’ve improved your business that we can all apply to ours?

Within the last couple of years, I hired a personal assistant after several years of not having one. That was a game-changer for me because my day is so busy. I’ve got a lot of demands to speak, in person or on webinars. I’m fortunate enough to be invited here and there to speak on a program such as yours. Having somebody help me to stay organized is extremely valuable and important. I’ve got 30 staff members that are here in my office, six of which are virtual employees. For business owners out there, taking a look at having virtual employees, people that are not housed within your office space can be very attractive and very valuable. We seem to be running out of space in my particular office here. We’ve got 6,000 square feet. We’re starting to run out of space for new people. We’re finding ways to connect people in with technology. They can work remotely and still be as effective 100% as if they are working right here. Those were a couple of things I would offer.

[bctt tweet=”Show genuine care and concern for what you do and the people you serve.” username=””]

I’ve used lots of virtual assistants for many things. I’ve encouraged it also to anybody. You mentioned the ways to work and connect remotely. Is there some type of system or anything you can recommend the ways that you all communicate or connect to work remotely with someone like that?

There are lots of ways with technology now. How we do it is we connect everybody to the same database. You could have a cloud-based database system or you could have an internal based system and still allow people to connect. Our phone system is a cloud-based phone system, which operates on the internet as opposed to the traditional telephone line. We can have people anywhere who are immediately accessible to take calls from the outside, from clients. They’re able to make calls, hit the intercom and connect with people inside the office. We use internal chat messaging systems so we can always connect that way and you’ve got an email and pick up the phone. Those are extremely valuable. We have people printing documents, an employee in Virginia or one in Nevada is printing out documents that some other team member needs here.

What’s the number one thing that’s contributed to your success?

It’s helping enough people get what they need and want. If you’re able to do that successfully, then you don’t have to worry about what you need and want. It’s all about having integrity, being authentic, showing genuine care and concern for what you do and the people you serve. Next to your employees, who are your most valuable asset, your clients are gold. You’ve got to treat them extremely well. It starts with your employees. I’ll tell you that much because if you don’t treat your employees like gold, your clients won’t be treated like gold. Another tip for you business owners out there, remember what’s important.

Tell us how you like to give back.

We do a number of things here. We had an event with Kids Around the World. That was a big event where we were all packaging up food for distribution to kids in areas whether it’d be Haiti or even parts of the United States. We got a food truck or a taco truck to come and feed everybody. We involved other people that happened to be in our building and other companies. We got together on that. My home office is in California even though we have offices in Virginia, Maryland and in different states. We had a lot of wildfires this year and people that lost their homes. A lot of devastation especially in Northern California and we have a lot of clients up there.

We contributed to the Red Cross, we contributed to emergency efforts and we also contributed to helping clients who had our documents. Clients with our estate planning documents that were burned or destroyed in a fire. We made sure that we got the word out that if there’s anybody that had anything happen, we will replace it for free. They just needed to reach out to us. We have everything saved and backed up so we can provide that service for our clients. If they wanted to make changes and updates, we offered to do that for free because they had lost everything else. They didn’t need to worry about this. That’s a couple of examples of things we’ve done lately.

RES 209 | Deferred Sales Trust
Deferred Sales Trust: If you don’t treat your employees like gold, your clients won’t be treated like gold.

Greg, thank you so much for your time and being on the show. Your expertise and explaining what a Deferred Sales Trust is, it’s so valuable to our audience. Is there anyway else that they should be able to contact you or anything like that?

I can also give out our toll-free number. That would be another way to reach out to me. That number is (866) 867-8633 and leave a message. Tell us how you heard about us and how we can connect back with you. We’ll do so and try to figure out what we can do to help.

I appreciate your time, Greg. I appreciate the readers being with us. I hope you’ll also go to Life Bridge Capital and connect with me. Go to the Facebook group and join the Real Estate Syndication Show. If you’ll do me a favor and share the show, I’d be grateful. We will talk to you in our next episode.

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About Greg Reese

RES 209 | Deferred Sales TrustGreg Reese is the Founder, President, and CEO of AmeriEstate Legal Plan, Inc. and Reef Point, LLC. Both are based out of Costa Mesa, CA. Mr. Reese graduated with a B.S. in Finance from San Diego State University.

He has more than 25 years of experience in Estate Planning, combined with his prior experience of 15 years in the Real Estate and financial services industry. Greg began his professional career in 1992 as a licensed realtor serving as a due diligence analyst specializing in real estate limited partnership offerings for LPL Financial. Shortly thereafter, Greg obtained his securities and insurance licenses and for the following 15 years helped his clients develop financial plans, managed securities, alternative investments and insurance-related portfolios. During this me, Mr. Reese also actively engaged in real estate transactions for individuals, families and business owners.

Greg founded AmeriEstate Legal Plan, Inc. in 1998 in order to focus on estate planning and asset protect on planning which became an emerging need for his clients. In the past 20 years, AmeriEstate has served more than 40,000 clients, providing access to the affordable expert estate and asset protection on planning services.

Today, AmeriEstate – with its extensive provider attorney network, provides a wide range of services to its clients focused on everyday legal services designed to help clients protect what is important to them. Greg frequently speaks to various groups and has been a guest on several radio programs on the Deferred Sales Trust, as well as topics of Living Trusts and other estate planning strategies, including Charitable and Asset Protec on Strategies.

Greg initially became involved with the Estate Planning Team in early 2016 and later was invited to apply to become a Certified Trustee for the Deferred Sales Trust. Once ve ed and approved, Greg and his team have successfully completed millions of dollars in DST Transactions. As a Trustee for the Deferred Sales Trust Greg has successfully assisted numerous clients as they sought to exit from businesses, real estate, and even rare collectibles.

His clients have significantly benefited from deferring taxes on the sale of their appreciated assets. Greg is a life–long southern California native with strong es to the Orange County area. He and his wife Sue live in Newport Beach and have two young children, ages 12 and 14. He is an ac ve volunteer leader for the Boy Scouts of America and a soccer referee for AYSO. In his leisure, Greg enjoys playing tennis, swimming, skiing, and camping. As a DST Trustee, Greg brings a unique multi-disciplinary approach to helping owners analyze their exit strategies while considering their tax, estate, and investment objectives and options.

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