How does the Deferred Sales Trust differ from a traditional installment sale?

The Deferred Sales Trust is a specialized form of installment sale under IRC Section 453. Here's how it distinguishes itself:

1. Tax Deferral Effect: Under IRC Section 453, the tax deferral effect is achieved by converting the seller's equity interest into a creditor (loan) interest upon the sale of the asset. This essentially transforms the seller into both a creditor and a noteholder.

2. Trust Involvement: In the Deferred Sales Trust, a third-party trust unrelated to the seller is established. The seller's loan is issued to this trust, which then sells the original asset to a third-party buyer. The trust then replaces the sold asset with other assets, providing collateral security to the seller.

3. Asset Diversification: The assets held by the trust are typically securities such as stocks, bonds, annuities, mutual funds, and managed accounts. However, they can also include traditional real estate and businesses, offering the seller a more diversified and liquid portfolio.

4. Tax Compliance: The Deferred Sales Trust has a long track record of success and has undergone scrutiny from both the IRS and FINRA, providing sellers with confidence in its tax compliance and effectiveness.