What is an Installment Sales Trust (IST)?

Posted Mar 14, 2023


Are you tired of paying taxes on gains that haven't even hit your bank account yet? Because of the Tax Reform Act of 1986, a new concept called "installment sales reporting" required taxpayers to report the entire gain from the sale of assets in the year of sale, even if they haven't received full payment for the assets. 

If you fall into the above category, the Installment Sales Trust (IST) might provide a much-needed tax benefit. It's a trust arrangement that allows the seller to defer the payment of taxes on the sale of assets over a period of time. It works by transferring ownership of the assets to a trust, which then sells them to the buyer on an installment basis. 

That might sound a bit confusing, but understanding an IST's benefits is worth the hassle.

How an Installment Sales Trust Works

With an IST, an investor can receive payments from the trust over time, paying taxes on those payments as they are received. The result is an improvement in cash flow. Investors can breathe a sigh of relief knowing they won't have to pay taxes on gains they haven't yet received in cash.

Additionally, ISTs can also provide asset protection, estate planning, and charitable giving benefits. Transferring ownership of the assets to the trust can protect it from the claims of creditors, lawsuits, or other legal actions. 

There are benefits when it comes to real estate planning as well. An IST can help reduce an investor's taxable estate and minimize estate taxes. For those feeling generous, the trust can make charitable gifts over time using the proceeds from the installment sales.

Asset Protection

An IST can provide asset protection for the seller. The seller transfers their ownership of assets to the trust. Because the trust now owns those assets, they are protected from potential claims of creditors, lawsuits, or other legal actions.

Estate Planning

ISTs can also be used as part of an estate planning strategy. The seller can reduce their taxable estate by transferring their assets to the trust. By working with an estate attorney, the trust can be set up to allow assets to transfer to heirs. Using the trust in this way helps avoid probate and all of the delays and costs that go along with it.

Charitable Giving

ISTs can also be used for charitable gifting. When asset ownership is transferred to the trust, the seller can receive a charitable deduction based on the value of those assets. The trust can then sell the assets on an installment basis, using the proceeds to make charitable gifts. This gifting will be spread out over time.

IST WorkFlow

In the first section, we outlined how an IST works. Now we’ll go through the steps of creating an IST.

  1. The seller transfers ownership of the assets to the trust.
  2. The trust sells the assets to the buyer on an installment basis.
  3. The buyer makes payments to the trust over time.
  4. The trust makes payments to the seller over time.
  5. The seller pays taxes on the payments received from the trust.

An Installment Sales Trust (IST) is a powerful tool that can help sellers defer the payment of taxes on the sale of assets. If you're considering creating an IST, it's best to work with an experienced estate attorney.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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