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176. Does an Installment Sale Defer the Tax on Recapture of Accelerated Depreciation? No. Can the Tax on Recapture of Accelerated Depreciation Nevertheless Be Deferred When an Installment Sale Occurs? Yes.
162. Transfer a Family Business to the Next Generation During the Parent's Lifetime, Retain an Asset for Income, Give the Transferee a Stepped-up Basis, Defer the Gain on Sale, Support the Parent with Deductible Rent, and Finance the Transaction, Too
June 17, 2010
I said a couple of days ago that I would comment further about what is called a "Deferred Sales TrustTM" (or "DST", for short), see www.myept.com marketed by an outfit called "Estate Planning Team" (EPT).
I don’t see it as my role to try to criticize (or publicize) the competition, but when people want to know how a DST differs from a collateralized installment sale, it’s appropriate to answer honestly about what those differences are.
Here’s one which should be emblazoned on a cautionary banner for every person who is considering selling an asset in a DST transaction: the DST promoters invite what I believe is a conflict of interest for the professionals who are advising the seller.
At www.myept.com/Attorneys the promoters say this, to attorneys:
"In addition to increasing your legal fees, by joining EPT you may be eligible to earn reoccurring solicitor's fees on each closed DST case. When a DST closes, the proceeds generated from the sale of the asset must be professionally managed by the DST Trustee. If your state bar allows you may earn a percentage of the investment manager's fee in the form of a solicitor's fee. These fees are paid to you every year that the assets are managed within the DST. Each state bar has its own view on solicitor fees. Contact your state bar to ensure that there are no state rules or ethical opinions that prohibit attorneys from receiving solicitor fees."
If you are a prospective seller, think very carefully about it, if your attorney advises you to use a DST transaction. You may just want to ask your attorney whether he or she will be compensated by EPT for recommending to you that you use a DST transaction.
Do you want your attorney to recommend a course of action because your attorney believes that is the best course of action for you, or do you want your attorney to have a personal monetary interest in recommending one course of action (a DST sale) as opposed to an alternative?
Whether or not a particular state’s bar association deems such a payment to your attorney to be an ethical violation, it doesn’t take a uniquely astute ethical sensitivity to see that the quoted statement above is an overt invitation to an attorney to have a personal monetary reason to advise you one way rather than another. In fact, the quoted statement above seems to me to indicate a willingness (by someone, anyway) to push the ethical envelope.
Okay, so suppose the person who recommends a DST transaction to you is a certified public accountant. Do the ethical concern and potential conflict of interest exist there, too?
Well, see this, at www.myept.com/CPA%27s---Tax-Professionals:
"As a member of the Estate Planning Team you may also be eligible to earn re-occurring solicitor fees [footnote about checking on the rules of the professional’s jurisdiction] on each closed DST case if your resident state allows. When a DST closes, the proceeds generated from the sale of the asset must be expertly invested by the DST Professional Trustee. These fees are paid to you every year that the assets are managed within the DST by the selected investment advisor.
"In the event your resident state prohibits fee sharing, you may request that EPT direct you to a securities broker/dealer and registered investment advisor that will sponsor you to obtain a Series 65 registration/Investment advisor representative registration which would enable you to be paid on-going compensation generated from monies invested from DST fee based money management."
For whom is your CPA working, if your CPA is paid by the DST promoter through the earnings on the investment of your sale proceeds?
In those jurisdictions which allow these side payments, at the very least the professional should disclose to you that the professional is being paid by the promoters whose transaction the professional urges you to undertake. Even if the professional discloses that to you, how certain can you be, that his or her advice is based solely on what is best for you?
Oh, yes, lest there be any doubt: in a collateralized installment sale transaction, S.Crow Collateral Corp. does not pay money on the side to your attorney or CPA. We can arrange the transaction so that the after-tax cost to you of other transaction costs is reduced, but you pay your attorney and CPA. We don’t.—Stan Crow
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The Latest Installment addresses situations, questions and issues which are brought to us in the course of the consideration, negotiation or execution of transactions. We don't use the real names of parties to transactions, and we may edit the statement of the question to try to tell the story better. Please feel free to comment, or to take issue, or to raise your own question or situation. If you do the latter, please do not relate any confidential information.
The Latest Installment blog is edited by Stanley D. Crow, who is president of S.Crow Collateral Corp.