Deferred Sales Trust Made Simple with Brett Swarts & Michael McIntyre

Deferred Sales Trust Made Simple with Brett Swarts & Michael McIntyre

Michael McIntyre is a financial advisor for many years. He’s the Chairman of Trust and Premium Finance and Insurance before he learned about the deferred sales trust. He is also the National Training Director of the Estate Planning Team. 

He is passionate about educating financial advisors, insurance professionals, or anyone who wants to help their clients escape feeling trapped by capital gains tax to use the deferred sales trust as a tool to grow your business.

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Deferred Sales Trust Made Simple with Brett Swarts & Michael McIntyre

Brett:

I’m excited to continue our series on the Deferred Sales Trust Made Simple. And really, we’re trying to just clarify, most frequently asked questions and conversations that we have every single week with potential deferred sales trust clients, and also professionals who are like insurance professionals or financial advisors or commercial real estate brokers or luxury realtors. And to help them clarify it for their business plan so they can grow their business and help more clients. I’m joined by my good friend and business partner, Michael McIntyre, who is the National Trainer for the Estate Planning Team. Please welcome the show, Michael. How are you doing?

Michael:

It’s an honor to be with you, Brett Swarts.

Brett:

Absolutely, it’s always a pleasure to have you on the show. And Michael is probably the most repeated guest. Now I think this is maybe our fifth or sixth. And you can learn more about Michael’s story in the previous interviews, but we’re gonna jump right into today’s show. And we’re focusing on could the deferred sales trust be used to fund tax-advantaged products like cash value life insurance, similar to premium financing? And this was kind of a popular question that I got this week for some professionals that are real estate professionals and insurance professionals. And so Michael, would you dive right into that? What is the answer to that?

Michael:

Yeah, it certainly could. It certainly can be an option. I think there’s a lot of reasons why life insurance might be an important feature solution for clients who are selling highly appreciated assets. One reason that insurable interest as we call it would be the replacement value of the asset, perhaps during your lifetime. You want to spend your money, and maybe you want your children to have some of that. And so that might be a reason. Another reason might be estate planning. And another might be capital gains taxes, so that you didn’t want to burden your children and state estate taxes are an important feature because, in 2025, there’s something called a sunset provision, which currently, the state tax exemption is a little over $11 million, that sunsets probably between 6 and 7 million for most Americans in 2025 per person. So it goes from 11 million, back down to 6 to 7 million where it was once before the tax job and Recovery Act. Every tax law has to sunset on a personal level. Otherwise, it has to go through a means-testing for taxation through Congress. And so it purposely was going to sunset in 2025 unless it’s extended, and it looks very unlikely that it will be extended. So it’s going to probably be more of an impact for many people who may have not had a problem of state taxes may now have to address it.

Brett:

Yeah, I’ve also heard they might even take it away sooner. I mean, there’s no one to say that they that the new Biden administration and they’ve taken the House and the Senate right and they want in Georgia and won the presidency. Inauguration Day was yesterday. The day before yesterday, we’re recording on the 22nd here and so who’s to say that they don’t pass something next year right and just pull those things back right now everything is pointing to higher taxes. But that being said even regardless, it’s good to know what your options are regarding the deferred sales trust and ways to use it to invest in the funds into insurance. So would you break down why someone would want even want premium financing right or cash value life? insurance? Why would someone want that to begin with, regardless of the deferred sales trust, and then let’s combine the power of deferring capital gains tax on highly appreciated assets and funding that policy?

Michael:

Well, life insurance is a beautiful tool, which allows leverage for the insured to take care of potential expenses at death. And there are many different things that could do that. And life insurance also provides tax-free leverage, which is an important feature. So that tax-free part is something that is extremely beneficial for somebody who is dealing with a direct expense. If you have an expense, typically, you have to shell out maybe, depending upon your tax bracket, tax bracket, the dollar $30, $40, for every dollar of expense. Now, some expenses are, you can write them off. Well, with life insurance, it is tax-free to the IRS, if structured correctly, so that in that way, it allows people to cover for a direct expense in the future. Now, the other thing that premium finance, as you were saying, allows for you to have multiple leveraging effects, and call it an arbitrage on top of it, which arbitrage meaning that you have one return that your let’s say borrowing on, and another return that you’re receiving that could be higher. And so therefore the return, that maybe the borrowing procedure that you have that’s out there could be far cheaper than the return that you’re getting. And then you’re using money in the deferred sales trust, that is, you’re deferring the taxes, and you’re allowing that deferral if you will, to provide a return for you. And then you’re borrowing on or against, perhaps against that money to provide a higher return for you. So there’s kind of like a triple arbitrage going on there. You’re sort of using I call it, Financial Akito. Right, you’re using the power of the deferred sales trust and the ability to defer a tax to pay for an expense in the future. 

Brett:

Okay, so let’s pause there. Let’s do it like a real-life example. This is a recent deal. Let’s use one that I just closed for a client, it was in Aptos, a $7.9 million sale. It was an investment property. She’s in her 70s. Okay. And once you choose that one, and we’ll use another one for another gentleman, just close in Alabama, it was a $2.6 million sale and he’s in his 40s. Okay, so different ages, right? And maybe different policy costs. And let’s break down what we’re able to do on the deferred sales trust. And let’s apply those real numbers to potential policy. Okay, so we’ll start with the first one Aptos,, she owned the property for 25 years on, very low basis, in fact, I think, once you first bought was about 900,000 or so and fully depreciate it. So we saved approximately two and a half to $3 million of tax liability. She was able to pay off her debt, and she netted about 6 million into the trust. Okay, so let’s say she’s 70. And so that extra about, let’s say two and a half million is what was saved. So now break down, Michael, what that might look like on an actual number for a policy for someone like that to take advantage of we just talked about,

Michael:

Well, when you get into the 70s, you start to get into some more expense, in terms of the actual life insurance, and I haven’t run those numbers yet. But we certainly could. I just did for one in their 50s. Maybe we could do that in my head and the one in the 70s is in my head. So this particular one was roughly about a $20 million transaction. And they’ve sold and they netted 20 million in the deferred sales trust, we were assuming that they would make about a 6% rate of return. So that would be about 1.2 million in cash flow.

Brett:

How much tax did they defer on not having used the DST? How much would have had they have met if using the DST? They’re at 20. So how much do they defer?

Michael:

Yeah, I think the taxes that they were deferring were closer to or above 6 million

Brett:

Okay, great. Keep going.

Michael:

It was the $6 million deferral in tax, it was in California. I’m sorry, in Minnesota was the transaction. And so you’re doing a pretty high tax state. And so on that 20 million, 6 million is deferred. And roughly, we’re talking about mid-50s individuals. And so the life insurance, they wanted to replace was about the tax that they wanted to cover was about 5 million, which isn’t entirely covering all of the taxes, the estate, or the capital gains taxes. And that’s certainly the choice of the note holder to not cover all of it over time. So that was about 300,000 a year and the life insurance and the borrowing. The policy we assumed would make over five and the borrowing would be somewhere in the 2% to 3% range. 

Brett:

Okay, pause right there. So he wanted to cover about 5 million of his liability. And or state tax every wants to look at that right? Both or combo to do that, in his mid-50s would cost him about $300,000 per year. In the actual and policy, itself was earning what exactly?

Michael:

Yeah, I was probably earning between five and six was the return.

Brett:

And the cost of that was five to six, right? So if it’s earning five to six, that the policy, and that’s putting 300,000. Break all that down. Well, I guess walk through that circle there to see how we’re paying for this.

Michael:

Yeah, the interest on it, I think, would probably be somewhere in the per 100,000. So we’re talking about 6,000, you know, 6000 to 7000, a year of interest that we’re talking about. And yet it’s earning the money on the 300,000 is earning a much higher rate that we’re we’re talking about. And so that accumulates over time, and roughly in the 16th year, the loan would be paid off, there’d be enough to accumulate, if you will, in the life insurance policy to pay off the loan, which is roughly about a million and a half dollars

Brett:

The 16th year paid $300,000 per year. Now it’s paid off, right, and the policy is still gonna payout that 5 million upon death, right? And now that extra $300,000 can go to something else.

Michael:

Right. Well, they only paid for five years, the policy. So it was a five-pay policy. It wasn’t a policy that they paid for 16 years. So I left that part out there. And then the interest on it, I think was about roughly 450,000. And the interest, the trust could pay, the deferred sales trust could pay as well as an investment. So it could say, “Hey, we want all our money back or 450,000 back, and we want to return on our money.” So we’re gonna loan it to what’s called an island, an irrevocable life insurance trust. So that’s outside of the noteholders’ estate, and the kids could operate that. And the lender could lend to the islet. And the lender isn’t just going to lend to the island, it’s going to want lateral, it’ll want part of that policy. They’ll say, “Hey, we want part of that policy.” But the note holder could say, “Hey, I’m in normal circumstances outside of the deferred sales trust, the owner puts up additional collateral additional money on their own”. Well, the trust could raise their hand and say, “Hey, I’ll put up collateral on the deferred sales trust, because we have $6 million of kind of free money here.” Okay. That is, so we’ll post any additional collateral and maybe the note holder says, “Well, we’ll go into the second position. Instead of being in the first position we’re gonna go to the second position in this circumstance”. 

Brett:

I can borrow against it. In other words, you can use, you can borrow against the policy that DST in order to fund the life insurance policy.

Michael:

At the permission of the trustee, and the permission of the note holder, that certainly is possible. So everybody agrees and then DACA which is the deposit account control agreement signs off on that as well. So everybody says OK to that and goes into in the note holder, it goes into the second position on a small portion of money so that they can have life insurance and policy which is theoretically, they don’t have to ever write a check on the note holder. So they’re literally using that money that the IRS is deferring to pay for their state taxes.

Brett:

Perfect. I love that. Now let’s talk about the advantage of taking income from the trust, and then using that to fund this policy versus borrowing against. So a scenario where you would say, do a little bit of both, or one or the other, can you walk us through those advantages, disadvantages?

Michael:

Well, more efficiently is to have something that is pre-tax, right? Because if I received that money, going back to our taxation comment earlier, I’m when I pay when I receive that $1.2 million on that $20 million investment, I pay taxes on that at ordinary income tax rates or anything above my $20 million. I’m paying ordinary income tax rates. So I’m not getting all of that I’m diluted by 30, 40, maybe depending on my bracket, maybe in the future, maybe 50%, maybe more, based on tax brackets. So by having the trust, let be the lender on it, I’m far more efficient with my cash flow, and I’m able to spend that 1.2 million, I might be diluted a little bit on that because some of that money is going out a few $1,000 a year. So I may not get exactly 1.2 million, because I’m lending that money. And for a future date. But eventually, the trust will be paid that money back, either through the death benefit or the growth of the cash value. So I’m not going to reduce much of my income down at 1.2 million is plenty for me. If you know, if that’s suitable for the note holder, we have to find out if they need every penny of those dollars, otherwise, it’s not possible to do it. So it’s far more efficient to do things without tax than with tax.

Brett:

Excellent. And then we’ll talk about the timing of pulling out funds from the deferred sales trust since it’s kind of like a 401k. And that you can park funds in the deferred sales trust, and you can delay payments. Now eventually, we needed to make some payments, but I would say about 70% of our clients are, you know, three, four, or five years, they’re delaying the payments, right? Meaning the interest that’s owed to the note holder, typically, around 8%, depending on the net of all recurring fees over a 10 year period of time. They don’t necessarily need the income, especially the deal we just closed in Colorado, it was about a $5 million sale of an apartment complex. And this gentleman is worth about 20 to 25 million, and he moved it outside of his taxable state. But he also doesn’t need or want the income. And he’s waiting for at least four years to even start the income. So let’s talk about the either, essentially, we can delay the income, so and then just borrow against it, use it as collateral fund life insurance policy. That’s definitely an option. We talked about that. And the other one would need to be taking the income and using that to do a personal life insurance policy. Right. I mean, you pay tax on that income and then fund that. So did you maybe already answered that. But I just want to make sure the audience catches that you have both options, right, Michael?

Deferred Sales Trust Made Simple with Brett Swarts & Michael McIntyre

Deferred Sales Trust Made Simple: “Now, one thing I tell everyone is to learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values, and the least risk. ” – Armstrong Williams

 

Michael:

Yeah, there are several reasons that noteholders might decide to defer up payments or income. One is, my favorite reason is seasoning, as I call it, it’s referred in the industry is if you ever taking income off of an investment, you want to allow it to have some seasoning some depth to it so that if there is a correction, or change or a drop in the value of the asset, it will not affect your overall principle, we all want to be good stewards of our money. And if we don’t need the money for, you know, we can afford to defer it, we might want to do that we might want to use investments that would allow what I call a spigot, right, you could turn it on, and you could turn it off. Another reason to defer your income off of the deferred sales trust would be if, for example, you sold a business and they asked you to stay on for a period of time, and you really don’t need the money. In fact, having the money might be a burden for you in terms of tax liability. This happens very frequently to people in the medical profession, where they’re making a segue or a very, very important business where they have an employee compensation package to stay on or hold back. That is there for that. So all of those things are super important that you might want to defer an income. I think the first is more common obviously than the second. But you may want to carve that out when you’re getting a deal. You may want to have a compensation package and that’s part of the reason that we work closely. With our sellers is to advise them and give them plenty of advice, particularly in the negotiation stage. And so different types of investments are going to behave differently and are going to be best better suited for that delay. Because what happens on the default don’t stress, as you know is that it’s its own entity. And when any income comes in, it’s going to pay taxes on it, or it’s going to have it as an expensive it pays it out. So it’s important not to have that as on that cash flow for the trust, is in the trust is going to pay taxes on it. And, and that defeats sort of defeats the purpose. So it’s important to have a continuity investment plan with that.

Brett:

Yep. And also to just to clarify on that. It’s a great point. If the note holder is not receiving payments in a given year, what’s unique about this particular trust that we use, it’s able to even if it’s not accruing an earning, the trust itself, the investments are, it’s able to expense what it owes even into the future, right? accrue that interest that’s been compounding, even if it hasn’t paid it out. And so most of the time a lot of our trust at the tax level or zero-taxed, events on both the trust and on the note holder because they haven’t received anything until of course, they start receiving payments. So that’s just a little clear clarifying there.

Michael:

If it’s structured properly.

Brett:

Yeah, if it’s structured properly, everything else. So that’s, that’s what we do. So 1000s of closes now 25 years, Michael, and we work with insurance professionals, financial advisors, commercial real estate brokers. So if you’re in this for the first time, we would love the opportunity to teach you more about capital gains taxes. And just so you know, is partnered with or a member of the Estate Planning Team, we act as the trustee. Michael McIntyre and I are educating and equipping people with the deferred sales charge every single day. So if you are a business professional listening to this, you can go to experttaxsecrets.com. You can also reach out to Michael directly. Mike, what’s the best place for them to find you?

Michael:

Well, before I say that, just make sure that you subscribe, like, and do that for those YouTube algorithms. So that Brett gets all the likes that he deserves. You can find me on the Success Training Estate Planning Team. You can also find me at mydstplan.com/askmac and then our main website is myept.com

Brett:

And for those who are wondering Michael’s expertise, he is actually a financial advisor for many years. He’s the Chairman of Trust and Premium Finance and Insurance before he learned about the deferred sales trust. And he had wished when he sold his business that he had used the deferred sales trust. But now he is passionate about educating financial advisors, insurance professionals, anyone who wants to help their clients escape feeling trapped by capital gains tax to use the deferred sales trust as a nice tool to grow your business. That being said, Who does this work for? This is also a very common question. Just as a reminder, it works for anyone who has highly appreciated real estate, including primary homes investment, real estate, including saving a failed 1031 exchange, also, including highly appreciated public stock or private stock. We’re actually working on a cryptocurrency deal right now. We believe it’s going to work for that as well because that subject capital gains tax also works for artwork and collectibles. So if you are a real estate professional, for example, listening to this, you can help somebody not only sell their primary home, defer the tax, but then it can fund the next investment real estate purchase, which is a nice alternative to the deferred sales trust. The funds can be invested in stocks, bonds, mutual funds, of course, insurance as we talked about, as well as real estate deals, by yourself with partners, which is really, really nice. We like to call it the Netflix. So the old blockbuster way of doing things. So Michael, do you want to touch on that on how you see that the deferred sales trust, really is the Netflix to the old blockbuster 1031 way of doing things?

Michael:

Yeah, I think it’s so important to be efficient in your financial independence, your quest for this, one of the biggest expenses that you’ll have when you sell a business, you sell real estate, you sell a stock you sell something that’s highly appreciated, is that you need to get to a big, critical mass number that’s going to provide you the retirement lifestyle that you want to if you start off that first step with 30, 40% less that’s that doesn’t sound like very good planning to me. And being a good steward means that you keep as much dollars as possible in your pocket without giving it away at the very beginning. So it’s important that you counsel with smart wise Law Firm. We’re a law firm accounting firm and marketing organization that really counsels you and helps you segue that beginning first step to financial independence, there are all sorts of taxes that you’re going to pay throughout your lifetime. There’s going to be property taxes, there’s going to be sales taxes, there’s going to be income taxes, and then at your final expense, you’re going to have a state taxes, and I didn’t even touch upon things, you fill up your gas tank here in California, and there’s a tax upon tax upon tax, and you’re going to be, you know, the slow death of 1000 cuts with taxation on this may be more than 1000 cuts. And so it’s important that you have as much money as possible to be that good steward of your money. And it begins on the moment that you are successful on your highly appreciated business, your highly appreciated real estate. So you want to get out of the tenants’ toilets and trash and move on to the cruises clubs and cocktails of your life. If that’s the case, you need to look at a strategy that’s going to mitigate your taxes over time and keep those chips on your side of the table and not give it away at day one.

Brett:

Very well said, let me touch on that we always learned in commercial real estate when I was at Marcus and Millichap how people buy and sell multifamily properties that you make your money on the buy side, right? You don’t make it on the sell, although you want to defer it on the sell, right? You actually make it on the buy. And this is where I think that 1031 exchange is very, very challenging to make your money on the buy, especially in today’s market, oftentimes you’re selling very high, right, and then buying higher 180 days later, right with lower interest rates. Maybe that helps you a little bit. But really, that just pushes the values up even more. And you’re going oh my gosh, like why am I buying this? Well, because of the tax deferral, I need to defer the tax. So that’s how we say it’s like the old blockbuster way of doing things is forcing you to not make your money in the vise forcing you to overpay or is the Netflix way of doing things. The way I like to talk about it is that deferred sales trust, you can sell, like Michael said, put it on the sidelines, defer it and then buy whatever you want, right, just like you could rent a movie whenever you want, right? You don’t have to drive down to the store, get out of the car, go see if it’s even available, return it within three days pay the penalty if you don’t, that’s the old way. And what we’re saying is don’t do it the old way sell high and buy low when it makes sense. Michael, any thoughts on that?

Michael:

Yeah, I was just sort of thinking that I read at one point that Blockbuster made a lot of their money off of the penalties. It was so hard to return that video. I mean, a lot of times when he there were people that would return videos, and it was the penalties were more than the video was worth. So at that point, what do you do, and it’s sort of the you know, let’s take that shotgun wedding approach, and apply it to the 1031, as you are kind of laying out there is that you’ve got 45 days to find a property and 180 days to get married to get hitched. And there’s a shotgun pointed at you the whole time. And there’s that, you know, where are you really making a wise decision? Are you really, you know, buying that property when you want to plus, you have to disclose to the seller, that they’re the only one? And why would they negotiate with you, if they knew that and in disclosures, you know, and with the deferred sales trust, you can take your time if that be your choice that you want to go back into real estate plus that we cast a new cost basis on the purchase of up to 80% in the real estate. So I have always found you know, I’m not a huge real estate purchaser and not terribly sophisticated. But when I did purchase real estate, it was because I took my time, it might have taken me a year or two. Maybe I’m just slow but 1031 just was a hurry up and get into the property with that Shotgun wedding and I just don’t see that’s a sustainable model.

Brett:

We never make a decision on the gun right typically it’s very difficult. And by the way, the 1031 doesn’t even work for primary homes, the deferred sales trust does. The 1031 doesn’t work for business sales, the deferred sales trust does. The 1031 only works for investment sales, whereas the deferred sales trust works for highly appreciated private stock, art working collectibles, cryptocurrency, it works for primary homes, works for investment property. So that being said, we’re running out of time now and so if you are interested in learning more about the deferred sales trust for yourself, go to capitalgainstaxsolutions.com. We have a free ebook there. Sell your real estate or business the smarter way to give that away to you and allow you to help take one step closer to escape feeling trapped by capital gains tax. And then if you’re a business professional looking to grow your business using the deferred sales trust, you go to experttaxsecrets.com. Then please reach out to Michael or me and find Michael again on YouTube for his channel – Success Training Estate Planning Team. We appreciate everybody being here and listening and please Rate, Review, Subscribe. Take care, everybody. Bye now.

 

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About Michael McIntyre

Deferred Sales Trust Made Simple with Brett Swarts & Michael McIntyre

Michael McIntyre is the National Training Director at The Estate Planning Team and Founder of the Deferred Sales Trust based in Palm Desert, California. Michael McIntyre is the person who typically spearheads the training to become an affiliate EPT member. He also assists with the training and vetting of new EPT affiliates who are Investment professionals including Registered Investment Advisors.

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