Selling a major asset can create a wealth of opportunity, but it also unveils a web of tax and estate planning questions. Most importantly, “How can I keep more of what I’ve earned and make sure it benefits my family in the long run?”
The answer may involve using a couple seemingly unrelated wealth management tools: innovative tax planning and life insurance. With the help of a Deferred Sales Trust (DST) trustee, you can set up a DST to defer capital gains taxes giving you greater flexibility over when and how the proceeds are reinvested, while keeping 100% of your equity working for you. The income and growth from that trust can fund life insurance, turning deferred proceeds into a tax-advantaged legacy plan.
Together, they create a financial strategy that not only protects wealth today but also ensures it transfers to future generations efficiently and securely. Here’s how combining a DST and life insurance works, and why doing so could redefine your wealth strategy.
What the DST Accomplishes
When you sell an asset directly, the IRS typically taxes your capital gains immediately, potentially taking up to 37%1 of your proceeds before you ever see a dollar. A DST sidesteps that by using the installment method of reporting. You sell the asset to a trust in exchange for a promissory note, and the trust then sells the asset to the buyer. Since you don’t receive the full amount of cash upfront (only scheduled payments), you don’t owe capital gains on the transaction. You defer your capital gains taxes until you receive the gains.
This structure allows you to:
- Reinvest a larger portion of your proceeds
- Spread your tax liability over years or decades
- Tailor income to your lifestyle and retirement goals
While the DST reduces the tax burden from a large sale, it also opens the door for long-term strategic thinking. That’s where life insurance comes in.
Why Life Insurance Belongs in the Wealth Strategy Conversation
One reason to consider pairing life insurance with a DST is that you can use the income from the DST to pay for your life insurance premiums, rather than using out-of-pocket cash. This lets you redirect what would have gone to the IRS into building a permanent death benefit for your heirs or estate.
Let’s say you’ve sold a business for $5 million using a DST, and you’re receiving structured payments annually. You take a portion of those payments and use them to fund a whole life or indexed universal life insurance policy. Over time, that policy builds cash value and secures a death benefit, which passes to your heirs income-tax-free.
This approach essentially transforms deferred tax dollars into generational wealth. You get to use the money during your lifetime and leave behind an additional layer of security and financial leverage for your family.
How the Pairing Works in Practice
Imagine you own a real estate portfolio that’s appreciated significantly over the last 20 years. You’re ready to sell, but a direct sale would result in a hefty $2 million tax bill. Instead, you use a DST and defer most of those taxes by receiving substantial annual payments.
Now, you decide to allocate $50,000 a year from that DST income to fund a permanent life insurance policy with a $3 million death benefit. Over time, the policy builds cash value you can borrow against in retirement if needed. And when you pass, your heirs receive $3 million tax-free, which they can use to:
- Pay any remaining deferred taxes
- Replace your DST income
- Fund their own investments or charitable causes
In this setup, you’ve created lifelong income and engineered a tax-free payout for your heirs.
Estate Planning Flexibility Without Losing Control
A primary concern you may have when setting up advanced financial strategies like a DST or life insurance trust is the loss of control. You might worry that placing assets in a trust or paying premiums into an insurance policy means you’re locking yourself into an inflexible plan. But that’s a myth, especially when you work with a coordinated team of capital gains tax advisers.
A properly structured DST gives you control over the income stream. You can then plan to match that income with your insurance funding schedule, allowing for flexibility. Meanwhile, the insurance policy’s structure can remove the proceeds from your taxable estate, ensuring your heirs receive the full benefit, tax-free.
You also retain the ability to choose your investment advisor to manage the DST, your trustee, and your policy type. So while you’re operating within a compliant framework, you’re not stuck. You’re designing a system that adapts to your needs while remaining rock-solid from a tax and estate law perspective.
Who Should Consider This Strategy?
You may want to explore combining life insurance with a DST if:
- You’re selling an appreciated asset like real estate, a business, or crypto
- You’re concerned about capital gains or estate taxes
- You want to leave a lasting legacy for your heirs while maintaining income
- You value tax deferral but want a way to plan ahead for when taxes come due
- You’re looking for creative ways to protect your heirs without compromising your lifestyle
Pairing a DST with life insurance isn’t a DIY setup, though. Careful and proper implementation is crucial and usually involves coordination between tax professionals, estate planners, insurance specialists, and your DST trustee. A single misstep can jeopardize your wealth tax plan or policy performance.
Maximize the Strategy, Minimize the Risk
The DST is a flexible, powerful financial tool. Life insurance adds a layer of protection and legacy-building that complements everything the DST offers. When used together, they create a wealth management strategy that serves you in life and benefits your heirs in death, all while staying compliant with IRS rules.
You don’t have to choose between tax deferral and legacy planning. You can design a system that performs both tasks. And it starts with working with the right team that knows how to bring all the pieces together.
1https://www.fidelity.com/learning-center/smart-money/capital-gains-tax-rates#:~:text=Meanwhile%2C%20the%20amount%20of%20time,and%20long%2Dterm%20capital%20gains.