When selling a business, owners often face a major dilemma: how to unlock the value of their company while managing the tax burden that comes with the sale. One strategy that has gained traction is the Deferred Business Trust (DBT), which provides a way to defer capital gains taxes, preserve wealth, and create flexible income options.
What Is a Deferred Business Trust?
A Deferred Business Trust is a specialized trust arrangement designed to help business owners or real estate investors defer the recognition of capital gains taxes when they sell an asset that has appreciated in value. Instead of selling directly to a buyer, the seller transfers the asset into a trust, which then sells it on the seller’s behalf.
The proceeds remain in the trust, allowing the seller to receive payments over time rather than a single lump sum. This deferral strategy can:
- Smooth out taxable income over multiple years
- Provide a customized cash flow stream
- Allow reinvestment of proceeds for continued growth
- Potentially reduce overall tax liability
In essence, it’s a way of saying: “I’ll pay my taxes later, but on my own terms.”
The Importance of the Two-Year Rule
One of the most critical features of Deferred Business Trusts is compliance with the two-year rule, which is rooted in IRS guidance for installment sales and trust structures.
Here’s what it means:
- If you sell a business (or other appreciated asset) to a related party using a trust structure, the IRS requires that the trust hold the asset for at least two years before it is sold.
- The rule is designed to prevent “quick flips” or arrangements that could be seen as tax avoidance schemes.
- If the asset is sold within that two-year window, the original seller could lose the tax deferral benefit and become immediately liable for capital gains taxes.
This rule ensures that the Deferred Business Trust is being used as a legitimate planning tool, not merely as a means to evade taxes.
Why Business Owners Use DBTs
Business owners often turn to a Deferred Business Trust when:
- They’ve built a company over decades and want to sell without losing a large portion of their proceeds to capital gains taxes.
- They’re transitioning into retirement and want a predictable income stream.
- They’re planning for estate and generational wealth transfer, since DBTs can be integrated into broader estate planning.
- They want flexibility in reinvesting proceeds into stocks, bonds, real estate, or other ventures.
Key Takeaways
- A Deferred Business Trust can be a powerful tax-deferral strategy for business and property owners looking to sell appreciated assets.
- The two-year rule is critical: assets sold within two years of being placed in the trust may jeopardize tax deferral benefits.
- With proper planning, DBTs can provide flexibility, income stability, and tax efficiency, helping entrepreneurs preserve the wealth they worked so hard to build.
? Final Note: Deferred Business Trusts are complex and subject to strict IRS rules. Anyone considering this strategy should consult with a qualified tax professional, estate planning attorney, and financial advisor to ensure compliance and tailor the trust to their specific situation.
If you would like to discuss your business or personal tax planning, tax preparation, or other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to schedule an appointment at our Exton, PA, office to review your situation. You can also schedule a consultation by clicking here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS-licensed Enrolled Agent and a Certified Tax Resolution Specialist who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA. This includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, and West Chester. We also serve clients in Delaware, New Jersey, New York, and throughout the United States.
Bryan is well-known for his expertise in IRS tax resolution and his book, “How to Resolve Your IRS Tax Debt Problems.”
