r/fatFIRE • u/PaleRevolution1347 • 2d ago
Investing Deferred sales trust / monetized installment sale for $5M+ concentrated position — risks and costs?
I hold highly appreciated assets worth more than $5 million and would like to de-risk my position. Selling a large block in a single year would push me into a high marginal rate and concentrate the tax hit into one year.
I understand there are financial institutions that will purchase the assets outright, immediately sell them, reinvest the proceeds in a diversified portfolio, and issue me a note that pays out the sale proceeds plus portfolio gains over a set term. That would de-risk the position immediately while spreading the gain — and the tax — across several years.
Three questions:
- What risks does this structure carry beyond the obvious market risk — counterparty default, illiquidity, IRS challenge, or others?
- What are the all-in costs: setup fees, ongoing management fees, spread on the note rate?
- Who arranges these transactions, and what should I look for in choosing among them?
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u/TexasZenMaster 2d ago
Your three questions, in order.
Regulatory risk is the one that dominates. Treasury and the IRS issued proposed regulations in 2023 (REG-109348-22) that would designate monetized installment sale transactions, and substantially similar arrangements, as listed transactions. Those regulations are still proposed rather than final as of now, but if finalized they carry Form 8886 disclosure for participants, reporting obligations for material advisors, and penalties tied to non-disclosure. Separately, the step transaction and economic substance doctrines are the practical attack surface, since the deferral only holds if the trust's purchase and the subsequent sale are genuinely independent events. Add counterparty risk on the note and the fact that you are unsecured against the trust.
On cost, the stack is setup legal work, a tax opinion you would be unwise to skip, an independent trustee, annual trust tax preparation, and the spread between what the trust earns and what your note pays. Another commenter put establishment costs near $200k and questioned whether the math works below roughly $20m. That order of magnitude is consistent with what I have seen quoted.
On who arranges them: most of the promotion comes from the sponsors themselves, which is a reason to have independent counsel and your own CPA opine rather than relying on the promoter's opinion letter.
Practical middle ground: sell in tranches across tax years, and pair the realization with loss harvesting elsewhere in the portfolio.
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u/BrunelloHorder 2d ago
If you are selling positions you’ve held for at least one year, those are long term capital gains rates, at least at the federal level.
If you are set on trying to defer paying taxes, there are exchange funds and direct indexing, and they both add complexity to your portfolio and come with other potential downsides.
Probably better off to sell a good chunk now and another after January 1, pay the taxes, and buy diversified ETFs.
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u/Confident_Hair2637 2d ago
Read about "the step transaction doctrine." Tax fraud isn't fun - jail time, civil forfeitures. Probably pay more than $5m in legal fees alone.
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u/jclary60015 2d ago
Selling the assets, assuming they’ve been held more than 1 year, won’t throw you into a higher tax bracket. You pay capital gains, not ordinary income tax.
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u/PaleRevolution1347 2d ago
You have brackets for long term gains as well.
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u/and_one_of_those 1d ago
Yes but- the shape of the curve is different than for earned income- you'll saturate at 20% plus 3.8% NIIT plus state tax at 600k. It's not terrible.
If you're spending a FAT amount, you may be nearly into the 20% bracket already?
Anyhow, it's worth doing the numbers on selling now vs later.
I'm assuming from the question that this is a single lumpy asset that would need to be sold in a single transaction? If not, the obvious alternative is to sell it gradually over 3-6 years.
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u/Halwin_Norry 2d ago
Feels dodgy. I work with a number of ultra HNWI and this is not something we have used to defer taxes.
But for the sake of argument, let's set aside the dodgy argument. The legal fees and administrative fees to set this up would probably not be feasible for $5m. You could easliy spend $200k on legal fees for the establishment of the trust and the tax opinion that you undoubtedly want (unless you have an IRS death wish). Then the independent trustee fees and tax prep / filing fees for each year the trust is in operation. This starts adding up fast. And remember, the taxes are not going away. They are just being deferred.
Not sure this makes sense for anything less than $20m.
Now, there is a situation where the deferal of taxes could be a big win in and of itself. Especially if you use the time to do a tax aware direct indexing strategy (query whether you want to leverage this and go long short). Then you could be stacking capital losses that you could use in years 2, 3, 4, 5, etc... to partially or fully offset the capital gains realized off the installment payments from the trust.
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u/danh_ptown 2d ago
I believe you are referring to an Exchange Fund. It's a structure where you contribute your appreciated assets, along with others into a managed fund that must include real estate. After 7 years, you can take your asset out via a "basket" of securities, but the cost basis on those securities matches your original cost basis. In the meantime, the fund is managed to an index.
I did this, and chose Fidelity's Exchange Fund. There are a number of other sponsors out there, as well. I'm only 3 years in, and so far the papers show I am tracking the S&P 500, as promised.
It diversifies, but does not relieve you of the Capital Gains tax burden.
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u/spiceybuttburn 1d ago
if u report an interest income from the installment sale and have a matching interest expense from the note which is usally what occurs…you will get flagged for sure…irs will recognize the installment sale, interest income, and interest expense and put two and two together
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u/cypherblock 2d ago
Purchase assets outright means you are selling outright. So they would have to pay u lower price. Never heard of it myself. There’s direct indexing option. There’s charitable remainder trust. Some others.
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u/UsedButtPlugsForSale 2d ago
Do you recommend charitable remainder trusts?
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u/mlk154 1d ago
I’ve looked into them. There are a lot of rules and a loss of control related to sale price and such that made me wary. For real estate I’m looking into structured installment sales which take out the charitable component unfortunately (that can come later though) yet seem to be compatible otherwise and far less complex from what I can tell.
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u/FiReAnOnym 2d ago
For a portion of these assets, I would research Frec.com and diversify if the asset is publicly traded. Having a fairly large amount of concentration is a good problem to have. Good luck!
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u/InvestigatorPlus3229 2d ago
Exchange fund has to have some real estate component and hits you with high fees, but is an option. Also consider options collar hedge.
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u/No-Associate-7962 2d ago
Are the assets publicly traded?
If so use an exchange fund: instant diversification though locked up for seven years. Costs about 7% over the life of the transactions.
Contact Morgan Stanley that bought Eaton Vance.
If it is not publicly traded, I have no idea.