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Installment Sales Trust (IST)™

Installment Sales Trust (IST)™

A Strategic Alternative to the 1031 Exchange

Do you want to exit highly appreciated real estate without being locked into the 1031 exchange cycle?
Would you prefer flexibility in how sale proceeds are invested and integrated into your broader estate and tax planning rather than being forced to acquire another “like-kind” property under strict IRS deadlines?
An Installment Sales Trust (IST)™ may provide an alternative legal strategy for deferring capital gains taxes on the sale of appreciated commercial or residential real estate while allowing for greater planning flexibility and risk management.

The Limitations of the Traditional 1031 Exchange

Many real estate owners are familiar with the 1031 exchange as the primary method for deferring capital gains taxes. While effective in certain circumstances, a 1031 exchange requires:

  • Identification of replacement property within 45 days
  • Closing within 180 days
  • Reinvestment exclusively into like-kind real estate
  • Continued exposure to real estate market and management risk

For some sellers, these constraints limit liquidity, diversification, and long-term planning options.

Legal Foundation of the Installment Sales Trust

The Installment Sales Trust is grounded in the federal installment sale rules under Internal Revenue Code § 453, which permit capital gains taxes to be deferred when sale proceeds are received over time rather than in a single lump sum. Under § 453, capital gain is generally recognized proportionately as installment payments are received, allowing the seller to spread tax liability over multiple years, subject to proper structuring and compliance.

Traditional Installment Sale vs. Installment Sales Trust

In a traditional installment sale, the buyer pays the seller directly over time pursuant to an installment note. While this defers capital gains taxes, it exposes the seller to significant buyer-related risks, including default, insolvency, or bankruptcy. Enforcement options may be limited and costly.

An Installment Sales Trust (IST)™ replaces reliance on the buyer with a third-party trust structure, providing additional safeguards and greater planning flexibility.

How an Installment Sales Trust (IST)™ Works

An IST™ is typically structured as follows:

  • The property is sold to an unrelated third-party buyer.
  • Sale proceeds are transferred to an independent trust.
  • The trust issues an installment note to the seller.
  • The trust makes scheduled installment payments over time.
  • Trust assets may be invested in accordance with an agreed-upon strategy.

The IST™ can be customized to address payment timing, duration, and coordination with estate planning objectives. Throughout the life of the trust, legal, tax, and financial professionals work together to help ensure proper administration and compliance.

Comparison of Common Strategies

Feature
1031 Exchange
Traditional Installment Sale
Installment Sales Trust (IST)™
Capital gains tax deferralYesYesYes
Reinvestment requiredReal estate onlyNoNo
Buyer credit riskN/AHighMitigated through trust
LiquidityLimitedLimitedGreater flexibility
Investment diversificationNoNoPossible
IRS timing restrictionsStrictNoneNone
Estate planning integrationLimitedLimitedHigh

Estate and Legacy Planning Considerations

An Installment Sales Trust is often evaluated in conjunction with broader estate planning strategies, including revocable trusts, dynasty trusts, asset protection planning, and intergenerational wealth transfer.

In many cases, the installment note may pass to beneficiaries at death and—depending on overall estate planning and applicable tax law—may reduce or eliminate future estate tax exposure.

Who May Benefit From an Installment Sales Trust™

An IST™ may be appropriate for individuals who:

  • Own highly appreciated commercial or residential real estate
  • Wish to defer capital gains taxes without reinvesting in real estate
  • Are concerned about buyer default in a traditional installment sale
  • Seek to integrate real estate exits into long-term estate planning

An IST™ is not appropriate for every transaction and should be evaluated on a case-by-case basis.

Important Legal Disclosure

This content is provided for informational purposes only and does not constitute legal or tax advice. Installment Sales Trusts involve complex legal and tax considerations and are not suitable for all transactions. Tax treatment depends on individual circumstances, proper structuring, and ongoing compliance. Consultation with qualified legal, tax, and financial advisors is required.

Request an Installment Sales Trust Review

J.S. Burton, P.L.C. provides legal analysis and structuring of Installment Sales Trusts in coordination with tax and financial advisors.

Contact our office to determine whether an IST™ is appropriate for your real estate transaction and estate planning objectives.

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    FAQs

    • What estate planning documents should I have?
      A comprehensive estate plan should include the following documents, prepared by an attorney based on in-depth counseling which takes into account your particular family and financial situation:

      A Living Trust can be used to hold legal title to and provide a mechanism to manage your property. You (and your spouse) are the Trustee(s) and beneficiaries of your trust during your lifetime. You also designate successor Trustees to carry out your instructions in case of death or incapacity. Unlike a will, a trust usually becomes effective immediately after incapacity or death. Your Living Trust is "revocable" which allows you to make changes and even to terminate it. One of the great benefits of a properly funded Living Trust is the fact that it will avoid or minimize the expense, delays, and publicity associated with probate.

      If you have a Living Trust-based estate plan, you also need a pour-over will. For those with minor children, the nomination of a guardian must be set forth in a will. The other major function of a pour-over will is that it allows the executor to transfer any assets owned by the decedent into the decedent's trust so that they are distributed according to its terms.

      A Will, also referred to as a Last Will and Testament, is primarily designed to transfer your assets according to your wishes. A Will also typically names someone to be your Executor, who is the person you designate to carry out your instructions. If you have minor children, you should also name a Guardian as well as alternate Guardians in case your first choice is unable or unwilling to serve. A Will only becomes effective upon your death, and after it is admitted by a probate court.

      A Durable Power of Attorney for Property allows your agent to carry on your financial affairs in the event that you become disabled. Unless you have a properly drafted power of attorney, it may be necessary to apply to a court to have a guardian or conservator appointed to make decisions for you during a period of incapacitation. This guardianship process is time-consuming, expensive, emotionally draining and often costs thousands of dollars.

      There are generally two types of durable powers of attorney: a present durable power of attorney in which the power is immediately transferred to your agent (also known as your attorney in fact); and a springing or future durable power of attorney that only comes into effect upon your subsequent disability as determined by your doctor. Anyone can be designated, most commonly your spouse or domestic partner, a trusted family member, or friend. Appointing an agent assures that your wishes are carried out exactly as you want them, allows you to decide who will make decisions for you, and is effective immediately upon subsequent disability.

      The law allows you to appoint someone you trust to decide about medical treatment options if you lose the ability to decide for yourself. You can do this by using a Durable Power of Attorney for Health Care or Health Care Proxy where you designate the person or persons to make such decisions on your behalf. You can allow your health care agent to decide about all health care or only about certain treatments. You may also give your agent instructions that he or she has to follow. Your agent can then ensure that health care professionals follow your wishes. Hospitals, doctors and other health care providers must follow your agent's decisions as if they were your own.

      A Living Will informs others of your preferred medical treatment should you become permanently unconscious, terminally ill, or otherwise unable to make or communicate decisions regarding treatment. In conjunction with other estate planning tools, it can bring peace of mind and security while avoiding unnecessary expense and delay in the event of future incapacity.

      Some medical providers have refused to release information, even to spouses and adult children authorized by durable medical powers of attorney, on the grounds that the 1996 Health Insurance Portability and Accountability Act, or HIPAA, prohibits such releases. In addition to the above documents, you should also sign a HIPAA authorization form that allows the release of medical information to your agents, your successor trustees, your family and other people whom you designate.
    • How do I name a guardian for my children?
      If you have children under the age of eighteen, you should designate a person or persons to be appointed guardian(s) over their person and property. Of course, if a surviving parent lives with the minor children (and has custody over them), he or she automatically continues to remain their sole guardian. This is true despite the fact that others may be named as the guardian in your estate planning documents. You should name at least one alternate guardian in case the primary guardian cannot serve or is not appointed by the court.
    • What does my estate include?

      Your estate is simply everything that you own, anywhere in the world, including:

      • Your home or any other real estate that you own
      • Your business
      • Your share of any joint accounts
      • The full value of your retirement accounts
      • Any life insurance policies that you own
      • Any property owned by a trust, over which you have a significant control
    • Why is it important to establish an estate plan?

      Sadly, many individuals don’t engage in formal estate planning because they don’t think that they have “a lot of assets” or mistakenly believe that their assets will be automatically shared among their children upon their passing. If you don’t make proper legal arrangements for the management of your assets and affairs after your passing, the state’s intestacy laws will take over upon your death. This often results in the wrong people getting your assets as well as higher estate taxes.

      If you pass away without establishing an estate plan, your estate would undergo probate, a public, court-supervised proceeding. Probate can be expensive and tie up the assets of the deceased for a prolonged period before beneficiaries can receive them. Even worse, your failure to outline your intentions through proper estate planning can tear apart your family as each person maneuvers to be appointed with the authority to manage your affairs. Further, it is not unusual for bitter family feuds to ensue over modest sums of money or a family heirloom.