An Intermediated Installment Sale Trust (IIST) is a financial and estate planning tool designed to facilitate the sale of appreciated assets while deferring capital gains taxes and providing liquidity. This trust structure allows individuals to sell assets under a structured installment agreement, reducing the tax burden while ensuring a steady stream of income. However, like any financial instrument, it has limitations that must be carefully considered.

When selling a highly appreciated asset, whether it’s a business you have built, investment property you have owned, or valuable collectibles, the Intermediated Installment Sales Trust creates a powerful tax deferral opportunity. Instead of selling directly to a buyer and facing immediate taxation, you sell through an intermediary trust structure. This transforms what would have been a large, one time tax event into a carefully managed series of income payments over time.

What is an Intermediated Installment Sale Trust?

An Intermediated Installment Sale Trust is a trust-based transaction structure that enables asset owners to sell their property, stocks, or business interests through an intermediary trust. This trust facilitates an installment sale, allowing the seller to spread capital gains over multiple years instead of recognizing them in a single tax year.

The key components of an IIST include:

1. Seller/Grantor – The owner of the asset who wishes to sell and defer taxes.

2. Intermediary Trust – Holds the asset temporarily before selling it to the ultimate buyer.

3. Buyer – The party purchasing the asset from the trust.

4. Trustee – Manages the trust, ensuring compliance with installment sale rules.

The transaction typically works as follows:

• The seller transfers an asset into the trust in exchange for a promissory note.

• The trust sells the asset to the buyer for cash.

• The trust uses the proceeds to make scheduled installment payments to the seller.

• The seller recognizes capital gains over time as payments are received.

Benefits of an Intermediated Installment Sale Trust

1. Capital Gains Tax Deferral

One of the most significant benefits of an IIST is the ability to defer capital gains taxes. Instead of paying the full tax amount in the year of sale, the seller reports gains gradually as installment payments are received. This tax strategy can:

• Lower the seller’s tax bracket in any given year.

• Allow more investment of the proceeds before taxes are due.

• Provide flexibility in tax planning.

2. Steady Income Stream

By structuring the transaction as an installment sale, the seller ensures a predictable income stream over time. This can be particularly beneficial for:

• Retirees seeking financial security.

• Business owners transitioning out of ownership.

• Individuals looking for reliable cash flow.

3. Estate Planning and Asset Protection

Placing the asset into a trust may provide estate planning advantages by:

• Avoiding probate in the event of the seller’s death.

• Protecting proceeds from creditors, depending on state laws and trust structure.

4. Diversification Opportunities

Instead of holding a single illiquid asset (e.g., a business or real estate), the seller can convert it into a diversified portfolio of installment payments, reducing exposure to market fluctuations.

5. Flexible Investment of Proceeds

Once the trust receives the sale proceeds, it can reinvest them in a manner that aligns with the seller’s financial goals, potentially generating additional returns before installment payments are made.

Limitations of an Intermediated Installment Sale Trust

1. Complexity and Costs

Establishing and maintaining an IIST requires legal and financial expertise. Costs may include:

• Legal fees for trust creation.

• Trustee management fees.

• Accounting and tax reporting costs.

This complexity makes it less practical for small transactions and better suited for high-value asset sales.

2. Irrevocability and Control Limitations

Once assets are transferred into the trust, the seller loses direct control. While they receive installment payments, they may not dictate trust opera􀆟ons or alter terms unless specifically outlined in the trust agreement.

3. Potential IRS Scrutiny

Tax deferral strategies like IISTs are subject to IRS rules and scrutiny. Improper structuring or failure to comply with installment sale regulations may lead to:

• Immediate recognition of all capital gains.

• Tax penalties and interest on unpaid taxes.

• Recharacterization of the transaction as a taxable event.

4. Interest Rate Sensitivity

Installment payments may be structured with interest components. If interest rates fluctuate, it could impact the overall value received by the seller. Additionally, IRS guidelines require a minimum interest rate, which must be factored into planning.

5. Impact on Heirs and Estate

If the seller passes away before receiving all installment payments:

• Uncollected amounts may still be subject to estate taxes.

• The structure may complicate estate planning if not properly coordinated with other assets.

Who Should Consider an Intermediated Installment Sale Trust?

An IIST is best suited for individuals who:

• Own highly appreciated assets (e.g., real estate, businesses, stocks) and want to defer taxes.

• Seek a structured income stream instead of a lump sum payout.

• Are comfortable with the complexity and costs of trust administration.

Conclusion

An Intermediated Installment Sale Trust is a valuable financial tool for tax deferral, income planning, and estate management. It offers significant benefits, including tax savings, financial security, and asset diversification. However, its complexities, regulatory requirements, and risks must be carefully weighed.

Individuals considering an IIST should consult with financial advisors, estate planners, and tax professionals to ensure it aligns with their financial goals and is structured in compliance with IRS regulations.

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.

McKeon Financial was established in 2004, specializing in a wide range of alternative investments. We are focused on retirement planning, wealth accumulation, insurance protection, and estate and legacy planning. When consulting, educating, and initiating tax savings strategies, we work closely with our clients’ tax and legal professionals. McKeon Financial offers securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member FINRA/SIPC. McKeon Financial and IFG are unaffiliated entities. If you have questions regarding the material presented, please don’t hesitate to contact us: 360-652-4244 or info@mckeonfinancial.com.