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Planning Drivers to Feed Your Strategy.

DSTs and 1031 Exchanges

APD Volume 1.1

September, 2015


Aaron Kolkman, CFP®, AAMS®


A Delaware Statutory Trusts (DST) refers to a Trust that owns real property. In turn, multiple investors may own a beneficial interest in the DST, and as such, qualify for like-kind exchange rules under IRC Section 1031.  The exchange process is the same with a DST, just with an alternative structure (or vehicle) used for holding the underlying real property.  Think of it as a "packaged" sleeve of a property with direct ownership in that piece of the property.  Unlike outright ownership, the DST relieves the owner of administrative and operational requirements normally associated with owning property.  For example, dividend and/or interest income is batched and delivered to DST owners by a DST sponsor.  Also, real estate taxes may be paid for the owner by the sponsor.  As a result, there is little required of the owner, who can enjoy the economic benefits (less some administrative and/or management fee assessed by the DST sponsor/custodian, as well as any fees paid to an advisory firm along the way).


Recent rumblings from lawmakers about limiting or eliminating the deferral of taxation through 1031 exchanges have left some considering exchanges wondering about the future treatment of such transactions (Nawrocki, 2015), whether or not a DST is involved.  Fortunately for taxpayers, the likelihood of such changes to current law is arguably low, with a Republican-controlled Senate and House of Representatives.   As a result, DSTs should continue to be a viable option for those seeking coverage under IRC 1031. Specifically, a taxpayer can continue deferring the recognition of gain using a 1031 exchange involving a DST.  Here is a recent example of a 1031 exchange involving a DST, which was advised by my firm during the summer of 2015:


Joy received a gift of farmland from her mother, while her mother was alive.  After her mother passed away, her 2 brothers opted to use their inheritances to acquire Joy’s share of the family farm, which Joy had little interest in operating (in whole or in part).  The 2 brothers acquired a DST, which Joy subsequently acquired via 1031 exchange for her farmland.  Joy’s basis carried into the DST.  Meanwhile, the brothers acquired the farmland, with no particular tax benefits, given they had acquired the DST for the purposes of completing the exchange.  Today, Joy enjoys the dividend income provided by the DST, has deferred taxation on over $300K of gain from her farmland, and has no maintenance responsibility with respect to the DST’s underlying property.  When Joy passes away, her interest in the DST will pass through her estate with an increased basis, equal to the FMV of the DST interest at her death.


While DST’s may not be attractive to some taxpayers, they offer a simple, 1031-exchange-qualified option for those wishing to conduct income and estate tax planning with minimal administrative or operational requirements.  Further, the DST structure can be found with any number of underlying


property types – apartment complexes, warehouses, manufacturing facilities, office buildings, and other types of commercial property – offering the taxpayer an opportunity to select those underlying holdings aligned most with his/her personal interests and/or investment objectives.  At the very least DSTs need to be part of the conversation for advisory firms seeking to maximize 1031 exchange opportunities for their clients.


To inquire or schedule, contact at: (877) 664-2583 or

The Nitty Gritty of Rabbi Trusts

APD Volume 1.2

October, 2015


Aaron Kolkman, CFP®, AAMS®


Named for a Dec 31, 1980 IRS ruling (PLR 8113107) concerning the deferred compensation plan funded for a rabbi by his congregation, Rabbi Trusts are an available option to employers seeking to reward executives and/or key employees through the use of a model trust (established by Rev Procedure 92-64, 1992-2 CB 422 and clarified in Rev Procedure 92-65, 1992-2 CB 428).


In Rev. Procedure 92-64, the IRS outlined model trust guidelines for employers’ use in adopting a Rabbi Trust.  In Rev. Procedure 92-65, the IRS indicated it was unwilling to provide an advance ruling (regarding the viability and/or income tax consequences) for unfunded deferred compensation plans designed with Rabbi Trust provisions, with few exceptions.


Based upon its Model Trust guidelines, the following advantages and disadvantages exist for the parties involved in a Rabbi Trust arrangement:

Key Employer Advantages

  • The employer maintains trust assets on its balance sheet during the deferral period.

  • The employer is able to better retain key personnel on a long-term basis.


Key Employer Disadvantages

  • The employer does not receive a tax deduction (expense) for compensation paid during the deferral period.

  • The employer is not able to offer its key personnel a funded deferred compensation plan.

  • The employer (as grantor of the Rabbi Trust) retains income tax liability for growth of trust assets during the deferral period


Key Participant Advantages

  • The participant is offered additional future compensation, without current income or employment taxation.

  • The participant has some assurance that benefits will be paid.


Key Participant Disadvantages

  • The participant must accept risk related to the employer’s financial solvency.  

  • The participant does not own or control any asset(s) in the plan, and therefore cannot access benefits until scheduled payment(s) occur(s).


Finally, in Rev Procedure 92-64, optional provisions for Rabbi Trusts include: change of control provisions, whereby 50% or more of a company's ownership has changed (where new ownership previously owned less than 30% of the company's outstanding stock prior to the control change event).





Stebbins, Rich (2013). Deferred Compensation & Other Benefit Plans for Key Executives. Accredited Asset Management Specialist Program (p. 49), College for Financial Planning, Centennial, CO.


Prame, Michael J. & McGuiness, John P. (2004, December). Rabbi Trusts: The Basics and Beyond.


BNA Benefits Practice Library. Retrieved from: (2015). Rev. Proc. 92-64. Retrieved from: (2015). Rev. Proc. 92-65. Retrieved from: 


CFP Certification Professional Education Program (2013). Retirement Planning and Employee Benefits. College for Financial Planning, Centennial, CO.

Are Incentive Stock Options (ISOs) Worth It?

The Economics of ISOs

November, 2015

APD Volume 1.3           


Aaron Kolkman, CFP®, AAMS®


Incentive Stock Options (ISOs) are a form of equity compensation that, when administered properly, can be lucrative for those executives receiving them. The following analysis is a breakdown of the requirements and the economic benefits associated with ISOs.


ISO Requirements


Final regulations around (§§1.421-1(j)(2), 1.421-2(f)(2), 1.422-5(f)(2), and 1.424-1(g)(2), offered by the IRS in 26 CFR Parts 1 and 14a (2004), state that an ISO Plan qualifies as such when: "the transfer of stock to an individual pursuant to the exercise of an incentive stock option if:


  • no disposition of the share is made within 2 years from the date of grant of the option or within 1 year from the date of transfer of the share, and

  • at all times during the period beginning on the date of grant and ending on the day 3 months before the exercise of the option, the individual is an employee of either the corporation granting the option or a parent or subsidiary of such corporation, or a corporation (or a parent or subsidiary of such corporation) issuing or assuming a stock option in a transaction to which section 424(a) applies.


[Further], Section 422(b) provides several requirements that must be met for an option to qualify as an incentive stock option. Section 422(c) provides special rules applicable to incentive stock options, and section 422(d) provides a $100,000 per year limitation with respect to incentive stock options."


IRS Revenue Bulletin 2004-36 (2004) provides additional guidance on these requirements, including:


  • Disqualifying (Qualifying) Dispositions resulting in 83(a) tax treatment

  • Sponsor Shareholder Approval of the ISO Plan

  • A maximum number of shares must be stated by the ISO Plan

  • Option (exercise) price must be equal to or greater than the FMV of the stock at grant

  • $100,000 limitation on aggregate FMV of stock is first considered Statutory, then Non-statutory, where both ISOs and NSOs are available to the participant.


ISO Economic Benefits


In terms of the income tax treatment of these options, the participant does not incur liability either at the grant or the exercise of such options, provided IRC Section 422 guidelines (above) are met. At exercise, the participant incurs an AMT adjustment; at disposition, capital gain (or loss) income tax treatment is available so long as holding period requirements are met, between exercise and disposition. Finally, no FICA/FUTA tax is incurred by the participant, upon exercise or disposition.

Adding the growth potential of underlying stock to these tax benefits, executives offered an ISO program would be wise to maximize their benefits.


Perhaps the primary downside in an ISO Plan for the participant, is the need for cash to exercise the options. Absent a tandem Cash Bonus plan for the participant, ISOs and their income tax bill (however well managed) can still have a significant “out-of-pocket” cost.


To inquire or schedule, contact at: (877) 664-2583 or



Upcoming Releases:


APD Volume 1.5

Executive Compensation for Closely-held Companies


APD Volume 1.6

Distributing from Qualified Plans: LSDs, KSOPs and NUA





Stebbins, Rich (2013). Deferred Compensation: Other Benefit Plans for Key Executives. Accredited Asset Management Specialist Program (p. 49), College for Financial Planning, Centennial, CO.


Internal Revenue Service. 26 CFR Parts 1 and 14a (2004, August). Retrieved from:


Internal Revenue Service. Internal Revenue Bulletin: 2004-36 (2004, September). Retrieved from:


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