facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Delaware Statutory Trusts(DSTs): 6 Tax and Estate Planning Benefits for Real Estate Investors Thumbnail

Delaware Statutory Trusts(DSTs): 6 Tax and Estate Planning Benefits for Real Estate Investors

INVESTMENT

Delaware Statutory Trusts (DST) can be a valuable tool for real estate investors looking to diversify their real estate portfolios, defer taxes and more efficiently distribute real estate assets to multiple beneficiaries as part of their estate plan.

What is a Delaware Statutory Trust

A Delaware Statutory Trust (DST) is a legal entity created under Delaware law that allows investors to pool their resources to invest in real estate and other assets.  DSTs are managed by a trustee who makes all major decisions regarding the trust’s assets. Investors are passive and do not have a say in management decisions.  They are primarily used for real estate investments, allowing investors to own fractional interests in large properties without direct management responsibilities.  

How are DSTs used in Planning:

1) Get out of active management of real estate

The DST is managed by a trustee who is responsible for making all major decisions. This structure limits the liability of individual investors and provides professional management.  As such, investors in a DST are passive and do not have a say in the day-to-day management of the property. This can be advantageous for those looking for a hands-off investment.

2)  Potential enhanced wealth accumulation and income

DSTs can provide investors acess to a diverse range of properties, property types and geographic markets that can help to mitigate individual investment risks, enhance wealth accumulation and potentially increase income.  The property types commonly found in DSTs include multifamily apartment buildings, industrial warehouses, medical office, self-storage facilities, senior housing properties, student housing, hospitality properties, net lease retail and occasionally commercial office properties.  Investing in one, let alone a diversified pool of these property types can require several to hundreds of millions of dollars, whereas the minimum investment for a DST can be as low as $100,000.

3)  Invest via 1031 Exchange to defer taxes

Most real estate investors are familiar with a 1031 exchange.  A 1031 Exchange allows you to defer the recognition and tax on capital gains when selling real property and buying a new property of "like-kind".  DSTs are considered by the IRS to be 1031 Exchange eligible as “like-kind property” allowing 1031 Exchange investors to have full tax deferral when investing both in and out of DST property.  

4)  Avoid capital gains with a step-up in basis 

The only thing better than deferring capital gains taxes is not paying them at all.   One of the most significant estate tax benefits of DSTs is the step-up in basis. When the owner of a DST interest passes away, the beneficiaries can receive a step-up in the cost basis of the property to its fair market value at the date of death. This means that if the beneficiaries decide to sell the property, they may not have to pay capital gains tax on the appreciation that occurred during the decedent’s lifetime.

5) Streamline the distribution among multiple beneficiaries at death

The problem with real estate is that it can't easily be divided when inherited.  Often times, at death, when property passes to surviving family members they don't agree on how to manage or whether to keep or sell inherited property - which can lead to confrontation and strained relationships.  DSTs allow for fractional ownership, which can help with estate planning by allowing you to divide the property interests among multiple heirs. there is no co-management and everyone can sell their interest when they like, subject to the DST liquidity provisions.

6) Reduce taxable estate

The fractional ownership of DST interest allows you to more easily gift assets outside of your estate and to potentially reduce your taxable estate value through discounts for lack of control and lack of marketability.   

  • Discount for lack of control:  Since DST investors do not have direct control over the property or the trust’s decisions, a discount can be applied to the asset’s value for estate valuation purposes. The reduced value is purely for estate valuation purposes and should not be interpreted to mean a true reduction in the asset values from a sale standpoint.
  • Discount for lack of marketability:  DST interests are not as easily marketable as publicly traded assets. The absence of a readily available market for these interests can further reduce their value for estate tax calculations.

Considerations

While DSTs offer significant benefits, there are also some considerations to keep in mind.  Investments in DSTs are generally illiquid, meaning they cannot be easily sold or exchanged.  Typically, principal is not returned to investors until the entire portfolio of real estate is sold generating the liquidity needed to pay out investors.  You also may be able to transfer you interest to another investor.   This can be a disadvantage for those needing quick access to cash.   Some investors may have trouble relinquishing control over property management decisions to the trustee.  Finally, DSTs must comply with various federal and state securities laws, which can add complexity and cost to the investment.

Many of the people we work with have significant exposure to real estate.   When it comes to creating a coordinated wealth accumulation, tax and estate plan DSTs are one of many tools that we evaluate and consider.  If you think a DST could be a useful strategy for your situation, then we invite you to connect with us so we can answer your questions.