High-net-worth individuals have many different options when it comes to preserving their financial legacy and distributing wealth to their beneficiaries.
People who have amassed significant fortunes often create trusts to ensure their heirs have financial means today and in the future. A well-structured trust can last for generations and generate significant wealth for its beneficiaries. However, trusts can be structured in several different ways, and that structure has financial and legal implications for beneficiaries.
In this article we’ll look at how common law trusts are used in estate planning. We’ll also look at how Delaware Statutory Trusts (DSTs) are used as estate planning tools so investors gain a better understanding of the potential benefits and drawbacks of each.
What Are Common Law Trusts?
Common law trusts are legally-binding contractual agreements between trustees and beneficiaries. The trust can control a number of assets, including property, land, and cash, which are regarded as property of the trust.
Common law trusts typically consist of four parts:1
- Designated beneficiary
- Designated trustee who is not a beneficiary
- A fund, real property, or other financial assets held within the trust
- A method to deliver assets held within the trust to beneficiaries
Preservation and protection of financial assets, as well as privacy, are key benefits of common law trusts. Since there are no public filing requirements to create common law trusts, trustees and beneficiaries can remain anonymous.
Common law trusts can be revocable, meaning the trust can be amended while the individual who created it is still alive, or irrevocable, meaning it can’t be revoked or amended.
What Are Delaware Statutory Trusts?
Delaware Statutory Trusts are formed in the state of Delaware for the sole purpose of holding title to commercial investment properties. These properties typically consist of real estate such as high-rise office buildings, industrial or self-storage facilities, multifamily apartment complexes, and larger triple-net leased retail centers that are usually well out of the financial reach of retail investors.
Investors purchase fractional interests in DSTs, often to satisfy the “like-kind” requirement of a 1031 exchange. While investments typically start at $100,000, they can be scaled to meet investor needs. DSTs provide both anonymity and legal separation to investors -- they are not personally liable for any debt or financial obligations incurred by the assets held within the trust.
Delaware Statutory Trusts are administered by sponsors who basically function as trustees and disperse proceeds, when applicable, to beneficiaries. Real property assets held within the trust are managed by third parties -- investors have no say in operating decisions.
The Bottom Line
Preserving a financial legacy for your heirs often means creating a comprehensive estate plan and forming a trust to ensure that cash, real property, stocks, and other assets are passed on to your beneficiaries. A trust also can help beneficiaries avoid paying stiff estate taxes on these assets.
The legal rules governing common law trusts can vary from state to state. This type of trust also is subject to more complex regulations than other trust structures. These are two reasons why common law trusts are often used by high-net-worth individuals who have an extensive team of legal and financial experts to help properly establish and administer the trust.2
Delaware Statutory Trusts, meanwhile, are pre-packaged securities that can be helpful in estate planning for both high-net-worth and retail investors. You can purchase fractional shares of DSTs in varying amounts and distribute and assign them to beneficiaries of your choosing.
There are many subtleties associated with Delaware Statutory Trusts and common law trusts. Consulting with experienced legal and financial experts can help you decide how these estate planning tools can be beneficial to your financial situation and estate planning purposes.
1. Closing Opinions for Common Law Trusts, Carter, Ledyard & Milburn LLP, https://www.clm.com/closing-opinions-for-common-law-trusts/
2. Statutory versus Common Law Trust: Understanding the Differences, Forbes, May 2021, https://www.forbes.com/sites/forbesfinancecouncil/2021/05/05/statutory-versus-common-law-trusts-understanding-the-differences/?sh=6f51e4ed1eb1
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Consult with your tax advisor regarding your individual circumstances.