Estate planning is a critical practice that many families implement to secure their legacy. One aspect of estate planning that deserves close attention is real estate, as it often has the highest value in comparison to other assets.
Many strategies are available for preserving and transferring real estate wealth, and one promising option is to use a Delaware Statutory Trust (DST).
DSTs—popular for passive income and tax-deferral benefits—have other features that make them ideal for estate planning. You may wonder, “How do you implement DST estate planning to safeguard your assets and ensure a smoother wealth transfer?” In this article, Realized 1031 shares what you need to know.
Refresher on the Structure and Features of the DST
A DST is an investment vehicle and trust entity that owns underlying income-generating properties. Investors enter the mix by purchasing beneficial interests. As the assets earn revenue through rent and other activities, the DST regularly distributes the net income to the investors.
DSTs are qualified for 1031 exchanges, allowing investors to use the proceeds from the relinquished asset to acquire DST interests. This transaction also allows you to defer capital gains taxes.
Note that there are strict rules imposed by Revenue Ruling 2004-86 to maintain 1031 eligibility, including the following:
- The DST must maintain its passive nature, so only the sponsor has control over the daily management and administration of the DST.
- DSTs must have a defined holding period, which is usually five to seven years or more. After the holding period, the sponsor must sell the assets and distribute all net proceeds to the beneficial interest holders.
- To maintain the passive nature of the DST, investors cannot have a say in operations, administration, or exit.
DST Estate Planning: Applications and Advantages
The structure of DSTs provides a few key benefits that allow investors to streamline estate planning.
1. Simplifying Ownership Through the Passive Investment
DSTs are considered naturally passive. Compared to other arrangements, investors are barred from any degree of involvement. This hands-off involvement makes ownership easier for retirees and other investors seeking lower engagement within the operations of a real estate asset.
More importantly, DST ownership is represented through beneficial interest, not direct ownership of the assets. This structure makes it easier for heirs to inherit, since the interests are already defined. Its simplicity can prevent conflict and ensure that the investment continues to generate income for your children without interruption.
2. Avoiding Forced Sales and Preserving Value
Forced sales can occur due to a variety of reasons, but they typically involve heirs who are unable to co-manage the asset. Unfortunately, forced sales often result in lower valuations and loss of long-term income potential.
DST interests—thanks to how easily they can be divided among heirs—lower the chances of forced sales. The assets can remain intact for the duration of the DST, preserving their long-term value.
3. Gaining a Step-Up in Basis
DSTs are also eligible for a step-up in basis as real estate assets. Upon your passing, the DST’s basis resets to its current fair market value, eliminating all accumulated capital gains and depreciation. This benefit minimizes the tax burden for your heirs.
4. Diversifying Across Assets and Regions
Estate planners often focus on diversification, and DSTs make that easier to achieve without adding management complexity.
Because DSTs can hold different types of institutional real estate, such as multifamily complexes, medical offices, or industrial facilities, you can spread risk across property types and geographic regions. Plus, a DST often owns institutional-grade assets, which further lowers risk.
5. Facilitating Equal Inheritance Distribution
Dividing an asset equally across multiple heirs can be difficult. DSTs allow for easier allocation and distribution, preventing conflicts from arising among your beneficiaries.
Looking at the Bigger Picture
DSTs are a powerful tool for estate planning, but it’s important to supplement them with other types of investments.
For example, you can lower dependency on a singular income source, especially since DSTs can still be vulnerable to real estate market risks. On that note, DSTs can be a cornerstone strategy that provides flexibility and long-term legacy preservation. Their structure allows for continuity in generational wealth transfer while simplifying asset distribution.
Wrapping Up: Delaware Statutory Trust Estate Planning
As you plan for the future, strategies like DSTs can become a powerful tool to protect your wealth and ensure your heirs receive their share. DSTs provide control over asset distribution, enhanced tax efficiency, and simplicity that make them the ideal vehicle for generational wealth planning.
As you plan to implement DSTs as part of your estate plan, consult with your qualified tax advisor or estate attorney to gain familiarity with DSTs, 1031 exchanges, and related processes.
Cited Sources:
https://www.investopedia.com/terms/s/stepupinbasis.asp
https://smartasset.com/investing/delaware-statutory-trusts-dsts
