When someone passes away, their loved ones don’t only face grief and loss. Estate settlement can become a complicated legal and financial process, involving debt resolution, tax considerations, and asset distribution. Managing debts, resolving taxes, and distributing assets can become a burden. You do not want to leave this type of legacy to your loved ones.
That’s why thoughtful estate planning often includes strategies intended to reduce administrative complexity. Among the various strategies available, Delaware Statutory Trusts (DSTs) may offer certain features—such as fractional ownership, professional management, and standardized valuation—that can help support more streamlined estate administration. Below, Realized 1031 has shared an insightful article on how DST investments may play a role in estate planning and settlement strategies. While not suitable for all investors, DSTs can be evaluated as part of a broader approach to managing real estate within a legacy plan.
The Estate Settlement Process
What is estate settlement? In theory, it’s the simple process of distributing the assets of a deceased person’s estate to the rightful heirs. However, the process often becomes more complicated since settling debt and tax obligations also come into play. It can be an administratively demanding experience that some find difficult to navigate.
In most cases, having a will can help clarify how assets are intended to be distributed. The probate process will still be necessary whether or not a will exists, as this is the legal step that validates the contents of the will and administers the asset distribution.
Before any distributions, though, the estate must settle any outstanding debts and taxes. These may include the following.
- Personal Loans
- Mortgages
- Credit Card Bills
- Medical Expenses
- Estate Taxes
Liquid assets can be used to pay for these obligations, with the remaining being distributed to the heirs. An additional layer of complexity can arise when the assets include real estate. How so?
Challenges You May Encounter With Traditional Real Estate
Inheriting real estate may sound like a blessing, and it is for many. However, the logistical and emotional responsibilities that come with property ownership may create complications for some families. Real estate typically requires valuation, upkeep, and sometimes legal action if multiple heirs can’t agree on what to do with it.
During estate settlement, your heirs may encounter challenges such as:
- Difficulty dividing the value between multiple beneficiaries
- Disagreements between two heirs may result in a forced sale
- Property sales can take a long time, delaying the distribution of your estate
- Management may be burdensome, and your heirs may not have enough funds to handle maintenance, property taxes, or insurance
These difficulties can lead to prolonged family disputes as well as financial strain. For some families, strategies like Delaware Statutory Trusts (DSTs) may offer a more flexible structure for real estate ownership that could help reduce administrative and emotional burdens during estate settlement.
DSTs: Overview of the Structure
DSTs are an investment vehicle where investors hold fractional interests in a trust that owns real estate. As investors pool money into the DST, it gathers enough funds to be able to purchase institutional-grade properties that might otherwise be inaccessible to individual investors.
Since only the DST sponsor can make decisions regarding management and operations, investors enjoy hands-off involvement and passive income. The structure of DSTs also makes them eligible for 1031 exchanges, which allow investors to defer capital gains taxes on the sale of relinquished property, provided the exchange is structured in accordance with IRS rules. Taxes are generally deferred until a future taxable event occurs, such as the sale of the DST interest or liquidation of the trust’s assets.
In the context of estate planning, DSTs may offer certain administrative advantages. Because fractional interests are standardized and professionally managed, they can be easier to value, transfer, and divide than traditional real estate—factors that may help simplify the distribution of wealth among heirs.
Important considerations when evaluating a DST include the fact that DSTs are illiquid investments and are not suitable for all investors. They carry risks, including potential loss of principal, limited control, and reliance on the performance of underlying real estate markets. Income is not guaranteed and may fluctuate. Investors should consult tax and financial professionals to determine whether a DST aligns with their overall investment and estate planning goals.
DST Estate Settlements: Supporting Smoother Asset Transfers
Here are some of the ways Delaware Statutory Trust investments may provide alternatives to traditional real estate when it comes to estate settlement planning.
1. Facilitated Transfer of Ownership
Fractional interests are not the same as direct ownership. The former can offer more flexibility and may not require retitling or the initiation of a sale. Instead, you can pass on the beneficial interests directly to your heirs as personal property, subject to estate documentation and applicable laws.
2. Asset Division
DST investments allow fractional ownership, which means one investor’s interest can be divided among multiple beneficiaries. This structure may help avoid the need to liquidate assets or require heirs to enter into joint ownership arrangements, both of which could cause delays or family disputes.
3. Professional Management
Traditional real estate assets require ongoing attention to maintain their condition and value. DST properties are managed by the sponsor, and heirs are typically not responsible for property management. This feature can reduce the administrative burden while maintaining potential income.
4. Valuation and Taxation
DST interests generally have available valuation data, which may simplify estate tax reporting.DST 1031 investments may receive a step-up in basis upon your passing, lowering or even eliminating capital gains tax liability if heirs choose to sell, depending on then-current tax laws.
Best Practices for Delaware Statutory Trust Estate Settlements
When considering DSTs to support estate settlement planning, taking the following proactive steps may help the process go more smoothly:
- Hold DST interests in the name of a revocable living trust or other estate-planning entity to help avoid probate and facilitate asset transfer.
- Maintain clear and accurate documentation to reduce the risk of administrative delays. You’ll want to keep records of all DST investments, valuation reports, and trust agreements.
- Your heirs should be informed ahead of time so they understand how the DST operates and what rights and responsibilities come with inherited interests.
- Work with tax professionals, attorneys, and financial advisors so you can get expert guidance and resources for your overall estate planning strategies.
Summing Up: How DSTs May Support Estate Settlements
Compared to traditional real estate, DST fractional interests can be more straightforward to value and divide among heirs. These characteristics may make DSTs a useful tool for families seeking to simplify the estate distribution process. For some investors, DSTs offer a way to convert complex property holdings into more manageable, transferable investment shares.
With proper planning and professional support, DST investments may contribute to estate strategies aimed at generating passive income, preserving generational wealth, and reducing administrative burdens during settlement.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://www.nbc.ca/personal/savings-investments/inheritance.html
https://www.investopedia.com/terms/p/probate.asp
https://smartasset.com/investing/delaware-statutory-trusts-dsts
