The state of Delaware has been a preferred jurisdiction for business entities since the early 1900s. Today, nearly 70 percent of all Fortune 500 companies are incorporated in “The First State,” and in 2019, there were almost 1.5 million legal entities registered in Delaware.
Delaware is a business-friendly state due to its corporate laws, judicial system, and long-standing tradition of legal expertise in corporate affairs. The state also offers business solutions for individual investors in the form of Delaware Statutory Trusts (DSTs).
We’re going to look at how to set up a Delaware Statutory Trust and who they may be right for.
Delaware Statutory Trusts are business trusts that form a separate legal entity to provide co-investment opportunities to accredited investors. Delaware Statutory Trusts are a popular legal entity for 1031 exchange investors because they allow individual investors to purchase fractional shares in institutional-grade real property assets.
While most states use common or business trust law, Delaware uses statutory trust law, which provides many potential advantages for investors. DSTs operate under a comprehensive legal framework with specific rules and guidelines. The DST is a separate legal entity from the investors within it, so personal assets outside the DST are protected from liabilities within the trust itself. Assets within a Delaware Statutory Trust are also protected from creditors.
DSTs can have an unlimited number of investors or beneficiaries. The shares investors own in a DST are called beneficiary interests. Since the IRS regards these interests as direct property ownership, they qualify for the potential advantages of a 1031 exchange.
Investors setting up a Delaware Statutory Trust file a Certificate of Statutory Trust with the Delaware Division of Corporations.
Part of the Delaware Statutory Trust formation names a Delaware trustee or a statutory trust that becomes a registered investment corporation with a registered agent. When filling out the Certificate of Statutory Trust, you’ll include:
The Delaware Statutory Trust Act of 2002 states that the trust must have a Delaware resident trustee. All business decisions, however, are made by the trust sponsor regardless of his or her state of residence.
The state requests that you include a cover letter with your name, address, and phone number (printed in black ink) to expedite any additional communication between you and the division, if necessary. There’s a $500 filing fee for the certificate, but no ongoing filing requirements or fees exist.
DSTs are passive investment vehicles used by many investors in 1031 exchanges. Since shares of a DST satisfy the “like-kind” requirement of a 1031 exchange, investors often roll over proceeds from the sale of real property assets into DSTs to defer capital gains and other taxes. Others turn to DSTs to diversify their commercial real estate holdings by asset type or geographical region.
Before investing in a Delaware Statutory Trust or for investors considering how to form a Delaware Statutory Trust, you should discuss with your tax and accountancy professional to help determine how DSTs might fit into your risk profile and investment goals.