How to Pass Your Delaware Statutory Trust Interests to Your Heirs

Posted Apr 25, 2023


For many investors, Delaware Statutory Trusts (DSTs) are a viable way to own real estate without the active management required for direct ownership. In addition, DSTs may provide income and tax advantages. One significant advantage to investing in DSTs is the investor’s ability to use a 1031 exchange to move from direct investment to fractional ownership of commercial property.

Suppose you own several properties but decide that active involvement in real estate management is no longer your preferred path. By using a 1031 exchange to sell and replace the property with DST holdings, you can defer the recognition of capital gains taxes and instead reinvest the entire proceeds. Furthermore, you can use the change to transition from direct involvement to passive ownership while maintaining the potential for tax-advantaged income.

How do DSTs work?

Delaware Statutory Trusts are pass-through entities that are allowed by Delaware trust laws (but you do not need to own assets in Delaware). DSTs are created by a sponsor that identifies and acquires the property and raises capital. The sponsor also oversees the property and financing, so investors will want to evaluate the sponsor’s credentials and track record.

DSTs may focus on a specific commercial property segment or have a broader approach. The typical holding period for a DST is at least five years, and these investments are only available for accredited investors. Furthermore, they usually have a minimum of at least $100,000. The trustees make the management decisions, so DST beneficiaries (shareholders) aren't involved with the administration but potentially receive regular distributions of earnings and a proportionate share of proceeds when the trust sells the property.

DST rules don’t allow for shareholder input into management decisions like the timing of sales, necessary repairs, or other sponsor responsibilities.

How can I give my DST to an heir?

DST shares can be directed to a specific heir by designating the targeted individual as the beneficiary. If the preferred heir changes, the beneficiary forms can be changed as well. 

Furthermore, the individual or trust selected as the recipient, may inherit the investment regardless of whether they were already qualified as an accredited investor.

What are the advantages of DSTs for heirs?

First, your heirs receive the same passive income potential that you may enjoy as the owner. Your designated heir takes ownership of the DST stake on a stepped-up basis, so they don’t pay capital gains taxes on its appreciation or any previously deferred capital gains.

Compared to direct investment in real estate, the DST heir may prefer the diversification the investment provides. But, of course, every DST is different, and many focus on a particular sector.

In addition, converting direct investments to DST shares before your death may ease the distribution of your assets among multiple heirs. For example, suppose you own commercial property like office buildings and multifamily housing. If you have a small number of sizable properties, you may bequeath one property in shares to more than one beneficiary. The result could be that individual heirs have disparate interests and financial goals, potentially causing conflict. Suppose you convert the commercial property into DST shares through a 1031 exchange instead. In that case, you may be able to direct individual shares to each designated heir, making it more straightforward for them to manage their own holdings. 

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.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.

The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.

No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.

There is no guarantee that the investment objectives of any program will be achieved.

Hypothetical examples shown are for illustrative purposes only.

The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.

Programs that depend on tenants for their revenue may suffer adverse consequences because of any financial difficulties, bankruptcy or insolvency of their tenants.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

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The Investor's Guidebook To DSTs

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