Investing in a Delaware Statutory Trust (DST) can be an appealing strategy for many investors because of potential benefits like passive income and diversification. There may also be tax-deferral benefits if you enter the DST through a 1031 exchange. However, the structure of this “trust” may make it confusing, especially in the context of estate planning. In particular, many investors wonder if DSTs are revocable.
Below, Realized 1031 answers these questions with an article about the nature of DSTs. Let’s explore their differences with traditional trusts and clarify whether DSTs are considered revocable in this sense.
In estate planning, personal trusts typically fall into two categories: revocable and irrevocable.
A revocable trust, often called a living trust, allows the grantor to make changes, amend terms, or even dissolve the trust during their lifetime. The trustee can manage the trust assets for the benefit of the grantor. Revocable trusts are commonly used for managing personal assets and simplifying the transfer of wealth at death.
On the other hand, an irrevocable trust generally cannot be altered once it is established. This feature limits flexibility, but may offer certain asset protection, tax planning, or estate reduction benefits.
These distinctions are critical when planning for asset management and inheritance. Many individuals assume all trusts offer this kind of flexibility. However, this is not always true. In the case of investment trusts, such as DSTs, the structure and purpose are entirely different.
A DST is neither a living trust nor a tool designed for estate planning flexibility. It is a legal entity primarily used for managing real estate holdings, and investors function more like passive shareholders than beneficiaries of a traditional trust. It’s important for anyone considering DSTs to understand this key difference in structure.
A DST is an investment vehicle wherein investors can purchase fractional interests, allowing them to have beneficial interests in a trust. The DST, in turn, owns a potential income-generating property. Given the investment aspect of this trust, it’s regulated by entities like the IRS and SEC. The trustee, often appointed by or affiliated with the sponsor, manages the DST's operations within strict IRS limitations.
Unlike traditional revocable or irrevocable trusts used in estate planning, individual investors in a DST have no control or management rights. Once the DST is formed and the property is acquired, its terms are fixed. You cannot revoke the trust, change the assets, or influence the trustee’s decisions. In structure and governance, a DST operates more like a passively held investment trust, rather than a personal trust used in estate planning.
Given the structure of DSTs, they are not revocable in the context of estate planning. The word “trust” may imply flexibility and control, but DSTs are legally binding investment vehicles that do not offer the same revocability as living trusts. Again, you cannot change a DST’s terms or remove your investment early once you enter one, making it distinct from the estate planning tool that allows grantors to retain control and modify the trust.
Even so, DSTs can still play a key role in estate planning. Your fractional interest can be passed on to heirs, and the step-up in basis can help reduce or eliminate capital gains taxes altogether.
DSTs are distinct from the traditional trusts that people associate with estate planning. However, in terms of structure, a DST is closer to an irrevocable trust, in that its terms are fixed and cannot be modified by investors after formation.
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.investopedia.com/terms/r/revocabletrust.asp