Delaware statutory trusts (DSTs) are independent legal entities created through the Delaware Statutory Trust Act. These trusts hold title to one or more income-producing properties that can include multi-family, retail, office, industrial, and similar commercial real estate assets.
Trustees, also called beneficiaries, hold individual beneficial interests in the trust and receive distributions, when applicable, according to their pro-rata shares in the DST.
Below we’ll take a look at how and why Delaware statutory trusts were created.
History of DSTs
Common law trusts have been used for hundreds of years as a means of preserving and transferring generational wealth from trustors to trust beneficiaries. Most states still use this form of trust law; however, special business trusts have been enacted in many states in response to legal ambiguities and different state-by-state rules in regards to common law trusts.
In 1986, the Delaware General Assembly began an ambitious overhaul of the state’s trust laws.¹ In 1988, the State of Delaware passed the Delaware Business Trust Act, renamed the Delaware Statutory Trust Act in 2002, as a means to create a clearly defined and legally secure trust entity. The act overruled many of the disadvantageous covenants of common law trusts by creating unparalleled contractual freedoms between trustors and trustees.
Chief among these newly established principles was the legal separation between the trust entity and its beneficiaries, which served to limit personal liability for trust beneficiaries. Since the trust is considered a separate legal entity from its trustees, creditors of beneficiaries have no legal right to seize or possess any of the assets contained within the trust. Similarly, beneficiaries have no specific ownership interests in any of the properties in the trust since they own shares of the DST rather than direct ownership of any real property assets held within the trust.
The Delaware Statutory Trust Act continues to be refined and advanced. Most recently, Delaware Governor John Carney signed into law the Delaware Trust Act 2020, which modified certain provisions and statutes, including the authority to allocate trust duties to multiple trustees.²
Here’s a timeline of some key events that led to the current laws and provisions of the Delaware Statutory Trust Act:
- 1971--Delaware allows for deductions for trust income gained in irrevocable trusts that are held for beneficiaries outside of the state.
- 1986--Directed and third-party administrative trusts are recognized.
- 1995--The 110-year Rule Against Perpetuities is abolished.
- 2015--Trust merger rules were further liberalized.
- 2019--Created the ability to allocate duties between successors and additional trustees through trustee appointment.
With the 1995 repeal of the common law perpetuity restriction, trusts created in Delaware also can hold real property without any time stipulation provided the property is held by a legal entity such as a corporation, LLC, or limited partnership.
The Bottom Line
Delaware has become a preferred jurisdiction for statutory trusts due to its progressive and well-defined trust laws, extensive legal and professional infrastructure to serve the estate and trust industries, all backed by the Delaware Court of Chancery. As history shows, the state is continually working to refine, revamp, and reinforce the provisions first established by the Delaware Business Trust Act more than three decades ago.
Sources:
1. Delaware Trusts, Safeguarding Personal Wealth, Northern Trust Institute, https://cdn.northerntrust.com/pws/nt/documents/wealth-management/delaware-trusts-whitepaper.pdf?utm_medium=email&utm_source=marketo&utm_campaign=wm-institute-coi-20210719&utm_content=trust&mkt_tok=NTA0LVpZSy0xNzMAAAF-XZ4xRjdL06DK2pJoWJXGLzzjPBv-mQRRLjhidTsHkMKKWC1q8GQfMN2yeJbMRZNqOJbdZJXjiQ0bTqfihGUmX0d1qGAfEHVD5VYIK-DbYYOhbQ
2. Delaware Trusts, Safeguarding Personal Wealth, Northern Trust Institute, Page 3, https://cdn.northerntrust.com/pws/nt/documents/wealth-management/delaware-trusts-whitepaper.pdf?utm_medium=email&utm_source=marketo&utm_campaign=wm-institute-coi-20210719&utm_content=trust&mkt_tok=NTA0LVpZSy0xNzMAAAF-XZ4xRjdL06DK2pJoWJXGLzzjPBv-mQRRLjhidTsHkMKKWC1q8GQfMN2yeJbMRZNqOJbdZJXjiQ0bTqfihGUmX0d1qGAfEHVD5VYIK-DbYYOhbQ
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