Within the Delaware Statutory Trust structure, there are typically two participants: trustees and beneficiaries. The DST offers management and ownership flexibility, but there are certain duties and obligations that must be fulfilled by each party.
How Delaware Statutory Trusts Work
The Delaware Statutory Trust is a popular real estate investment vehicle that gives investors access to commercial real estate properties. These properties are typically the same type and quality as those owned by institutional investors.
The DST is in accordance with the Delaware Statutory Trust Act (DSTA), which was written to simplify the arrangement of a structured real estate transaction as well as recognize DSTs as their own legal entity. The Delaware Act also states that the personal liability of the shareholders is limited to the same extent as stockholders in a Delaware corporation.
The master tenant acquires the property under the umbrella of the DST and opens the trust for investors to hold a fractional ownership interest. DSTs can be used as a replacement property in a 1031 exchange or investors can purchase a direct interest. The master tenant leases the property from the DST Sponsor or the affiliate of the Sponsor and manages the property, makes payments to the DST, and collects lease payments from occupants.
Fiduciary Duties Involved in a Delaware Statutory Trust
The Delaware Act defines a trustee as “the person or persons appointed as a trustee in accordance with the governing instrument of a statutory trust, and may include the beneficial owners or any of them.” At least one trustee of the DST must be a resident of Delaware, which can be achieved by naming a Delaware trust company or by forming a Delaware corporation to act as the trustee.
While the trustee holds the legal title to the assets of the trust, they are obligated to follow the terms of the trust agreement in managing those assets. The DSTA does not define the fiduciary duties of the trustee, leaving the matter to common law. A common assumption is that trustees of a DST have the same fiduciary duties as directors of a Delaware corporation.
- Duty of care - This involves informed, thoughtful decision-making based on accessible information.
- Duty of loyalty - This requires acting or deciding not to act on a disinterested and independent basis, in good faith, and with the belief that the action is within the best interests of the company and shareholders.
If there’s a breach of fiduciary duties, the court may decide to take action. According to The Delaware Code, the court may order an equitable remedy in the event of a breach of trust, including:
- Compel the trustee to perform the trustee duties
- Enjoin in the trustee from committing a breach of trust
- Compel the trustee to pay back the trust for any harms or losses caused
- Order the trustee to account
- Appoint a special fiduciary to take possession of the trust property and administer the trust
- Suspension or removal of the trustee
- Reducing or denying compensation to the trustee
- Void any act of the trustee, imposing a lien or a constructive trust on trust property or tracing trust property wrongfully disposed of and recover the property or its proceeds
The Delaware Supreme Court has stated that the fiduciary duties of corporate directors and trustees of common law trusts are different and trust law has stricter standards. However, the DSTA also provides flexibility to construct duties that meet particular needs.
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. 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. 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.