Delaware has long been known to offer a corporate-friendly environment, which offers benefits relating to tax liability, convenience, and legal protection in corporate affairs. Delaware Statutory Trusts were formed per the Delaware Statutory Trust Act, which was written to simplify the arrangement of a structured real estate transaction (or other assets).
The best part — anyone can be eligible for a DST. Here’s what you need to know about forming a Delaware Statutory Trust.
What Is a Delaware Statutory Trust (DST)?
A DST is a popular real estate investment vehicle that operates as a separate legal entity for passive investment. Holding a fractional interest in a DST receives the same tax treatment as direct property ownership. DSTs can also have an unlimited number of investors or beneficiaries.
The master tenant acquires the asset under the DST and opens the trust for investors to purchase a fractional interest in the property. The master tenant leases the property from the DST Sponsor or affiliate of the Sponsor and operates the property through sub-leases with the property’s tenants. Each investor receives net operating income from the DST based on their ownership.
Because DSTs operate as a separate legal framework, there’s personal liability protection similar to an LLC or a partnership. Simply put, personal assets outside the DST are protected from liabilities within the trust itself. Assets within the DST are also protected from creditors.
The Requirements to Form a DST
The Delaware Statutory Trust is created by filing a Certificate of Trust with the Delaware Division of Corporations and governed by Chapter 38, Part V, Title 12 of the annotated Delaware Code. When filling out the Certificate of Trust, you include the name of the trust, the name of the registered agent in the State of Delaware, and other information required by the trustees.
At least one trustee must be a resident of Delaware, which can be fulfilled by naming a Delaware trust company or by forming a Delaware corporation to act as the trustee. However, all business decisions are made by the trust sponsor regardless of the state of residence.
A cover letter with your name, address, and phone number should be included when filling. The fee to file the certificate is $500, and a stamped “Filed” copy of the submitted document will be given back to you. Besides the filing fee, there are no other ongoing requirements or fees.
Should I Form a Delaware Statutory Trust?
The DST is one of the most common ownership structures used by smaller investors in commercial real estate and it has become the legal entity of choice for investors using the 1031 like-kind exchange. Investors can also purchase a direct interest in the DST to diversify their commercial real estate holdings.
If you’re interested in investing in a DST, consult with a tax professional and your financial advisor to see if this investment structure is right for you and the steps you need to take to form a Delaware Statutory Trust.
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.