We’ve written a great deal about how the Delaware Statutory Trust (DST) can be used to defer capital gain taxes. Furthermore, as the IRS regards DST interests as direct property ownership, they are eligible for use as 1031 exchange replacement properties.
Speaking of which, what property can a Delaware Statutory Trust hold? The simple answer to this is, any type of real, tangible or intangible property. Technically, art collections or patents could be held in a DST. But for the most part, DSTs -- also sometimes referred to as Unincorporated Business Trusts or UBOs -- are used for real estate investments. DSTs can buy, finance, hold, and sell any type of real estate asset used for business purposes and/or investments.
While Internal Revenue Bulletin 2004-33 bestowed property status on DSTs in 2004, the idea of holding property in trust by one individual for another’s benefit goes back several centuries to English common law. These days, lawyers regularly use common-law trusts to help high net-worth individuals pass asset ownership to heirs and beneficiaries, thereby reducing taxation in the process.
But statutory trusts differ from their common-law counterparts in that they are considered a juridical category. In other words, they are entities, such as LLCs and corporations, rather than individuals, which are more frequent in common law. Parties involved with common-law trusts can legally sue, or be sued, for violating terms of the trust. However, parties participating in a statutory trust cannot sue or be sued. Rather, the entities, not the beneficiaries, take on the liability.
Interesting fact: Delaware is one of the few states in America with a statutory trust law, as most states still rely on common-law trusts. Trustees create DSTs by filing a Certificate of Trust with the Delaware Division of Corporations. The only information required on the filing are the trust’s name and the trustee’s name and address. This means if you invest in a DST as a beneficiary, your name won’t be on that filing. Nor will trust agreement provisions.
One DST requirement is a Delaware-based trustee. However, the trust’s business decisions and management are typically delegated to out-of-state co-trustees and managers. Additionally, DST properties don’t need to be in Delaware. Nor do DST beneficiaries.
However, before exchanging into, or investing in, a DST, it’s essential to research the following.
The property/properties. Get to know the properties held by the trust. Know their location, type (multifamily, office, warehouse, and so on), and where they are in the real estate cycle. Study the pro formas and historical data, if any. Also important is market intelligence about that property, including demographics, supply, and demand.
The sponsor/trustee. This is the entity that will be overseeing both the trust’s properties and the monies you invest. As such, it’s a good idea to perform due diligence on the trustee’s track record, both with the current DST and any previous investments. If the trustee is unwilling to supply such information, it might be a good idea to look elsewhere.
To conclude, DSTs can hold most types of real estate. Trusts are formed to buy, sell, finance, and manage everything from industrial warehouses, to multifamily complexes, to medical office buildings, to trophy office assets, to retail centers . . . and more. Furthermore, DSTs can offer fractional ownership in one asset, or multiple properties. There really is no limit to this structure.
However, when it comes to DST investments, research remains important. Double due diligence is necessary, both on property held by the trust, and the trustee managing it.