Among various tax deferral strategies available to investors today, Delaware Statutory Trusts (DSTs) remain a popular choice. When used with 1031 exchanges, DSTs allow you to defer capital gains taxes and enjoy not having to deal with day-to-day operations. Those who intend to employ this strategy should be knowledgeable about the DST to determine if it’s a strategy that aligns with their goals.
One common question from investors is who sets up and sells Delaware Statutory Trusts. Below, Realized 1031 has shared a guide discussing the role of the DST sponsor to answer this question.
DST Sponsors
The DST sponsor is the entity that creates and manages the DST investment offering. They are the ones in charge of setting up the trust, purchasing the property, and preparation of the offering for prospective investors. The DST sponsor is responsible for structuring the DST to comply with IRS and SEC regulations.
In contrast, the beneficial owners are the investors who purchase fractional interests in the DST. According to provisions set by Revenue Ruling 2004-86, beneficial owners cannot play an active role in the management, administration, or operations of the underlying DST property. The sponsor or appointed trustee is responsible for day-to-day operations and asset management, but must do so within strict IRS limitations. If the sponsor engages in prohibited activities—such as refinancing the property, making capital improvements, or actively renegotiating leases—the DST could lose its eligibility for like-kind exchange treatment under §1031.
What Are the Responsibilities of the DST Sponsor?
The sponsor has plenty of responsibilities, even before starting the DST itself. A few key duties include the following.
- Find, assess, and acquire properties for investment.
- Create the legal structure for the DST to comply with IRS guidelines set by the IRS for 1031 Exchanges.
- Market or sell the DST to investors (if they are a registered broker-dealer), coordinating with broker-dealers and registered investment advisors (RIAs) to find investors.
- Manage day-to-day operations of the DST property with the help of third-party service providers.
- Handle compliance with SEC regulations for securities offerings.
- Managing the distribution of available net income
How DST Offerings Reach Investors
DSTs are private investments, so they’re not readily available to the public. As a result, DST sponsors typically work with broker-dealers and registered investment advisors (RIAs) to make these offerings available to accredited investors. These professionals may present DST opportunities to clients as part of §1031 exchange strategies or broader real estate investment planning, depending on the investor’s objectives, risk profile, and tax situation.
The DST offering will include the private placement memorandum (PPM)—a legal disclosure document prepared by the sponsor, which the sponsor created to provide as many details as possible about the DST. Through the PPM, the investor gains information about the investment property, the sponsor’s background and experience, the DST’s structure, associated fees and risks, and the overall investment strategy.
Choosing a DST Sponsor
Careful evaluation of DST sponsors is important, given their responsibility for structuring, managing, and operating the trust throughout the investment’s life cycle. Consider the following factors when assessing a sponsor:
- Check their experience and number of years working in this niche.
- Ask for reports about their performance in past DSTs to assess their competency. Keep in mind that past performance is not a guarantee of future results.
- Transparency is key. Review their offering documents and reporting practices.
- Determine if the DST sponsor is able to provide clear communication, support, and regular updates based on reviews, as well as their existing protocols/channels.
- You can also ask your financial advisor for recommendations based on performance, reputation, and fit for your goals.
Wrapping Up: Who Sets Up and Sells DSTs?
The DST sponsor plays a central role in structuring and managing the trust. Responsibilities typically include establishing the trust, acquiring real estate assets, and coordinating the offering of beneficial interests to accredited investors. They generally work with other financial professionals to connect the DST to suitable investors to make DST offerings available to qualified investors. Because the sponsor plays such a central role in the success of the investment, their experience, track record, and transparency should be carefully evaluated. Choosing a reputable DST sponsor can make a significant difference in your overall 1031 exchange outcome.
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.irs.gov/pub/irs-drop/rp-20-34.pdf
https://www.nolo.com/legal-encyclopedia/what-is-private-placement-memorandum.html
