Delaware Statutory Trusts: Three Advantages for Estate Planning

Retirement and estate planning can present challenges for real estate investors. Sometimes their property has appreciated in value while annual depreciation has reduced the cost basis. Selling a property before death can result in hefty capital gains taxes. After an investor dies, his heirs may not be interested in actively managing his real estate properties. A 1031 Exchange into a Delaware Statutory Trust (DST) may be an option. By preserving the eventual step-up on the basis upon the investor’s death, DSTs allow investors to sell properties without tax consequences.

Delaware Statutory Trusts

A Delaware Statutory Trust (DST) is a legally recognized business trust, and it’s also known as an Unincorporated Business Trust (UBO). DSTs are commonly formed in Delaware, one of the few states with statutory trust law. Revenue Rule, 2004-86, approved this structure in 2004. The ruling approved qualified DSTs as an investment option for 1031 Exchange clients.

Rather than buying new rental properties, investors can reinvest in a Delaware Statutory Trust and avoid paying capital gains tax. Investing the proceeds in one or more trusts qualifies as an exchange-qualified co-ownership. In other words, buying a DST qualifies as a 1031 Exchange for the IRS. One of the biggest draws for retirees or those looking to leave assets to heirs is the potential for monthly income without the responsibility of owning and managing another property.

Three Estate Planning Advantages of a Delaware Statutory Trust

Sophisticated investors also recognize the value of Delaware Statutory Trusts in estate planning. Implementing a DST strategy allows beneficiaries to avoid capital gains taxes on inherited real estate, reduces disagreements, and simplifies charitable giving.

Capital Gains Tax Abatement

A step-up basis can help you avoid paying capital gains tax on inherited property.

When the investor dies, the estate beneficiaries receive a tax-favored stepped-up basis. This means that beneficiaries do not have to pay capital gains taxes on the accumulated appreciation from when the assets were purchased until the investor dies. This includes deferred capital gains from real estate 1031 exchanged into the DST. When a beneficiary sells an asset, the basis is increased to the value as of the investor’s death date. Although capital gains tax can be avoided on inherited property, assets in a Delaware Statutory Trust are still considered part of the investor’s estate. The standard estate tax rules and exclusions apply. Consult with an estate planning professional or an expert at to see how this will affect your estate.

Beneficiaries of Trust Assets Can Be Distributed in a Variety of Ways

Reduce disagreements over the distribution of trust assets to partners and heirs.

When beneficiaries receive assets following the death of a loved one, there may be disagreements about what to do with the assets. Some may wish to keep them, while others prefer that trust assets be distributed to beneficiaries as soon as possible. This is especially true for larger assets, such as real estate investments, which can be difficult to divide equitably. A loan could be taken out to buy out the heirs who want to sell, but getting approved for a loan may be difficult based on the economy, the performance of the asset, and the applicant’s situation. Some investors choose to be proactive to reduce the likelihood of these disagreements. They can sell their real estate and divide the proceeds into different trusts by including a DST in their estate plan. After that, each of these investments can be easily identified and distributed to individual beneficiaries. This gives beneficiaries more control over the asset while avoiding the involvement of other family members.

Distributions to Charities Have Been Simplified

Streamline the distribution and liquidation of charitable trust assets.

Delaware Statutory Trusts also make it simpler to leave your real estate holdings to charity. If you name a charity as the beneficiary of your real estate, it may or may not be able or willing to manage your properties. This could force the charity to sell the property right away, even if the value is temporarily lower due to economic conditions. During a downturn, a quick sale reduces the potential good that your donation can do for the charity. With a DST, the charity can receive your interest in the trust without managing the property on a day-to-day basis. It will benefit from the potential monthly income stream until the sponsors decide when to sell the underlying assets. When the trust’s properties are sold, the charity will receive a portion of the proceeds.