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Why Delaware Statutory Trust Are Great for Estate Planning

The fractional ownership benefit of DSTs can help ease family tensions among heirs.

Few would think of a real estate investment property from the lens of estate planning. But most should. Here’s a hypothetical example that illustrates that point:

Bob and Linda owned several residential rental properties in San Diego which, over the years, proved to be a reliable and important source of income as they raised their four children and ultimately launched them into college and adulthood. When Linda died unexpectedly, Bob made the decision to keep these investment properties, rather than sell them, because he thought they would be important for his sons and daughters as supplementary income while they were raising their own children.

Bob never asked his children or considered if they wanted to be landlords as he and Linda had always been. When Bob died, his attorney was faced with the very uncomfortable responsibility of having to mitigate the disputes that arose amongst Bob’s heirs. Turns out, only two of his four children had an interest in owning and managing investment property, and the others wanted to sell. Ultimately it was determined they would sell the properties, even though the capital gains that had been deferred for years, finally had to be recognized and the tax obligation paid.

Had Bob used a 1031 Exchange and a Delaware Statutory Trust (DST) structure to sell his portfolio of properties and invest as a fractional interest owner in a portfolio of professionally managed properties within the DST, he not only could have eliminated the family disputes (each heir could do what they wanted with their proportional interest), but the capital gains tax could have been deferred even further into a new generation of investors.

There are many reasons why DSTs continue to grow in popularity among real estate investors, but this often-overlooked benefit of fractional ownership should perhaps be one of the most important benefits.

For more information this, please feel free to contact Financial Designs, Ltd at (858) 597-1980. You can also schedule a phone call, one on one meeting with us or on Zoom at your convenience.

It is important to note that DST investing is subject to specific eligibility criteria, and only individuals who meet the definition of an accredited investor are permitted to participate.

DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years; or have an active Series 7, Series 82, or Series 65).  Individuals holding a Series 66 do not fall under this definition) and accredited entities only.  If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney. Before considering a DST investment, it is crucial to evaluate your eligibility as a qualified investor. Our team is committed to assisting you in this process, ensuring that you meet the necessary requirements to participate in DST opportunities. Additionally, we are here to address any questions you may have and provide detailed information to guide your investment decisions.

Please be aware that DST investments involve risks and considerations which include but are not limited to substantial fees and expenses, inability of the DST to actively manage the property, strict timing limitations and risk of not meeting requirements for 1031 exchange tax treatment, and other negative tax consequences. There are risks associated with investing in real estate and Delaware Statutory Trust (DST) properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies, lack of liquidity with restrictions on ownership and transfer. Potential cash flow, returns and appreciation are not guaranteed and could be substantially lower than anticipated. Diversification does not guarantee profits or protection against losses.

Additional risks and considerations related to investing in 1031 DST commercial real estate include, but are not limited to, general real estate risks, financing risks, tax risks, interest rate risk, management risks, operating risk, market risks such as supply and demand, changing market demographics, tenant turnover, tenants inability to pay rent, acts of God such as earthquakes, floods or other uninsured losses. There are also potential risks relating to the trust structure and the potential for adverse changes in laws and regulations. This material is not to be interpreted as tax or legal advice.