Delaware has long been known as the preferred jurisdiction for corporations. Did you know the “First State” is also recognized as a leader in the area of statutory trusts?
In 1988 Delaware adopted the Delaware Business Trust Act, which became the Delaware Statutory Trust Act (the “DST Act”) in 2002. This legislation overruled the principles of common law trusts. which were deemed disadvantageous. The new rules authorized a high degree of freedom of contract between the trustor and the trustee in determining their respective liabilities and the manner in which a trust (a “Delaware Statutory Trust”) could be administered.
While other states have each enacted their own versions of the act, Delaware's has evolved over the years and remains the most advantageous for investors all over the country.
Properly set up by an experienced attorney, a DST is easy to form and maintain. Delaware residency is not necessary; all business decisions of the trust may be delegated to out-of-state co-trustees and managers. Additionally, there are no annual fees or filing requirements—simply a one-time fee upon the filing of the certificate of trust.
Short answer: The Delaware Statutory Trust is seen as an estate planning tool. As such, it is not subject to the California state franchise tax that an LLC would pay.
What about dispute resolution? The Delaware Court of Chancery is generally regarded as the preeminent business court in the United States. It has jurisdiction over trust and fiduciary matters as long as the trust agreement contains certain required language, which your lawyer can help you with.
A Delaware Statutory Trust comes with tax flexibility. For example, the trust may qualify as a RIC (registered investment company), a FASIT (financial asset securitization investment trust), a REMIC (real estate mortgage investment conduit) or a REIT (real estate investment trust).
As a “bankruptcy remote” entity, the DST protects individual beneficiaries from liens against the property, giving greater security against judgement. DSTs are typically financed with non-recourse debt, which limits a lender’s remedies to the DST’s underlying property.
Is it contractual flexibility you seek? The parties to the trust are able to dictate matters such as management and economic rights of owners, duties of managers, indemnification, mergers and other management and operational issues.
Beneficial owners of a DST enjoy the same liability protections as stockholders of Delaware corporations. We’re talking limited liability here. Trustees and other managers are not personally liable to third parties for acts, omissions or obligations of the DST.
You should have dependable legal counsel before entering into any 1031 Exchange or Delaware Statutory Trust property exchange. We often hear about investors forming entities then not using them appropriately or failing to maintain compliance. This is less likely to happen when you form your structures under the supervision of a qualified professional.
Hire an attorney with a thorough understanding of the essential statutory requirements for formation, maintenance, and termination of a Delaware Statutory Trust. There are other options available, and your lawyer should help you decide which of these entities can meet the needs of the trust owners, creditors, and management.
If you’re considering an interest in a Delaware statutory trust, particularly in the context of a 1031 exchange, you need an attorney who is current with important developments in the world of tax, business and finance. He or she should know about tenant-in-common (TIC) and other DST structures. These offerings are often structured so that investors can successfully achieve tax deferred exchange treatment.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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