Chapter 9
DST Estate Planning
Delaware Statutory Trusts and Estate Planning Considerations.
For many investors, especially those in or nearing retirement, estate planning becomes an increasingly important factor when evaluating replacement strategies in a 1031 exchange. Delaware Statutory Trusts (DSTs) offer several features that can support estate planning objectives, though they also come with certain limitations.
Step-Up in Basis at Death
One of the most valuable estate planning benefits of DST ownership is the potential for a step-up in basis. When an investor passes away, their heirs typically receive the DST interest with a cost basis equal to the fair market value at the date of death. This can eliminate the deferred capital gains that had accumulated during the investor’s lifetime.
This benefit is similar to what heirs would receive with direct real estate ownership and is one reason many investors prefer to keep real estate exposure rather than selling and paying taxes during their lifetime.
Simplified Transfer to Heirs
Because DST interests are fractional and professionally managed, they are often easier to transfer to multiple heirs than direct ownership of one or more properties. Heirs do not inherit landlord responsibilities or the need to manage tenants and maintenance. This can reduce family conflict and administrative burden during an already difficult time.
Liquidity Considerations for Heirs
While DSTs offer estate planning advantages, they are generally illiquid. Heirs who need cash may have limited options until the sponsor eventually sells the underlying property. Some investors address this by allocating a portion of their portfolio to 721 UPREIT structures, which may offer a future path to liquidity.
Continued Tax Deferral
As long as the DST interest remains in the estate, the tax deferral continues. Heirs who inherit the DST interest can choose to hold it, exchange it into another 1031-eligible property later, or eventually sell it (triggering taxes at that time).
Key Planning Considerations
Investors should consider:
- Whether their heirs will want continued real estate exposure or prefer liquidity
- The age and health of the investor (longer expected hold periods favor structures with strong estate planning features)
- The desire to simplify the estate for surviving spouses or children
- Coordination with overall estate planning documents and trusts
DSTs can be a useful tool in estate planning when the goal is to preserve wealth across generations while reducing management responsibilities. However, they should be evaluated as part of a broader estate strategy rather than in isolation.
If you would like to discuss how DSTs might fit into your estate planning objectives, schedule a consultation or a brief call today by calling (949) 722-1031.
This content is educational and is not tax or legal advice. Please consult your CPA and attorney.
This content is educational and is not tax or legal advice. Please consult your CPA and attorney.
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