Investment property owners have many considerations when estate planning.  The financial and lifestyle objectives of investment real estate owners change as they enter new chapters of life. Many of the property owners we work with no longer want to spend time managing tenants, addressing new regulatory issues and paying for large capital projects. What they want instead is to spend more time with their children and grandchildren, traveling and pursuing hobbies. Oftentimes, we hear these owners say, “I want to simplify my life”, which is a very worthy goal.

Around the time of life in which owners begin to place a higher value on time, they should also begin addressing estate planning. Estate planning brings with it many considerations. However, simply choosing to sell highly appreciated investment real estate because it seems like the easiest option can expose owners to a large capital gains tax liability and eliminates the opportunity to use real estate to reduce one’s future estate tax liability. If owners of investment real estate find themselves in this situation, they should consider the approach outlined below.

Delaware Statutory Trusts can be an effective estate planning tool for many property owners.

Highly appreciated property can be sold and 1031 exchanged into a Delaware Statutory Trust (DST). DSTs are trusts of institutional real estate managed by national real estate sponsors and are considered “like-kind” property for 1031 exchange purposes. Generally, DSTs have the following characteristics:

  • Owning strong, stable institutional property such as large “Class A or B” multi-family buildings, self-storage, medical-office, etc.
  • Third party management, eliminating the headaches of active management by investment property owners
  • Producing predictable cash flow

What’s more, DSTs are an effective estate planning tool. Because they have relatively low minimum investment requirements of $100k, and 1031 exchange laws allow for multiple properties to be exchanged into, the proceeds from the sale of a single real estate asset can be exchanged into multiple DSTs of equal amounts. Effectively this allows for an even distribution of real estate among the estate’s beneficiaries by specifically identifying DSTs for each beneficiary. Consider the following comparison:

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Here we see that DSTs can allow for a far more even allocation of assets among beneficiaries. Furthermore, the beneficiaries do not need to actively manage the property and are free to pursue their careers and busy lives while still reaping the benefits of ownership such as potential for predictable cash flow and the opportunity to continue to tax defer through exchanges. 

Delaware Statutory Trusts is considered ownership of a “minority share of a non-public entity” meaning they are eligible for a “discount for lack of marketability” (DLOM). This discount can reduce the value of the real estate owned by as much as 35% from fair market value when calculating the total assets within the estate should an owner want to reduce their overall estate value for estate tax purposes. Additionally, DST properties are commonly located outside Washington State, thus avoiding being subject to Washington estate tax which has the lowest exemption amount of all states in the country.

Furthermore, since ownership of beneficial interests in DSTs is tangible real property, a surviving spouse would still receive a complete step-up in tax basis in a community property state such as Washington. 

There are many ways to approach estate planning considerations and the right approach is dictated by your individual objectives, assets and family dynamics. Delaware Statutory Trusts tend to be a versatile form of ownership that can potentially satisfy many objectives of owners who are in the third and fourth quarters of life, both during their own lifetime and in the transference of assets to their beneficiaries.  

 

If you are interested in learning more about DST ownership as a tax-deferral strategy, I encourage you to download our free guide, “Investing in Delaware Statutory Trusts” by visiting re-transition.com/aoa. To speak to one of our 1031 Exchange professionals or to schedule a complimentary consultation, call us at 888-286-5395 or email [email protected]

 

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Important Information

The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the sponsor’s Private Placement Memorandum (PPM), which is solely available to accredited investors and accredited entities. Case studies and examples are for illustrative purposes and not representative of future results. There are risks associated with investing in real estate properties, including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies, and illiquidity. Because investor situations and objectives vary, this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your situation. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) 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. Securities offered through Aurora Securities, Inc. (ASI), member FINRA/SIPC. Advisory services offered through Secure Asset Management, LLC (SAM), a registered investment advisor. ASI and SAM are affiliated companies. Real Estate Transition Solutions (RETS) is independent of ASI and SAM.

 

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