We frequently encounter older investors who have built up a substantial portfolio of rental properties and discovered that their kids or other beneficiaries have no interest in managing real estate. They are then often faced with tough estate planning decisions including 1) whether to cash out their portfolio and pay taxes to avoid passing on the burdens of property management to their heirs, or 2) leave the properties to their kids and hope that they will be able to deal with the issues after the parents have passed.
We also meet with kids who have inherited real estate and find themselves hopelessly deadlocked with each other on what to do with the properties - often creating serious long-running disputes that can ruin life-long relationships. Despite the potential improvements to net worth that occur when real estate is passed on to heirs, the added burdens can generate significant problems and headaches.
Delaware Statutory Trust (DST) investments can provide a good solution to relieve the anxiety and problems that can occur when rental properties are transferred to heirs.
When an investor sells a rental property and reinvests the proceeds into a DST property, they are obtaining a beneficial interest along with other investors in an institutional quality property that is managed by a trustee. The trustee is also responsible for any loan that may exist on the property. So, the typical burdens associated with property management and loan responsibilities are effectively shifted from the investor to the trustee (or an affiliate).
Heirs who may be otherwise averse to owning rental real estate due to added responsibilities may be relieved to learn that they can own income-producing real estate in a DST property structure and have very little additional work to perform other than some added tax reporting responsibilities at year end.
Improving options for heirs. Once traditional income properties are sold and exchanged into DSTs, the DST interests can be allocated to potential heirs. When the DST interests are sold, each heir can choose to go their own way and either cash out and pay taxes or further defer taxes through another 1031 Exchange into new DSTs or other like-kind rental properties.
The decision to sell the DST is generally made by the trustee thereby avoiding the bickering that often occurs between siblings regarding sales matters. Importantly, each heir can elect to either do another 1031 Exchange or not. DST investors are exempt from the “same-investor” provisions associated with traditional ownership structures such as LLCs and limited partnerships which require that the same ownership structure of the relinquished property must be maintained for the acquired property.
Partnership transfers. The transfer of income properties to partnerships can carry similar added risks that can also be partially mitigated with DSTs. Partners can also disagree as to how properties should be managed and ultimately sold. Income property owners who have concerns in transferring their interests to partnerships might consider options to first convert their rental properties into DSTs. The added responsibilities of the DST’s trustee may reduce disagreements between partners and provide for greater harmony and alignment between the partners.
Charitable donations. Finally, we have many investors who plan on donating at least a portion of their income properties to charities. While this can be a good strategy, investors should determine if their selected charities have interest and capabilities to manage the types of real estate assets that they may be donating. Most charities have little interest in taking on the responsibilities and liabilities associated with income properties. They would rather receive hassle-free assets that could be liquidated in the future with very little effort on their part. DSTs may therefore, be far preferable as a charitable donation.
For further information and insights on how DSTs may solve some of your estate planning issues, please contact us. Over our 15+ year history, we have worked with over 5,000 investors and have seen a broad range of estate planning solutions related to income properties. We would be pleased to share our success stories with you and also acquaint you with potential pitfalls.