DSTs & Estate Planning for Real Estate Investors

About This Webinar

This webinar outlines strategies that real estate investors may consider when exploring Section 1031 exchanges and Delaware Statutory Trusts (DSTs). Archer Investors Managing Partner, Beth Veloz, focuses on options for transitioning from active property management to passive real estate structures, while incorporating estate planning and wealth transfer considerations.

I. Common Objectives for Real Estate Investors. Beth notes that investors typically explore these strategies to address three primary goals:

• Income and Risk Management: Exploring options to transition from growth-focused assets to structures designed for potential passive income generation and increased geographic or asset-class diversification.

• Delegation of Management: Seeking to reduce or eliminate the day-to-day responsibilities of active property management, such as maintenance and tenant relations.

• Wealth and Legacy Transfer: Establishing intentional methods for transferring wealth to heirs, spouses, or charitable organizations.

II. Foundational Planning Concepts Understanding the following tax codes and principles is necessary when considering these strategies:

• Section 1031 Exchange: A provision in the Internal Revenue Code that allows investors to defer capital gains taxes by selling an investment property and reinvesting the proceeds into a "like-kind" asset. "Like-kind" is broadly defined, permitting reinvestment into different markets, property types, and specific passive structures. Strict adherence to IRS timelines (45 days to identify, 180 days to close) is required.

• Step-Up in Basis: A tax provision that generally adjusts the tax basis of an inherited asset to its fair market value upon the owner's death. This can potentially eliminate the capital gains tax liability on appreciation that occurred during the original owner's lifetime under current tax law.

• Estate Taxes: Investors are encouraged to monitor state and federal estate tax exemptions with their qualified tax or legal professionals to prepare for potential tax liabilities that could impact estate liquidity.

III. Direct Ownership vs. The DST Structure The webinar contrasts the characteristics of holding physical real estate directly with the structure of a DST, particularly during wealth transfer.

Considerations of Directly Held Real Estate:

• Illiquidity & Divisibility: Physical properties can be difficult to divide equally among multiple heirs without forcing a sale.

• Operational Responsibilities: Heirs may lack the expertise, time, or desire to manage a property, which can lead to challenges if beneficiaries have differing financial needs.

The Delaware Statutory Trust (DST) Structure: A DST offers a fractional interest in professionally managed real estate. It qualifies as "like-kind" replacement property for a 1031 exchange under Revenue Ruling 2004-86.

• Passive Management: Relieves the investor of day-to-day property management responsibilities, as the sponsor manages the asset.

• Estate Division: Fractional shares can be divided among multiple heirs or charitable organizations.

• Tax Status: Subject to current tax law, DST investments can be eligible for a step-up in basis upon the owner's passing.

• Charitable Strategies: May be a suitable vehicle for charitable giving, as nonprofits can receive potential distributions without assuming the operational liabilities of direct real estate ownership.