A History of the Delaware Statutory Trust Act

A building that teaches about the Delaware Statutory Trust act

By Matthew McFarland, Associate at Kay Properties & Investments, and The Kay Properties team

American Trust Funds

For many years, trusts were primarily used by wealthy Americans to transfer property from one generation to another with minimum taxes and maximum security. Delaware modernized common law and, in so doing, was the first state to create an effective and judicially secure legal entity, the Delaware Statutory Trust (DST.)

The Delaware Statutory Trust Act

Delaware is a trust-friendly state. In the early 20th Century it pioneered separating the duties between corporate trustees and their investment advisors. For decades, trust income, including capital gains have not been taxed, including those owned by nonresidents. Delaware welcomes out-of-state trust funds and was reckoned, as far back as 1986, to have more of them than any other state.  

In 1988 the state adopted the Delaware Business Trust Act for structured financial transactions by overriding some old rules and adding new provisions. The name of the Delaware Business Trust Act was changed to the Delaware Statutory Trust Act in 2002. Several other states have since adopted different versions of similar statutes that offer validation to business trusts.

However the DST Act has been singularly more successful than others as it has continued to progress over the years and increased in popularity too. But what is a Delaware Statutory trust? And how to form a Delaware Statutory Trust? We answer these questions next.

What is a DST and How Is It Formed?

A DST is an ownership model in which co-investors and sponsors can purchase fractional interests in the holdings and assets of a trust. It can be thought of as being similar to tenant-in-common (TIC) ownership, although there are some structural differences. In other words, the Delaware Statutory Trust Act allows the creation of a legal entity that enables multiple investors to pool money to co-own fractional interests.

To form a DST, a certificate of trust that includes the name of the trust and the name and address of the Delaware trustee needs to be filed with the Office of the Secretary of State of the State of Delaware. The trust formation has a low one-time filing fee and the filing doesn’t require disclosure of the identity of the owners or the conditions of the agreement.

A DST may be structured in different ways and qualify as different sorts of investment trusts or conduits. A DST may be in the name of several people or legal entities and it delivers more security than a “common” trust. Here’s the progression of events relevant to the history of DSTs and Delaware Statutory Trust laws:f

  • In 1929 Delaware changed its laws concerning investments in corporations which were not previously included.
  • 1931 saw the law changed again to permit investment in bonds in non-transport or public service corporations which were engaged in productive real estate, and which were secured by a first mortgage but free from any prior liens.
  • The 1931 legislation inserted a net earnings requirement with respect to those corporations and added a 60% debt limit.
  • In1933, perpetual trusts were linked to limited powers of appointment.
  • A 1935 amendment added the ability of trusts to invest in: mortgage bonds when there had not been any loan default in the previous five years; land only within the estate of Delaware; and removed the “free from prior liens” stipulation.
  • 110-year trusts were introduced in 1986, as was the “prudent investor” rule.
  • 1995 saw perpetual trusts of personal property introduced.
  • Domestic Asset Protection Trusts (APT) were introduced in 1997.
  • 2006 saw Noncharitable Purpose Trusts introduced. These may, as of 2008, be made perpetual.
  • DSTs were approved for 1031 Exchanges in 2004

1031 Exchanges were introduced to enable one or more pieces of commercially-owned real estate and associated property (plant and equipment, for example) to be sold (relinquished) in exchange for (acquiring) one or more like-kind pieces of the same or greater value. Time limits, finding and negotiating terms on appropriate property, and other requirements, to complete the transaction could make the whole project difficult to achieve. Potential property acquisitions must be listed with the 1031 Exchange agent within 45 days of the relinquished property transaction being completed, and the acquisitions must be completed in 180 days of the first transaction.

The Advantages of a DST

Since the passage of the Delaware Statutory Trust Act, we have seen DSTs steadily increase in popularity, which can be attributed to the variety of potential benefits they offer to investors. Using a DST helps individual investors to diversify* and to manage risk. The DST is a legal entity that both purchases and finances investment property. Because REITs can be DSTs, they allow fractional ownership, so an individual investor can relinquish property and become part of a much larger investment that may not have been possible otherwise. Making use of a DST, therefore, can remove those original constraints and create readily available inventory. It should be remembered that the 2017 Tax and Jobs Act limited 1031 Exchanges to real property, not equipment or other “personal” property items.

SOURCES:

1. Morris James LLP

2. What is a Delaware Statutory Trust? https://www.delawareinc.com/blog/what-is-a-delaware-statutory-trust/

3. Laws Relating to the Investment of Trust funds, 1930-1937 https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1918&context=lcp

4. Oddball Trusts and the Lawyers Who Love Them https://www.flprobatelitigation.com/wp-content/uploads/sites/206/2013/08/oddballtrusts1.pdf

*Diversification does not guarantee profits or protect against losses.

About Kay Properties and www.kpi1031.com

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 21 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

Nothing contained on this website constitutes tax, legal, insurance or investment advice, nor does it constitute a solicitation or an offer to buy or sell any security or other financial instrument. Securities offered through Growth Capital Services, member FINRASIPC, Office of Supervisory Jurisdiction located at 2093 Philadelphia Pike Suite 4196 Claymont, DE 19703.

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