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.)
Delaware and Trust Funds
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. 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.
- 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
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.
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