Estate Planners may consider Delaware Statutory Trusts (DSTs)

Estate Plan­ners expand client options with DSTs.

Cer­ti­fied Exit Plan­ner Advi­sors (CEPAs) often face many issues with busi­ness own­ers antic­i­pat­ing sell­ing their busi­ness as well as the real estate owned that often may accom­pa­ny the busi­ness.

By Al DiNi­co­la, AIF®, CEPA ™
adinicola@namcoa.com
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC

CEPAs inter­act with CPAs, attor­neys and oth­er finan­cial pro­fes­sion­als to iden­ti­fy the best alter­na­tives on the struc­tur­ing and sale of the busi­ness. Over the years many investors seek the best struc­tures for effi­cient tax plan­ning. Uti­liz­ing the 1031 tax deferred exchange pro­gram with the Delaware Statu­to­ry Trust (DST) has become very pop­u­lar. The DST is a tax advan­taged invest­ment that can uti­lize the 1031 exchange ben­e­fits as well as the pas­sive nature of real estate own­er­ship. It is no won­der why DSTs are part of the exit plan­ning dis­cus­sion.
Often a busi­ness own­er con­tem­plates sell­ing their busi­ness or keep­ing the busi­ness in the fam­i­ly. Unfor­tu­nate­ly, sta­tis­tics show fam­i­ly tran­si­tion is suc­cess­ful 30% of the time when trans­fer­ring to the sec­ond gen­er­a­tion of own­er­ship and 12% when mov­ing to the third gen­er­a­tions. For those busi­ness­es who do have a fam­i­ly tran­si­tion con­grat­u­la­tions on your suc­cess. When a busi­ness sells, typ­i­cal­ly the adjust­ed EBITDA would be mul­ti­ply by an indus­try mul­ti­ple to arrive at a poten­tial sell­ing price. There would be a range of mul­ti­ples estab­lished by the pri­vate equi­ty mar­kets and all com­pa­nies don’t sell for the same mul­ti­ple. There may also be a real estate com­po­nent to the busi­ness that could be a 1031 tax deferred exchange ben­e­fit­ting the busi­ness own­er.

Who is the (new) boss?

Occa­sion­al­ly we as finan­cial advi­sors will meet with attor­neys to review strate­gies on estate plan­ning. Often we hear the sto­ries typ­i­cal­ly revolv­ing around finan­cial issues once the remain­ing matri­arch or patri­arch has passed away. Thank­ful­ly the heat­ed dis­cus­sions are well after the funer­al ser­vices. There are investors who seek advice (while still liv­ing) on struc­tur­ing their real estate hold­ings and repo­si­tion­ing the assets. The thought of inher­it­ing the par­ents’ invest­ment prop­er­ty is a dou­ble edge sword for some fam­i­lies. The real estate may rep­re­sent a valu­able asset but at the same time may require a lot of man­age­ment and over­sight.

For­ward think­ing Investors.

We have inter­viewed sev­er­al investors who may be con­sid­ered for­ward think­ing investors. One indi­vid­ual investor who has three chil­dren decid­ed to sell his one larg­er invest­ment prop­er­ty and uti­lize a 1031 exchange. The investor exchanged (tax deferred) into three DSTs with the intent of pro­vid­ing each child with the DST when he pass­es. His ini­tial inten­tion was to move from active man­age­ment of the real estate hold­ings into a more pas­sive role. While he owns the prop­er­ty he enjoys the pas­sive nature of the DST struc­ture along with the poten­tial dis­tri­b­u­tions and poten­tial appre­ci­a­tion. In his for­ward think­ing and plan­ning he want­ed to pro­vide an easy option for each of his chil­dren when they inher­it the prop­er­ty. In the­o­ry each of the chil­dren will ulti­mate­ly inher­it a DST and when the time comes can decide what they do with their part of the estate.

Can you man­age a prop­er­ty from a thou­sand miles away?

We receive calls from old­er chil­dren who are attempt­ing to assist their elder­ly par­ents man­age rental prop­er­ty. Recent­ly two daugh­ters (one in Texas and the oth­er in Flori­da) are attempt­ing to man­age their par­ents rental prop­er­ty in Illi­nois. One of the big advan­tages of the DST is the pas­sive nature of the invest­ment that includes full man­age­ment of the prop­er­ty. For the daugh­ters men­tioned in this exam­ple this would elim­i­nate all prop­er­ty man­age­ment as well as all the book­keep­ing and oth­er task asso­ci­at­ed with own­ing invest­ment real estate. Liv­ing in Flori­da and wor­ry­ing about frozen pipes in Illi­nois can cre­ate a tremen­dous amount of anx­i­ety. Wor­ry­ing about prop­er­ty man­age­ment when the daugh­ters tran­si­tion to being heirs may be total­ly elim­i­nat­ed.

Cap­i­tal Gains & Step Up.

There could be a tremen­dous dif­fer­ence between an investor sell­ing with­out a 1031 tax deferred exchange and with a 1031 tax deferred exchange. Here is a quick exam­ple. Hypo­thet­i­cal­ly if an investor (while they are liv­ing) sells a $1 M prop­er­ty that orig­i­nal­ly cost $250,000, they could pay as much as 40% in cap­i­tal gain tax­es. This would be a com­bined tax on the recap­tured depre­ci­a­tion tak­en on the prop­er­ty as well as fed­er­al and state (if applic­a­ble) cap­i­tal gains tax on the prof­it. If the investor exchanges out of their cur­rent invest­ment prop­er­ty not only do they elim­i­nate the man­age­ment respon­si­bil­i­ties but also can diver­si­fy into sev­er­al dif­fer­ent asset class­es. Inevitably the investor will leave this earth and there is a step up in basis the heirs would enjoy. So, what would that mean? In the exam­ple of the $1M prop­er­ty above if that prop­er­ty was exchanged into three DSTs (with no appre­ci­a­tion in val­ue) there would be a step up from the $250,000 orig­i­nal val­ue to $1M. If the recip­i­ent of the prop­er­ty were to sell the prop­er­ty for $1M that would be con­sid­ered the new orig­i­nal price and no recap­ture of depre­ci­a­tion or cap­i­tal gains tax­es would be due. All of the chil­dren men­tioned in the exam­ple would own each of their DSTs and con­tin­ue to receive the dis­tri­b­u­tions and tax ben­e­fits each DST would pro­vide. When it became time for the DST to sell (occa­sion­al­ly ref­er­enced as going full cycle) each child may enjoy the ben­e­fits and col­lect pro­ceeds tax free. We need to men­tion at this time there may be a tax the ben­e­fi­cia­ries or heirs may not avoid. Every­thing in the investor’s estate at the time of their death would be sub­ject to any estate tax or exclu­sions. The estate plan­ner may sug­gest alter­na­tive meth­ods to min­i­mize tax­es and max­i­mize pro­ceeds flow­ing through to the ben­e­fi­cia­ries.

Char­i­ta­ble Con­tri­bu­tion Option

Char­i­ta­ble con­tri­bu­tion options may be reviewed by estate plan­ners. Char­i­ta­ble giv­ing has been con­sid­ered to be a part of a well-round­ed estate plan. Donor Advised Funds and poten­tial­ly Char­i­ta­ble remain­der trust have been iden­ti­fied by many plan­ners as an excel­lent option. Char­i­ties do ben­e­fit from real estate gifts and DSTs may fall right into the pre­ferred options because of the pas­sive nature and poten­tial dis­tri­b­u­tion. Char­i­ties do not want to be respon­si­ble for the man­age­ment of the prop­er­ty. Upon the full cycle event the char­i­ty may real­ize prof­its from the sale. If char­i­ties are faced with man­age­ment of a prop­er­ty ver­sus the sale of the prop­er­ty, the char­i­ty may look at sim­ply sell­ing no mat­ter what the cur­rent mar­ket reflects on the val­ue. A pre­ma­ture sale may reduce the amount received by the char­i­ty. The char­i­ty will ben­e­fit from hold­ing the asset, receiv­ing any dis­tri­b­u­tions, and then ben­e­fit from the sale with­out hav­ing the pres­sure to active­ly man­age the prop­er­ties.

Edu­ca­tion and prepa­ra­tion are the keys to estate plan­ning.

The 1031 tax deferred exchange process may be dif­fi­cult to under­stand and nav­i­gate. How a DST may ben­e­fit investors and ben­e­fit estate plan­ning should be iden­ti­fied. NAMCOA engages with investors, CPA, attor­neys, and oth­er finan­cial pro­fes­sion­al to eval­u­ate each investor’s suit­abil­i­ty for DST invest­ment. Con­tact us for a con­ver­sa­tion regard­ing your needs.

DSTs are not for all investors. The acqui­si­tion of a DST is for accred­it­ed investors only. Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus. Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor. NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 8215 SW Tualatin- Sher­wood Rd, Suite 200, Tualatin, OR 97062. MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.
Thank you.

NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC