DSTs in Estate Planning: Understanding the Step-Up in Basis Advantage

Estate plan­ning is about more than sim­ply trans­fer­ring assets to the next gen­er­a­tion. For many investors, it is also about pre­serv­ing wealth, min­i­miz­ing tax­es, and ensur­ing that heirs receive assets in the most effi­cient man­ner pos­si­ble.

July 2, 2026

By Al DiNi­co­la, AIF®
Pri­vate Fund Advi­sor
DST 1031 Spe­cial­ist
Fidu­cia­ry Cap­i­tal Man­age­ment, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

Intro­duc­tion

Real estate investors who uti­lize Delaware Statu­to­ry Trusts (DSTs) often focus on the tax defer­ral ben­e­fits asso­ci­at­ed with Sec­tion 1031 exchanges, but DSTs can also play an impor­tant role in com­pre­hen­sive estate plan­ning strate­gies.

One of the most sig­nif­i­cant estate plan­ning advan­tages avail­able to investors is the step-up in basis. This tax pro­vi­sion can sub­stan­tial­ly reduce or even elim­i­nate cap­i­tal gains tax­es for heirs who inher­it appre­ci­at­ed prop­er­ty. Because DST inter­ests rep­re­sent ben­e­fi­cial own­er­ship in real estate, they may qual­i­fy for the same favor­able treat­ment that applies to oth­er inher­it­ed invest­ment real estate assets.

Under­stand­ing how DST estate plan­ning strate­gies work and how a step-up in basis affects DST invest­ments can help investors make informed deci­sions regard­ing wealth trans­fer, lega­cy plan­ning, and long-term tax effi­cien­cy.

Under­stand­ing the Step-Up in Basis

The con­cept of a step-up in basis is one of the most pow­er­ful tax ben­e­fits avail­able under cur­rent fed­er­al tax law. To under­stand its sig­nif­i­cance, it is impor­tant to first under­stand what “basis” means.

An asset’s basis gen­er­al­ly rep­re­sents its orig­i­nal pur­chase price plus cer­tain cap­i­tal improve­ments and adjust­ments. When an investor sells an appre­ci­at­ed asset, cap­i­tal gains tax­es are typ­i­cal­ly cal­cu­lat­ed based on the dif­fer­ence between the sale price and the adjust­ed basis.

For exam­ple, sup­pose an investor pur­chas­es an invest­ment prop­er­ty for $500,000. Over time, the prop­er­ty appre­ci­ates and is even­tu­al­ly worth $1,200,000. If the investor sells the prop­er­ty dur­ing their life­time, cap­i­tal gains tax­es may be owed on the $700,000 increase in val­ue, sub­ject to var­i­ous adjust­ments and depre­ci­a­tion recap­ture rules. The above is an over­sim­pli­fied exam­ple because tax cal­cu­la­tion involved recap­ture of depre­ci­a­tion, NIT tax for high­er earn­er, and applic­a­ble state tax­es.

How­ev­er, when prop­er­ty is inher­it­ed, fed­er­al tax law gen­er­al­ly allows heirs to receive a new basis equal to the prop­er­ty’s fair mar­ket val­ue as of the own­er’s date of death. This adjust­ment is known as a step-up in basis.

Using the same exam­ple, if the investor pass­es away when the prop­er­ty is worth $1,200,000, the heirs may receive a basis of $1,200,000 rather than the orig­i­nal $500,000 basis. If the heirs sub­se­quent­ly sell the prop­er­ty for approx­i­mate­ly $1,200,000, lit­tle or no cap­i­tal gains tax may be due.

This pro­vi­sion can dra­mat­i­cal­ly reduce the tax bur­den on future gen­er­a­tions and has become a cor­ner­stone of many estate plan­ning strate­gies involv­ing real estate invest­ments.

Why Real Estate Investors Focus on Basis Plan­ning

Many real estate investors accu­mu­late sub­stan­tial appre­ci­a­tion over decades of own­er­ship. In addi­tion to mar­ket appre­ci­a­tion, investors may also face depre­ci­a­tion recap­ture tax­es that can fur­ther increase their tax oblig­a­tions when a prop­er­ty is sold.

As a result, investors often seek strate­gies that allow them to:

• Defer cap­i­tal gains tax­es dur­ing their life­time
• Gen­er­ate pas­sive income
• Reduce man­age­ment respon­si­bil­i­ties
• Pre­serve wealth for heirs
• Max­i­mize after-tax inher­i­tance val­ue

This is where Delaware Statu­to­ry Trusts can become par­tic­u­lar­ly valu­able.

How DSTs Sup­port Estate Plan­ning Goals

A Delaware Statu­to­ry Trust allows investors to own frac­tion­al inter­ests in insti­tu­tion­al-qual­i­ty real estate while main­tain­ing eli­gi­bil­i­ty for Sec­tion 1031 exchange treat­ment. DSTs com­mon­ly own assets such as:

• Mul­ti­fam­i­ly apart­ment com­mu­ni­ties
• Med­ical office build­ings
• Indus­tri­al facil­i­ties
• Dis­tri­b­u­tion cen­ters
• Self-stor­age prop­er­ties
• Net-leased retail prop­er­ties
• Senior hous­ing com­mu­ni­ties

For investors seek­ing pas­sive own­er­ship, DSTs can elim­i­nate many of the day-to-day respon­si­bil­i­ties asso­ci­at­ed with direct prop­er­ty man­age­ment while still pro­vid­ing expo­sure to income-pro­duc­ing real estate.

From an estate plan­ning per­spec­tive, DSTs offer sev­er­al addi­tion­al advan­tages.

Sim­pli­fied Own­er­ship Struc­ture

Many aging investors no longer wish to active­ly man­age rental prop­er­ties or over­see com­plex real estate oper­a­tions. DSTs pro­vide a pas­sive own­er­ship struc­ture that allows investors to con­tin­ue receiv­ing poten­tial income dis­tri­b­u­tions while reduc­ing man­age­ment respon­si­bil­i­ties.

This sim­plic­i­ty can make estate admin­is­tra­tion eas­i­er for heirs who may have lit­tle expe­ri­ence man­ag­ing real estate invest­ments.

Frac­tion­al Own­er­ship Ben­e­fits

DST inter­ests can be divid­ed among mul­ti­ple ben­e­fi­cia­ries more eas­i­ly than a sin­gle prop­er­ty. For exam­ple, a fam­i­ly own­ing a com­mer­cial build­ing worth sev­er­al mil­lion dol­lars may face chal­lenges when attempt­ing to divide own­er­ship equal­ly among heirs.

DST inter­ests often pro­vide a more flex­i­ble solu­tion because own­er­ship can be allo­cat­ed pro­por­tion­ate­ly among ben­e­fi­cia­ries accord­ing to the estate plan.

Access to Insti­tu­tion­al Assets

Many DST offer­ings own high-qual­i­ty com­mer­cial prop­er­ties that indi­vid­ual investors may not be able to acquire inde­pen­dent­ly. This allows investors to con­tin­ue par­tic­i­pat­ing in pro­fes­sion­al­ly man­aged real estate invest­ments while plan­ning for future wealth trans­fer.

DST Step-Up in Basis Con­sid­er­a­tions

One of the most fre­quent­ly asked ques­tions involves whether DST inter­ests receive a step-up in basis sim­i­lar to direct­ly owned real estate.

Gen­er­al­ly speak­ing, DST inter­ests are includ­ed in the investor’s tax­able estate and may be eli­gi­ble for a step-up in basis upon death under cur­rent fed­er­al tax law. As a result, heirs may receive a new basis equal to the fair mar­ket val­ue of the DST inter­est as of the date of death.

This can be par­tic­u­lar­ly advan­ta­geous for investors who have com­plet­ed mul­ti­ple 1031 exchanges over many years.

Con­sid­er the fol­low­ing sce­nario:

An investor sells a rental prop­er­ty and com­pletes a 1031 exchange into a DST. The investor con­tin­ues exchang­ing prop­er­ties over time, defer­ring tax­es while main­tain­ing expo­sure to invest­ment real estate.

Even­tu­al­ly, the investor pass­es away while still own­ing DST inter­ests. Assum­ing cur­rent tax rules remain in place, the heirs may receive a stepped-up basis based on the fair mar­ket val­ue of the inher­it­ed DST inter­ests.

This out­come may sig­nif­i­cant­ly reduce the deferred cap­i­tal gains tax­es that would oth­er­wise have accu­mu­lat­ed over decades of own­er­ship.

Com­bin­ing 1031 Exchanges and Estate Plan­ning

Many investors use 1031 exchanges as part of a long-term estate plan­ning strat­e­gy com­mon­ly referred to as “swap until you drop.”

This strat­e­gy involves:

1. Sell­ing appre­ci­at­ed invest­ment prop­er­ty
2. Com­plet­ing a Sec­tion 1031 exchange
3. Defer­ring cap­i­tal gains tax­es
4. Repeat­ing the process through­out the investor’s life­time
5. Pass­ing the assets to heirs upon death

The com­bi­na­tion of ongo­ing tax defer­ral and a poten­tial step-up in basis can cre­ate sub­stan­tial tax effi­cien­cy for fam­i­lies seek­ing to pre­serve multi­gen­er­a­tional wealth.

DSTs often fit nat­u­ral­ly into this strat­e­gy because they allow investors to tran­si­tion from active prop­er­ty own­er­ship into pas­sive real estate invest­ments while main­tain­ing 1031 exchange eli­gi­bil­i­ty.

Poten­tial Estate Admin­is­tra­tion Ben­e­fits

Beyond tax con­sid­er­a­tions, DSTs may help sim­pli­fy the estate set­tle­ment process.

Tra­di­tion­al real estate own­er­ship can cre­ate sev­er­al chal­lenges for heirs:

• Prop­er­ty man­age­ment respon­si­bil­i­ties
• Main­te­nance oblig­a­tions
• Leas­ing deci­sions
• Cap­i­tal improve­ment require­ments
• Mar­ket tim­ing con­cerns

DST invest­ments are pro­fes­sion­al­ly man­aged, which can reduce some of these bur­dens.

Addi­tion­al­ly, because DST inter­ests are own­er­ship inter­ests rather than direct­ly man­aged prop­er­ties, estate execu­tors may find it eas­i­er to inven­to­ry and val­ue these hold­ings for estate admin­is­tra­tion pur­pos­es.

While every estate is unique, many investors appre­ci­ate the poten­tial for smoother asset tran­si­tions when com­pared to man­ag­ing mul­ti­ple indi­vid­u­al­ly owned prop­er­ties.

Impor­tant Con­sid­er­a­tions for Investors

Although DSTs can pro­vide sig­nif­i­cant estate plan­ning advan­tages, investors should rec­og­nize that estate and tax laws may change over time.

Fac­tors that should be reviewed with qual­i­fied advi­sors include:

• Cur­rent fed­er­al estate tax exemp­tions
• State estate and inher­i­tance tax­es
• Trust struc­tures
• Ben­e­fi­cia­ry des­ig­na­tions
• Over­all port­fo­lio diver­si­fi­ca­tion
• Liq­uid­i­ty needs of heirs
• Poten­tial leg­isla­tive changes affect­ing basis rules

Investors should work close­ly with attor­neys, CPAs, estate plan­ning pro­fes­sion­als, and finan­cial advi­sors to ensure that DST invest­ments align with their broad­er wealth trans­fer objec­tives. There is one item that needs to be under­stood.  Once the investor pass­es away the DST needs to be held until the spon­sor ini­ti­ates sale of the asset. The heirs will con­tin­ue to receive dis­tri­b­u­tions until the sale of the DST.

Because every fam­i­ly’s finan­cial cir­cum­stances dif­fer, pro­fes­sion­al guid­ance remains essen­tial when devel­op­ing a com­pre­hen­sive DST inher­i­tance strat­e­gy.

Con­clu­sion

Delaware Statu­to­ry Trusts can serve as pow­er­ful tools with­in a com­pre­hen­sive estate plan­ning frame­work. By com­bin­ing pas­sive own­er­ship of insti­tu­tion­al-qual­i­ty real estate with the poten­tial ben­e­fits of a step-up in basis, DSTs may help investors pre­serve wealth, sim­pli­fy inher­i­tance, and reduce future tax bur­dens for heirs.

For many fam­i­lies, the com­bi­na­tion of Sec­tion 1031 exchange tax defer­ral and favor­able inher­i­tance treat­ment cre­ates a com­pelling long-term wealth trans­fer strat­e­gy. As part of a broad­er DST wealth trans­fer plan­ning approach, investors can con­tin­ue gen­er­at­ing pas­sive income while posi­tion­ing assets for a poten­tial­ly more tax-effi­cient tran­si­tion to future gen­er­a­tions.

Under­stand­ing how DSTs impact estate plan­ning is an impor­tant step toward build­ing a lega­cy that bal­ances income, tax effi­cien­cy, and fam­i­ly wealth preser­va­tion.

Delaware Statu­to­ry Trusts (DSTs) have become a notable part of com­mer­cial real estate invest­ing. As Al DiNi­co­la empha­sizes, a DST is a struc­ture, not an asset class—the focus should remain on the qual­i­ty of the under­ly­ing prop­er­ty and how it fits your goals.  DSTs are for accred­it­ed investors and car­ry risks—illiquidity, real estate mar­ket fluc­tu­a­tions, and spon­sor deci­sions. Con­sult your advis­er for suit­abil­i­ty, espe­cial­ly for §1031 exchanges. For more details, please con­tact:

• Al DiNi­co­la adnicola@fiduciarycm.com  
• Direct: 239 691 8098
• Sched­ule Appoint­ment

Advi­so­ry ser­vices are offered through Fidu­cia­ry CM, an SEC-reg­is­tered advis­er. Invest­ments involve risk and are not guar­an­teed. Always refer to offer­ing doc­u­ments for full risk dis­clo­sures. Delaware Statu­to­ry Trust (DST) invest­ments involve risks asso­ci­at­ed with com­mer­cial real estate own­er­ship and are not suit­able for all investors. These risks may include, but are not lim­it­ed to, loss of prin­ci­pal, illiq­uid­i­ty, ten­ant vacan­cy, financ­ing risk, inter­est rate fluc­tu­a­tions, prop­er­ty val­ue declines, eco­nom­ic and mar­ket con­di­tions, and risks asso­ci­at­ed with spon­sor and prop­er­ty man­age­ment deci­sions. Please refer to the applic­a­ble Prop­er­ty Pri­vate Place­ment Mem­o­ran­dum (PPM) for a com­plete dis­cus­sion of the risks and con­sid­er­a­tions spe­cif­ic to that offer­ing. For addi­tion­al infor­ma­tion regard­ing gen­er­al DST invest­ment risks, please click here. Past per­for­mance is not indica­tive of future results. Nei­ther the Reg­is­tered Rep­re­sen­ta­tive nor the Bro­ker-Deal­er can con­trol or guar­an­tee future deci­sions made by the DST spon­sor, asset man­ag­er, prop­er­ty man­ag­er, ten­ants, lenders, or oth­er third par­ties involved in the oper­a­tion of the prop­er­ty. Past per­for­mance is not indica­tive of future results. Secu­ri­ties may be offered through MSC-BD, LLC, a mem­ber of FINRA/ SIPC.