Passing Real Estate Wealth to Heirs Using DSTs

For many real estate investors, build­ing wealth is only part of the long-term objec­tive. Equal­ly impor­tant is ensur­ing that those assets can be trans­ferred effi­cient­ly to future gen­er­a­tions. How­ev­er, pass­ing real estate wealth to heirs is often more com­pli­cat­ed than many investors antic­i­pate.

July 8, 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

How­ev­er, pass­ing real estate wealth to heirs is often more com­pli­cat­ed than many investors antic­i­pate. Mul­ti­ple prop­er­ties, active man­age­ment respon­si­bil­i­ties, unequal inher­i­tance allo­ca­tions, and sig­nif­i­cant embed­ded cap­i­tal gains can cre­ate chal­lenges for both investors and their ben­e­fi­cia­ries.

As investors age, many begin look­ing for strate­gies that sim­pli­fy own­er­ship while pre­serv­ing the val­ue of their real estate hold­ings. Delaware Statu­to­ry Trusts (DSTs) have become increas­ing­ly pop­u­lar not only for their role in Sec­tion 1031 exchanges but also for their poten­tial estate plan­ning ben­e­fits. By con­vert­ing active­ly man­aged real estate into pro­fes­sion­al­ly man­aged frac­tion­al own­er­ship inter­ests, DSTs can help stream­line wealth trans­fer while main­tain­ing expo­sure to income-pro­duc­ing real estate.

For fam­i­lies seek­ing a prac­ti­cal and tax-effi­cient solu­tion, DST inher­i­tance plan­ning may pro­vide a valu­able path­way for pass­ing real estate wealth to future gen­er­a­tions.

The Chal­lenges of Pass­ing Tra­di­tion­al Real Estate to Heirs

Many investors accu­mu­late mul­ti­ple prop­er­ties through­out their life­time. These hold­ings may include rental homes, apart­ment com­plex­es, com­mer­cial build­ings, indus­tri­al facil­i­ties, or oth­er invest­ment real estate.

While these assets can cre­ate sig­nif­i­cant wealth, they often present chal­lenges when passed to heirs.

Com­mon inher­i­tance con­cerns include:

• Deter­min­ing how to divide own­er­ship among mul­ti­ple ben­e­fi­cia­ries
• Man­ag­ing ongo­ing prop­er­ty oper­a­tions
• Han­dling main­te­nance and repair oblig­a­tions
• Mak­ing leas­ing and ten­ant deci­sions
• Address­ing dif­fer­ing finan­cial goals among heirs
• Man­ag­ing poten­tial cap­i­tal gains tax­es upon sale

For exam­ple, if a par­ent owns a com­mer­cial prop­er­ty worth $3 mil­lion and has three chil­dren, divid­ing own­er­ship equal­ly may not be straight­for­ward. Some heirs may want to retain the prop­er­ty, while oth­ers may pre­fer imme­di­ate liq­uid­i­ty. Dis­agree­ments can cre­ate fam­i­ly ten­sion and com­pli­cate estate admin­is­tra­tion.

DSTs can help address many of these con­cerns by con­vert­ing a large, indi­vis­i­ble real estate asset into frac­tion­al own­er­ship inter­ests.

Under­stand­ing DST Own­er­ship

A Delaware Statu­to­ry Trust is a legal struc­ture that allows mul­ti­ple investors to own ben­e­fi­cial inter­ests in insti­tu­tion­al-qual­i­ty real estate. DSTs are com­mon­ly used in con­junc­tion with Sec­tion 1031 exchanges and can own a vari­ety of prop­er­ty types, includ­ing:

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

Unlike direct prop­er­ty own­er­ship, investors do not active­ly man­age the real estate. Instead, pro­fes­sion­al asset man­agers over­see day-to-day oper­a­tions, leas­ing, main­te­nance, and prop­er­ty admin­is­tra­tion.

This pas­sive own­er­ship struc­ture can be espe­cial­ly appeal­ing for investors focused on long-term estate plan­ning.

Why DSTs Can Sim­pli­fy Wealth Trans­fer

One of the most sig­nif­i­cant advan­tages of DST wealth trans­fer strate­gies is the abil­i­ty to sim­pli­fy the inher­i­tance process.

Frac­tion­al Own­er­ship Can Be Eas­i­er to Divide

Tra­di­tion­al real estate often presents allo­ca­tion chal­lenges when mul­ti­ple heirs are involved.

DST inter­ests, how­ev­er, rep­re­sent frac­tion­al own­er­ship. These inter­ests can typ­i­cal­ly be divid­ed pro­por­tion­ate­ly among ben­e­fi­cia­ries accord­ing to the estate plan.

For exam­ple, if an investor owns $1.5 mil­lion in DST inter­ests and has three ben­e­fi­cia­ries, own­er­ship can poten­tial­ly be allo­cat­ed even­ly among the heirs with­out requir­ing the sale or par­ti­tion of phys­i­cal real estate.

This flex­i­bil­i­ty can help reduce dis­putes and cre­ate a smoother inher­i­tance process.

Pro­fes­sion­al Man­age­ment Con­tin­ues After Trans­fer

Many heirs have lit­tle inter­est in becom­ing land­lords or prop­er­ty man­agers.

With tra­di­tion­al real estate, ben­e­fi­cia­ries may sud­den­ly find them­selves respon­si­ble for:

• Ten­ant rela­tions
• Main­te­nance deci­sions
• Prop­er­ty tax­es
• Insur­ance require­ments
• Lease nego­ti­a­tions
• Cap­i­tal improve­ment projects

DSTs elim­i­nate many of these respon­si­bil­i­ties because pro­fes­sion­al man­age­ment remains in place.

As a result, heirs may con­tin­ue receiv­ing income dis­tri­b­u­tions with­out assum­ing the bur­dens asso­ci­at­ed with active prop­er­ty own­er­ship.

Sim­pli­fied Admin­is­tra­tion for Execu­tors

Estate execu­tors are respon­si­ble for iden­ti­fy­ing, valu­ing, and dis­trib­ut­ing assets accord­ing to the terms of a will or trust.

Man­ag­ing mul­ti­ple prop­er­ties can sig­nif­i­cant­ly increase the com­plex­i­ty of estate admin­is­tra­tion.

DST inter­ests are gen­er­al­ly eas­i­er to inven­to­ry and doc­u­ment com­pared to numer­ous sep­a­rate­ly owned prop­er­ties. This can poten­tial­ly reduce admin­is­tra­tive bur­dens and improve effi­cien­cy dur­ing estate set­tle­ment.

Tax Advan­tages of DST Inher­i­tance Plan­ning

One of the pri­ma­ry rea­sons investors incor­po­rate DSTs into estate plans involves tax effi­cien­cy.

Defer­ral of Cap­i­tal Gains Through 1031 Exchanges

Many investors enter DST own­er­ship after com­plet­ing a Sec­tion 1031 exchange.

A §1031 exchange allows investors to defer cap­i­tal gains tax­es when sell­ing invest­ment prop­er­ty and rein­vest­ing pro­ceeds into qual­i­fy­ing replace­ment real estate.

Over time, investors may com­plete mul­ti­ple exchanges, con­tin­u­ous­ly defer­ring tax­es while main­tain­ing expo­sure to income-pro­duc­ing prop­er­ties.

DSTs allow investors to con­tin­ue this strat­e­gy while tran­si­tion­ing away from active man­age­ment respon­si­bil­i­ties.

Poten­tial Step-Up in Basis Ben­e­fits

A key com­po­nent of many DST estate plan­ning strate­gies is the poten­tial step-up in basis avail­able under cur­rent tax law. Gen­er­al­ly, when inher­it­ed prop­er­ty pass­es to ben­e­fi­cia­ries, the prop­er­ty’s tax basis is adjust­ed to its fair mar­ket val­ue as of the own­er’s date of death. This adjust­ment can sig­nif­i­cant­ly reduce or elim­i­nate cap­i­tal gains tax­es that would oth­er­wise be owed.

Con­sid­er the fol­low­ing exam­ple:

An investor pur­chas­es invest­ment real estate for $500,000 and even­tu­al­ly exchanges into DST invest­ments worth $2 mil­lion. If the investor sells dur­ing their life­time, sub­stan­tial cap­i­tal gains and depre­ci­a­tion recap­ture tax­es may apply. How­ev­er, if the DST inter­ests are inher­it­ed and qual­i­fy for a step-up in basis, heirs may receive a new basis equal to the fair mar­ket val­ue at the time of inher­i­tance. This can dra­mat­i­cal­ly improve after-tax out­comes for ben­e­fi­cia­ries and pre­serve more fam­i­ly wealth. Because tax laws can change, investors should always con­sult qual­i­fied tax and legal advi­sors regard­ing their spe­cif­ic cir­cum­stances.

Cre­at­ing a Fam­i­ly-Ori­ent­ed DST Strat­e­gy

Suc­cess­ful DST inher­i­tance plan­ning should be aligned with the broad­er goals of the fam­i­ly.

Under­stand­ing Ben­e­fi­cia­ry Objec­tives

Not all heirs have the same finan­cial pri­or­i­ties.

Some ben­e­fi­cia­ries may seek:

• Cur­rent income
• Long-term growth
• Liq­uid­i­ty
• Wealth preser­va­tion
• Diver­si­fi­ca­tion

Under­stand­ing these objec­tives can help investors select DST invest­ments that sup­port future fam­i­ly needs.

Con­sid­er Port­fo­lio Diver­si­fi­ca­tion

A diver­si­fied DST port­fo­lio may pro­vide expo­sure to mul­ti­ple prop­er­ty types, geo­graph­ic regions, and ten­ant sec­tors.

Diver­si­fi­ca­tion can poten­tial­ly reduce con­cen­tra­tion risk and cre­ate a more bal­anced inher­i­tance port­fo­lio.

Many investors allo­cate assets across:

• Mul­ti­fam­i­ly hous­ing
• Indus­tri­al prop­er­ties
• Health­care facil­i­ties
• Self-stor­age assets
• Essen­tial retail prop­er­ties

This diver­si­fi­ca­tion may con­tribute to more sta­ble income and long-term port­fo­lio resilience.

The Impor­tance of Prop­er Estate Doc­u­men­ta­tion

Even the most care­ful­ly designed invest­ment strat­e­gy requires appro­pri­ate legal doc­u­men­ta­tion.

Investors should work close­ly with estate plan­ning pro­fes­sion­als to ensure DST inter­ests are prop­er­ly inte­grat­ed into:

• Revo­ca­ble liv­ing trusts
• Irrev­o­ca­ble trusts
• Wills
• Fam­i­ly lim­it­ed part­ner­ships
• Estate tax plan­ning struc­tures

Prop­er doc­u­men­ta­tion can help ensure that own­er­ship trans­fers accord­ing to the investor’s wish­es while min­i­miz­ing delays and con­fu­sion.

Reg­u­lar reviews are also impor­tant because fam­i­ly sit­u­a­tions, tax laws, and invest­ment port­fo­lios may change over time.

Review­ing Income Dis­tri­b­u­tion Needs for Heirs

One often over­looked aspect of wealth trans­fer plan­ning involves cash flow.

DST invest­ments are fre­quent­ly select­ed because they may gen­er­ate reg­u­lar income dis­tri­b­u­tions from under­ly­ing prop­er­ty oper­a­tions.

Investors should eval­u­ate whether those pro­ject­ed dis­tri­b­u­tions align with the needs of future ben­e­fi­cia­ries.

Ques­tions to con­sid­er include:

• Will heirs rely on the income for liv­ing expens­es?
• Are ben­e­fi­cia­ries seek­ing growth or sta­bil­i­ty?
• Will dis­tri­b­u­tions be rein­vest­ed or spent?
• Does the port­fo­lio pro­vide ade­quate diver­si­fi­ca­tion?

By con­sid­er­ing these fac­tors dur­ing the plan­ning process, investors can cre­ate a more thought­ful and effec­tive inher­i­tance strat­e­gy.

Com­bin­ing Wealth Preser­va­tion and Sim­plic­i­ty

Per­haps the great­est advan­tage of pass­ing real estate with DSTs is the bal­ance between wealth preser­va­tion and sim­plic­i­ty.

DSTs allow investors to:

• Main­tain real estate expo­sure
• Poten­tial­ly gen­er­ate pas­sive income
• Reduce active man­age­ment respon­si­bil­i­ties
• Sim­pli­fy own­er­ship struc­tures
• Facil­i­tate wealth trans­fer to heirs
• Poten­tial­ly ben­e­fit from favor­able tax treat­ment

For many fam­i­lies, these ben­e­fits cre­ate a more effi­cient tran­si­tion between gen­er­a­tions while pre­serv­ing the long-term val­ue of real estate invest­ments.

Con­clu­sion

Pass­ing real estate wealth to heirs can be one of the most impor­tant finan­cial deci­sions an investor makes. Tra­di­tion­al real estate own­er­ship often cre­ates chal­lenges relat­ed to man­age­ment, divi­sion of assets, and tax con­se­quences. Delaware Statu­to­ry Trusts offer a poten­tial solu­tion by trans­form­ing active­ly man­aged prop­er­ties into pro­fes­sion­al­ly man­aged frac­tion­al own­er­ship inter­ests.

Through thought­ful DST inher­i­tance plan­ning, investors may sim­pli­fy estate admin­is­tra­tion, pro­vide ongo­ing income oppor­tu­ni­ties for ben­e­fi­cia­ries, and posi­tion assets for poten­tial­ly favor­able tax treat­ment. When inte­grat­ed into a com­pre­hen­sive estate plan, DSTs can serve as an effec­tive tool for pre­serv­ing fam­i­ly wealth while min­i­miz­ing stress and com­plex­i­ty for future gen­er­a­tions.

For investors seek­ing a prac­ti­cal approach to DST wealth trans­fer, care­ful plan­ning with qual­i­fied legal, tax, and finan­cial pro­fes­sion­als can help ensure that real estate assets con­tin­ue ben­e­fit­ing heirs for years to come.

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.