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How 1031 DSTs Can Simplify Estate and Transition Planning

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We frequently encounter older investors who have built up a substantial portfolio of rental properties and discovered that their kids or other beneficiaries have no interest in managing real estate. They are then often faced with tough estate planning decisions including 1) whether to cash out their portfolio and pay taxes to avoid passing on the burdens of property management to their heirs, or 2) leave the properties to their kids and hope that they will be able to deal with the issues after the parents have passed.

We also meet with kids who have inherited real estate and find themselves hopelessly deadlocked with each other on what to do with the properties – often creating serious long-running disputes that can ruin life-long relationships. Despite the potential improvements to net worth that occur when real estate is passed on to heirs, the added burdens can generate significant problems and headaches.

Delaware Statutory Trust (DST) investments can provide a good solution to relieve the anxiety and problems that can occur when rental properties are transferred to heirs.

When an investor sells a rental property and reinvests the proceeds into a DST property, they are obtaining a beneficial interest along with other investors in an institutional quality property that is managed by a trustee. The trustee is also responsible for any loan that may exist on the property. So, the typical burdens associated with property management and loan responsibilities are effectively shifted from the investor to the trustee (or an affiliate).

Heirs who may be otherwise averse to owning rental real estate due to added responsibilities may be relieved to learn that they can own income-producing real estate in a DST property structure and have very little additional work to perform other than some added tax reporting responsibilities at year end.  

Improving options for heirs. Once traditional income properties are sold and exchanged into DSTs, the DST interests can be allocated to potential heirs. When the DST interests are sold, each heir can choose to go their own way and either cash out and pay taxes or further defer taxes through another 1031 Exchange into new DSTs or other like-kind rental properties. 

The decision to sell the DST is generally made by the trustee thereby avoiding the bickering that often occurs between siblings regarding sales matters. Importantly, each heir can elect to either do another 1031 Exchange or not. DST investors are exempt from the “same-investor” provisions associated with traditional ownership structures such as LLCs and limited partnerships which require that the same ownership structure of the relinquished property must be maintained for the acquired property.  

Partnership transfers. The transfer of income properties to partnerships can carry similar added risks that can also be partially mitigated with DSTs. Partners can also disagree as to how properties should be managed and ultimately sold. Income property owners who have concerns in transferring their interests to partnerships might consider options to first convert their rental properties into DSTs. The added responsibilities of the DST’s trustee may reduce disagreements between partners and provide for greater harmony and alignment between the partners.

Charitable donations. Finally, we have many investors who plan on donating at least a portion of their income properties to charities. While this can be a good strategy, investors should determine if their selected charities have interest and capabilities to manage the types of real estate assets that they may be donating. Most charities have little interest in taking on the responsibilities and liabilities associated with income properties. They would rather receive hassle-free assets that could be liquidated in the future with very little effort on their part. DSTs may therefore, be far preferable as a charitable donation.

For further information and insights on how DSTs may solve some of your estate planning issues, please contact us. Over our 15+ year history, we have worked with over 5,000 investors and have seen a broad range of estate planning solutions related to income properties. We would be pleased to share our success stories with you and also acquaint you with potential pitfalls.

 


BIO : Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing.Paul Getty’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions.Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.

Prior to founding First Guardian Group/FGG1031,Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.

Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council.Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC .

Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is author of The 12 Magic Slides ,Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors , and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.



Disclaimer
There is no guarantee that any strategy will be successful or achieve investment objectives. All real estate investments have the potential to lose value during the life of the 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 be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.

This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, FGG1031, First Guardian Group, LightPath Capital, Inc., and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.

Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect.  The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All financed real estate investments have a potential for foreclosure. Delaware Statutory Trust (DST) investments are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments. Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions. Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.

IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of LightPath Capital, Inc. Member FINRA / SIPC. FGG1031, First Guardian Group, and LightPath Capital, Inc. are separate entities.

DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.