What is a Delaware Statutory Trust?
As early as the 16th century, the concept of property being held in trust by one person for the benefit of another was part of the English Common Law. Since then, the common law trust has been utilized by lawyers, primarily for the benefit of extremely wealthy people who have cultivated a realm of trusts in order to pass ownership of assets from generation to generation with the least amount of taxation and the greatest degree of security in the process.
A Delaware Statutory Trust, often called a DST, is a statutory entity created by filing a Certificate of Trust with the Delaware Division of Corporations. Governed by Delaware law, a DST can be used to hold, manage, or invest in property for the benefit of its beneficial owners. While DSTs are often associated with real estate investments and 1031 exchanges, they can also be used for other asset-holding and investment arrangements.
What is a Delaware Statutory Trust?
A Delaware Statutory Trust, often abbreviated as DST, is a legal entity used to hold, manage, invest, or administer property for the benefit of its beneficial owners. The trust is governed by a private document commonly called the trust agreement, which sets the rights, duties, and responsibilities of the trustees and beneficial owners. This statutory entity is created by filing a Certificate of Trust with the Delaware Division of Corporations and governed by Chapter 38, Part V, Title 12 of the Annotated Delaware Code (See 12 §§ 3801 through 3862).
Because of its flexibility, a Delaware Statutory Trust can be used for a variety of purposes, including real estate ownership, investment structures, asset-holding arrangements, and certain financing transactions.
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Trustees and Beneficial Owners
Generally, a Delaware statutory trust has two types of participants—trustees and beneficial owners:
- A trustee holds the legal title to the assets of the trust but is obligated to follow the terms of the trust agreement in managing these assets. Depending on the structure of the trust, the trustees may have broad authority or very limited responsibilities.
- A beneficial owner holds equitable ownership and they, too, are governed by the terms of the trust agreement as to their ability to manage, control, or utilize the assets. They may receive income or other benefits from the trust property, depending on the terms of the trust agreement. However, beneficial owners do not necessarily control the day-to-day management of the trust.
Trustees and beneficial owners cannot be held liable for their good faith reliance on provisions of the trust agreement (See 12 §3802). At least one trustee must be a resident of Delaware, which can be satisfied by naming a Delaware trust company or by forming a Delaware corporation to act as the trustee (See 12 §3807).
The Delaware Statutory Trust Agreement
The Delaware Statutory Trust Agreement is the private governing document of the trust. Similar to an operating agreement for an LLC, the trust agreement explains how the Delaware Statutory Trust will be managed. Delaware does not require the trust agreement to be filed (unlike several other states), and therefore the parties to the statutory trust and their relative duties and responsibilities can remain confidential of the parties involved (See 12 §3810).
The trust agreement is a definitive document, and Delaware law provides that the Delaware Court of Chancery will enforce its terms upon the trustees and beneficial owners (See 12 §3804).
The trust agreement is a contract and therefore enforceable. It may create various classes or groups of trustees and/or beneficial owners (See 12 §3806), and it determines the nature of distributions of the trust's assets for the benefit of the beneficial owners (See 12 §3805).
Trustees may have very broad powers or very limited powers, per the trust agreement, and they may delegate their duties and authority to officers, committees, agents, or others named in the trust agreement (See 12 §3806).
Why Form a Delaware Statutory Trust?
A Delaware Statutory Trust may be used when the parties want a flexible legal structure for holding, managing, or investing in property. Rather than placing ownership and management directly in the hands of each individual investor or owner, the DST can hold the assets while the trust agreement defines how those assets are managed.
Delaware Statutory Trusts are commonly used in real estate investment structures, including certain 1031 exchange transactions. In those situations, investors may be able to hold beneficial interests in real estate owned by the trust, often without personally managing the property.
How Is a Delaware Statutory Trust Taxed?
A Delaware Statutory Trust may have different tax treatment depending on how it is structured and the type of assets or business activities involved. However, there is no Franchise Tax and no Delaware income tax on statutory trusts formed in Delaware.
Under the United States' Internal Revenue Code, a business trust may be treated as a grantor trust, a partnership, or an association, just as a corporation, depending on the wording of the trust agreement. With check-the-box regulations in place, it is possible for a statutory trust to elect which type of tax structure under which it wishes to operate. Further, non-resident alien beneficiaries of self-settled trusts are not required to pay any income tax to or file any tax returns with the United States. See 26 CFR Section 1.6012-1(b)(2).
A Delaware statutory trust may qualify as a REMIC (Real Estate Management Investment Contract), a REIT (Real Estate Investment Trust), or a Regulated Investment Company, such as a mutual fund, under the IRC and receive preferential tax treatment. Mutual funds set up using a Delaware statutory trust may not be required to hold annual shareholder meetings or allow shareholder votes on any matters.
Benefits of a Delaware Statutory Trust
A Delaware Statutory Trust can offer several benefits for investors and asset holders. Here are a few of the most cited reasons to form one:
- More security than "common" trusts
- Flexibility in determining trustee and beneficial owner classes, as well as specific rights and responsibilities of the various parties included in the trust
- Privacy of individuals due to the trust agreement not having to be filed with the state of Delaware
- No Franchise Tax or Delaware income tax
Delaware Statutory Trusts vs. Common Law Trusts
Delaware is one of the few states in America to have a statutory trust law. Most states still rely upon common law trusts.
Common law trusts, though often still used, have many outdated rules, which can create uncertainty about a number of legal aspects of the trust. Delaware has undertaken the task of modernizing the common law and creating an effective and judicially secure form of entity. A Delaware Statutory Trust gives the trust a specific statutory framework and allows the parties to rely heavily on the written trust agreement.
In simple terms, a common law trust is rooted in traditional trust law, while a Delaware Statutory Trust is designed to provide flexibility and legal certainty for modern asset-holding and investment structures.
Delaware Statutory Trusts vs. LLCs
Delaware Statutory Trusts and Delaware LLCs are both flexible business entities, but they are typically used for different purposes. A Delaware Statutory Trust is more commonly used for investment and asset-holding. The participants are usually trustees and beneficial owners, and the trust is governed by a trust agreement. Meanwhile, a Delaware LLC is often a better choice for active businesses and startups.
Both entities offer flexibility, but the best choice depends on the purpose of the entity and the needs of the parties involved.
Is a Statutory Trust Right for You?
A Delaware Statutory Trust can be a useful option for certain investors, but is not necessarily the right fit for every situation. For many small businesses, forming a Delaware LLC or corporation may be better suited for everyday operations.
If you’d like to form a business of your own, you’re in the right place. Harvard Business Services, Inc. is here to support you throughout the formation process via email or live chat. Contact us today to get started!
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There are 14 comments left for What is a Delaware Statutory Trust?
Tommy..Rush said: Sunday, March 13, 2022I will like to have DST who can I hire a lawyer to do this for me please call me at.803-600-7332.Thanks
HBS Staff replied: Monday, March 14, 2022Hi Tommy,
To setup a Delaware Statutory Trust it will need to be done through an Attorney. We are glad you found our article helpful.
Milton E. Jefcoat said: Monday, March 30, 2020I am anew Realtor and I am learning about the DSTI believe it is a useful tool in My business We deal mostly in land .thank You
Rick Humphreys said: Saturday, August 17, 2019Is it MANDATORY for a Delaware Statutory Trust to have a Federal Tax ID number?
HBS Staff replied: Monday, August 19, 2019Rick, this question would be better suited for an accountant, as we are unable to give you a definite answer or offer any accounting advice. Feel free to contact us by phone, email or live chat if you have additional questions.
Christof Welsch said: Monday, August 5, 2019Is it necessary for a Delaware Trust to have an US-EIN?
HBS Staff replied: Tuesday, August 6, 2019Generally, a Delaware Statutory Trust should have an US-EIN. When it comes to trusts, obtaining a Federal Tax ID often makes it easier to file taxes, manage assets and conduct various financial transactions.
Libby Gordon said: Friday, July 26, 2019I am from Melbourne, Australia but I lived in Texas for many years in a marriage situation. I would like to have more information on a Delaware Trust document that is operative now. Do you know of an experienced lawyer who could answer some questions with remuneration for me please? I would be most grateful.
HBS Staff replied: Monday, July 29, 2019Libby, unfortunately we are not able to recommend a lawyer to you. Sorry we can't be of more assistance.