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Passing Real Estate on to Your Heirs

Delaware Statutory Trusts in Estate Planning

As a real estate investment owner, there are many issues to consider when passing an asset on to the next generation. Navigating the family dynamic can be a cumbersome task and is often overlooked.

Considerations

  • Tax liability (step-up in basis).
  • Ownership transfer to multiple heirs.
  • Will my heirs be in agreement?

It is possible the real estate you acquired for income will appreciate in value from the time you buy it until you pass it on to your beneficiaries. Passing your real estate assets on to your heirs at a step-up in basis is something to consider for estate planning.

A step-up in basis is the readjustment of the value of an appreciated asset for tax purposes upon inheritance.
Swap Until you Drop

Timing of when a beneficiary inherits property is critical, property transferred before death receives a "carryover basis" which means it carries the original cost basis over to the heirs. This is not ideal, as there may be a tax liability. Passing real estate assets at death can result in a step-up in basis, how is this done with the use of a Delaware Statutory Trust (DST)?

Highly appreciated property can be 1031 exchanged into DSTs for tax and estate planning purposes.

Objectives of the DST include:

  • Occupied, stabilized, institutional income-producing real estate.
  • Passive real estate ownership.
  • Stabilized predictable cash flow (potentially for retirement).

DST beneficial ownership can be passed on to multiple heirs at a step-up in basis at the time of death, simplifying the transfer of wealth.

Scenarios to consider:

Example:

  • Single asset passed to 3 beneficiaries.
    Issues: conflict of decision making.
  • Multiple assets passed to 3 beneficiaries.
    Issues: difficult to divide equal value.
  • DST is utilized.
    Solution: beneficiaries receive specified beneficial ownership in trust making their own independent decisions.

By investing in a Delaware statutory trust, or DST, heirs may receive any distributions paid from the investments. Upon the sale of the property owned by the DST, each heir can choose what to do with their inherited portion. It is possible that one heir continues to exchange the investment, while another can sell and receive cash proceeds.