Delaware statutory trust
Encyclopedia
A Delaware statutory trust (DST) is a legally recognized trust
that is set up for the purpose of business, but not necessarily in the State of Delaware. It may also be referred to as an Unincorporated Business Trust or UBO.
Delaware statutory trusts are formed as private governing agreements under which either a) property (real, tangible, and intangible) is held, managed, administered, invested and/or operated, or b) business or professional activities for profit are carried on by a trustee
(s) for the benefit of the trustor
who is entitled to a beneficial interest in the trust property.
began recognizing statutory trusts. No legal recognition of statutory trusts existed until the passage of the Delaware Statutory Trust Act (DSTA), 12 Del. C. 3801 et. Seq., in 1988. Under The Act, developed on the premise of trust law
, statutory trusts were now recognized as their own legal entity, separate from their trustee(s), offering freedom from the corporate law template. Within the tradition of trust law, freedom of contract allows the trustee(s) to structure their entity in a way that is most beneficial to the relationship of all parties and their expertise, while offering liability protection similar to that of a Limited liability company
or Partnership
. Since the year 2000, Delaware statutory trusts have increasingly been used as a form of tax deferral, asset protection, and balance sheet advantages in real estate
, securitization
, mezzanine financing, Real estate investment trusts (REITs), and mutual funds. Massachusetts, another state that has trust law, refers to its legal entity as a Massachusetts business trust
. Most states, however, still rely on Common Law to oversee the trusts within their jurisdiction.
These holdings of the Federal Government offered a clearer notion that Delaware statutory trusts are legal entities, separate from their trustee(s), offering them limited liability. In addition, Delaware statutory trusts were shown to be considered a trust for federal tax purposes, making them a pass through entity that mitigates taxation for their trustee(s). The second holding offers the opinion that real property, being held under a Delaware statutory trust, is eligible to use a 1031 exchange, without the recognition of gain or loss, as long as the following seven restrictions are met:
Many say that the features of a Delaware statutory trust read like a holiday wish list when it comes to business entities. These features include:
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
that is set up for the purpose of business, but not necessarily in the State of Delaware. It may also be referred to as an Unincorporated Business Trust or UBO.
Delaware statutory trusts are formed as private governing agreements under which either a) property (real, tangible, and intangible) is held, managed, administered, invested and/or operated, or b) business or professional activities for profit are carried on by a trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
(s) for the benefit of the trustor
Trustor
* In law a trustor is a person who settles property on express trust for the benefit of beneficiaries. See settlor.* In social sciences and in information technology, trustor is an entity that trusts the other entity...
who is entitled to a beneficial interest in the trust property.
History
The concept for business trusts, especially those that involve the holding of property, dates back as early as 16th century English Common Law. In Delaware, it was not until 1947 that Common LawCommon law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
began recognizing statutory trusts. No legal recognition of statutory trusts existed until the passage of the Delaware Statutory Trust Act (DSTA), 12 Del. C. 3801 et. Seq., in 1988. Under The Act, developed on the premise of trust law
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
, statutory trusts were now recognized as their own legal entity, separate from their trustee(s), offering freedom from the corporate law template. Within the tradition of trust law, freedom of contract allows the trustee(s) to structure their entity in a way that is most beneficial to the relationship of all parties and their expertise, while offering liability protection similar to that of a Limited liability company
Limited liability company
A limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
or Partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
. Since the year 2000, Delaware statutory trusts have increasingly been used as a form of tax deferral, asset protection, and balance sheet advantages in real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
, securitization
Securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
, mezzanine financing, Real estate investment trusts (REITs), and mutual funds. Massachusetts, another state that has trust law, refers to its legal entity as a Massachusetts business trust
Massachusetts business trust
A Massachusetts business trust is a legal trust set up for the purposes of business, but not necessarily one that is operated in The Commonwealth of Massachusetts. They may also be referred to as an unincorporated business organization or UBO. Business trusts may be established under the laws of...
. Most states, however, still rely on Common Law to oversee the trusts within their jurisdiction.
Formation requirements
The formation of a Delaware statutory trust is relatively simple and inexpensive, when compared to that of the more complex filings of other entity types. To form a statutory trust, a private trust agreement must be developed by all involved parties to ensure that individual interests are protected. The private trust agreement need not be shown to any official of the State. Once the agreement is completed, a Certificate of Trust can be obtained from the Delaware Division of Corporations and completed. The signatures of the trustee(s) involved are then required, followed by submission of the forms to the Division of Corporations, along with a one-time $200 processing fee. If the statutory trust is, or will become, a registered investment company, it must maintain a registered agent and a registered office within the State of Delaware. If no desire for the statutory trust to be an investment company exists, the only remaining requirement is that it must have at least one trustee who resides in, or has a principal place of business within the State of Delaware.Federal/1031 Exchange
On August 16, 2004 Internal Revenue Bulletin 2004-33 was published in reference to Rev. Rul. 2004-86. This involved a Delaware Statutory Trust that came before the Internal Revenue Service (IRS) and Treasury Department, who offered a ruling on the following two issues:- "[H]ow is a Delaware statutory trust, described in Del. Code Ann. title 12, §§ 3801 - 3824, classified for federal tax purposes?"
- "The Delaware statutory trust described above is an investment trust, under § 301.7701-4(c), that will be classified as a trust for federal tax purposes."
- "[M]ay a taxpayer exchange real property for an interest in a Delaware statutory trust without recognition of gain or loss under § 1031 of the Internal Revenue Code?"
- "A taxpayer may exchange real property for an interest in the Delaware statutory trust described above without recognition of gain or loss under § 1031, if the other requirements of § 1031 are satisfied."
These holdings of the Federal Government offered a clearer notion that Delaware statutory trusts are legal entities, separate from their trustee(s), offering them limited liability. In addition, Delaware statutory trusts were shown to be considered a trust for federal tax purposes, making them a pass through entity that mitigates taxation for their trustee(s). The second holding offers the opinion that real property, being held under a Delaware statutory trust, is eligible to use a 1031 exchange, without the recognition of gain or loss, as long as the following seven restrictions are met:
- Once the offering is closed, there can be no future contributions to the DST by either current or new beneficiaries.
- The trustee cannot renegotiate the terms of the existing loans and cannot borrow any new funds from any party, unless a loan default exists as a result of a tenant bankruptcy or insolvency.
- The trustee cannot reinvest the proceeds from the sale of its real estate.
- The trustee is limited to making capital expenditures with respect to the property for normal repair and maintenance, minor nonstructural capital improvements, and those required by law.
- Any reserves or cash held between distribution dates can only be invested in short-term debt obligations.
- All cash, other than necessary reserves, must be distributed on a current basis.
- The trustee cannot enter into new leases, or renegotiate the current leases unless there is a need due to a tenant bankruptcy or insolvency.
Local
As an entity that was created within the boundaries of Delaware and is written into the Delaware state charter, Title 12 Chapter 38, there is no question as to where the state stands on the backing of the Delaware statutory trust. Limited liability is offered for DSTs, affording each trustee the benefit of personal asset protection. DSTs can be structured as a pass through entity, so that any income will go straight to each individual trustee’s Form 1040 and state’s tax returns, thus avoiding income tax at the entity level.Many say that the features of a Delaware statutory trust read like a holiday wish list when it comes to business entities. These features include:
- liability protection for the trustee(s)
- asset protection for the beneficial owner
- delegation of management
- low minimum investment requirements
- cash investors may complete a 1031 exchange upon sale
- one-time registration
- no need for annual meetings
- no franchise tax
- no limit on the number of investors
- availability of indemnification
- recognition of separate series