DST vs. Common Trusts: Quick Comparison

DST vs. Common Trusts: Quick Comparison

Revised: June 08, 2024

Understanding the distinction between Delaware Statutory Trusts (DSTs) and Common Trusts is crucial, representing a fusion of historical legal concepts and contemporary statutory innovation. This comparison highlights the foundational differences, operational mechanics, and strategic benefits associated with each trust type.

Historical Foundations

The concept of a trust, where one party holds property for another's benefit, originated in 16th-century English Common Law. This foundation has facilitated seamless asset transfer across generations, minimizing tax burdens and ensuring security. Trusts have historically provided a reliable framework for estate planning, asset protection, and wealth management.

Common Trusts

Common Trusts, entrenched in this historical tradition, adhere to common law principles evolving through court decisions. These trusts lack specific statutory backing, relying instead on legal precedents, which may sometimes lag behind modern complexities. Common Trusts operate within the bounds of judicial interpretation, offering flexibility but sometimes lacking the precision and clarity of statutory structures.

  • Legal Framework: Common Trusts are governed by a series of court decisions that have shaped their current form. This reliance on precedent means that the application of the law can vary depending on jurisdiction and case law evolution.
  • Flexibility: They offer significant flexibility, allowing trustees to make decisions based on the unique circumstances of each case. This adaptability is beneficial but can also lead to uncertainty due to varying interpretations of the law.
  • Historical Significance: The historical roots of Common Trusts provide a well-established framework, trusted by many for centuries. However, this same history can sometimes make them less adaptable to contemporary legal and financial landscapes.

Delaware Statutory Trusts (DSTs)

Contrarily, the Delaware Statutory Trust (DST) is a modern construct under Delaware's statutory law. Formed by filing a Certificate of Trust, DSTs operate under clear guidelines outlined in Delaware's legal code. This statutory basis offers certainty and legal security, unlike common law trusts reliant on judicial interpretations.

  • Statutory Basis: DSTs are created under specific statutory provisions, providing a clear and precise legal framework. This statutory clarity ensures that all parties understand their rights and obligations from the outset.
  • Adaptability: A notable feature of DSTs is their adaptability and robust legal protections for trustees and beneficiaries. Unlike common law trusts, which may struggle with outdated rules, DSTs can swiftly adapt to legal and financial shifts, making them attractive for modern investment and estate planning.
  • Professional Management: DSTs often involve professional management, providing expertise in handling the assets within the trust. This professional oversight ensures that the trust is managed efficiently and effectively, maximizing returns and minimizing risks.

Operational Mechanics

The operational mechanics of DSTs and Common Trusts further delineate their suitability for different scenarios.

Common Trusts
  • Management: Common Trusts are typically managed by individual trustees, often family members or close associates of the settlor. This personal touch can be beneficial for small, family-run trusts.
  • Flexibility: Trustees have the flexibility to make decisions based on changing circumstances, provided they adhere to fiduciary duties and the trust's terms.
  • Complexity: The lack of statutory guidance can lead to complexity, requiring trustees to navigate a maze of legal precedents and interpretations.
Delaware Statutory Trusts
  • Professional Management: DST-held properties are managed by professional trustees and real estate managers, bringing expertise and efficiency to the table. This alleviates investors from direct ownership burdens, such as maintenance, tenant relations, and regulatory compliance.
  • Legal Certainty: The clear statutory guidelines governing DSTs provide a high degree of legal certainty, reducing the risk of disputes and misunderstandings.
  • Investor Protections: DSTs offer enhanced legal protections for investors, ensuring that their interests are safeguarded under Delaware law.

Strategic Benefits

The strategic benefits of DSTs and Common Trusts cater to different investment goals and risk profiles.

Common Trusts
  • Personalized Management: The flexibility of Common Trusts allows for personalized management tailored to the settlor's specific wishes.
  • Long-standing Tradition: The historical foundation of Common Trusts offers a sense of stability and continuity, valued by many long-term investors.
Delaware Statutory Trusts
  • Tax Advantages: DSTs present significant tax advantages, notably through participation in 1031 exchanges, allowing investors to defer capital gains taxes by reinvesting proceeds into DSTs. This strategy fosters substantial tax savings and facilitates seamless capital transition between properties, fostering growth potential. Additionally, investors benefit from depreciation deductions, reducing taxable income and enhancing after-tax returns.
  • Diversification and Passive Income: Investing in DSTs provides an opportunity for diversification, crucial for spreading risk across various properties. DSTs offer investors a passive income stream derived from rental income, an attractive feature for those seeking consistent earnings without active management responsibilities. Income distribution among investors occurs according to their beneficial interests, ensuring predictable revenue streams. This stability is especially valuable during market volatility, where real estate assets offer security and reliable income.
  • Legal and Financial Innovation: Delaware's proactive approach to trust law, exemplified by the DST, underscores the state's commitment to innovative and secure asset management structures, attracting individuals and entities seeking sophisticated solutions.

Final Thoughts

Choosing between a DST and a Common Trust should consider the unique needs, goals, and circumstances of the settlor and beneficiaries. The decision often pivots on factors like asset nature, desired control, tax considerations, and jurisdictional legal environment. In practice, opting for a DST over a Common Trust often hinges on the need for statutory clarity, operational flexibility, and Delaware's specific advantages, including enhanced asset protection and tax mitigation strategies.

The transition from Common Law Trusts to statutory entities like the DST reflects the legal system's adaptation to societal changes. As trust professionals, our role is to navigate this terrain, harnessing the strengths of traditional and modern structures to serve our clients' interests. The DST, with its clarity, flexibility, and security, embodies a significant advancement in contemporary asset management and estate planning.

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