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.
For nearly 400 years, 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.
The Delaware Statutory Trust (DST), however, is a statutory entity, 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).
Statutory Trust vs. Common Trust
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Common law trusts, though often still used, have many outdated rules, which can create uncertainty about a number of legal aspects of the trust.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.
How Does A Delaware Statutory Trust Work?
The Statutory Trust Act, similar to the Delaware LLC law, relies on the legal principle of freedom of contract (See 12 § 3823(b)). This grants the power to determine the rights and responsibilities of the various parties to the drafters of the governing instrument, usually referred to as the trust agreement (See 12 §3801(f)). The trust agreement is the private, governing document of the entity.
The Delaware Statutory Trust Agreement
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 the secret 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).
Delaware Statutory Trust Requirements
There is no requirement for the trust agreement to be drafted in English, and no requirement to submit the document to any authority in Delaware for approval.
There is no restriction as to the specific location in which the trust agreement must be kept, and no specific format or phraseology that must be taken into account. In fact, the drafters possess complete authority to devise the relationship of the trustee and the beneficial owners however they desire.
For example, the voting rights of the trustee or the beneficial owners may be expanded, limited or eliminated with respect to any matter relating to the trust, such as investment decisions or distribution decisions (See 12 §3806).
This provides greater flexibility than common law trusts and most alternative forms of business organizations, which often have mandatory provisions on such matters as voting rights and dividend distribution.
The Delaware Statutory Trust Act (DSTA) states the trust is a separate legal entity and no creditor of a beneficial owner has any right to obtain possession of any of the property belonging to the trust (See 12 §3805(b)).
The DSTA also states that a beneficial owner has no specific interest in the property of the trust (see 12 §3805(c), and the beneficial owner may not terminate the trust except in accordance with the private trust agreement (See 12 §3803).
Thus, other beneficial owners of the trust are protected against any beneficial owner filing for bankruptcy or divorce, or undergoing any major life change.
Beneficial owners can have the same limitations on personal liability for the entity as shareholders of a Delaware corporation (See 12 §3803); that is, beneficial owners may participate in management, or effectively control the statutory trust by directing the trustees, without taking on any personal liability (See 12 §3806(a)).
Beneficial owners may transfer their interests to others, unless prohibited or limited by the trust agreement. Transferability will be permitted by the courts unless specifically limited in the trust agreement (See 12 §3805(d)).
Trustees vs. Beneficial Owners
Generally, the entity 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.
- 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.
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).
How Is A Delaware Statutory Trust Taxed: Delaware Statutory Trust Tax Reporting
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.
Delaware Statutory Trusts for Like-Kind Exchanges Under IRC Section 1031
Generally, when you sell a business or property and have a financial gain, you typically have to pay taxes on those gains. But with a 1031 Exchange, you can often defer the tax on those gains if they are reinvested in a similar property within 180-days, hence the "Like-Kind" moniker.
Typically, for taxes, Delaware statutory trusts can be considered direct property ownership, which in this case means they often qualify for 1031 exchanges. Delaware statutory trusts are not only eligible for a 1031 exchange from a relinquished property, they also tend to solve with a few days, which is well within the deadline for these types of exchanges.
Delaware statutory trusts are often utilized for financing commercial airliners. The trust holds the title to the plane, which is managed administratively by a Delaware trust company. The airline is the beneficial owner, which uses and maintains the plane while paying a lender, who makes a return on the investment.
This type of arrangement is sometimes called a leveraged lease; this way, none of the three possess responsibility for the plane itself, should an accident occur. This type of entity illustrates how much flexibility is permitted while still protecting the parties under a statute which respects their trust agreement and the good faith management decisions of the parties involved.
Benefits of a Delaware Statutory Trust
To summarize, here are some of the benefits of forming a Delaware Statutory Trust:
- 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
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
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There are 14 comments left for What is a Delaware Statutory Trust?
WH said: Thursday, April 12, 2018WHAT ARE THE TERM LIMITS TO A DST? OR, ARE THERE TIME CONSTRAINTS TO HAVE ACCESS TO THE FUNDS?
HBS Staff replied: Monday, April 16, 2018For specifics about DSTs, it is best to consult an attorney. Thanks for reading our blog.
STANLEY SCHEINMAN said: Monday, October 30, 2017If a DST is a "legal entity" why isnit generallythe view that the Trustee should be a lawsuit party and not the Trust?
HBS Staff replied: Wednesday, November 1, 2017This is a great question for a law professor or a lawyer. We are not able to answer it, unfortunately. You could try posting it on Quora to find the answer.
Adam barakat said: Sunday, October 29, 2017can you please advise if you can set up a trust. Thank you
HBS Staff replied: Monday, October 30, 2017We can help you set up a Delaware Statutory Trust, but only if you are physically located in Delaware or have a principal place of business here in Delaware. Otherwise, we recommend you consult an attorney.
Christine Dehnert said: Wednesday, September 6, 2017Great article. Do the beneficial owners of the DST have to file non-resident state returns for the different states the properties are located?
HBS Staff replied: Wednesday, September 6, 2017Unfortunately, we can't answer such a specific tax-related question like that. We suggest you contact a lawyer or CPA in order to get the best answer to that good question.
Heinz Vollenweider said: Friday, September 1, 2017Excellent article, many thanks! Can you provide referrals of Registering Agents or other fiduciary entities who provide this service on a professional basis?
HBS Staff replied: Tuesday, September 5, 2017Unfortunately, we cannot. Your best bet is to inquire with an attorney or a CPA with ties to or knowledge of Delaware's corporate and/or banking laws.