Are you thinking of incorporating a trust in your business? If so, you may want to consider the benefits of a statutory trust under the Delaware Statutory Trust Act.
There are many benefits to forming a trust. Yet, as with most things in law — as well as business and finance — there are some limitations, too.
Learn more about what a Delaware statutory trust is. Understand the benefits and limitations of forming a statutory trust under this act.
Benefits of the Delaware Statutory Trust Act
One of the major benefits of this act is the flexibility it offers in the management and distribution of assets. Unlike traditional trusts, DSTs allow for many trustees. It has a wide range of investment options.
Additionally, the DSTA offers protection against personal liability. This allows trustees to mitigate financial risk. Read more benefits below.
Delaware Statutory Trust Act is used in real estate investment, allowing investors to defer capital gains taxes when they sell their interest in the trust. This tax deferral can be a significant advantage for those looking to reinvest their profits without immediate tax liability.
Investors in a DST enjoy limited liability protection. This means their personal assets are typically shielded from the trust’s liabilities, reducing personal risk. This feature is similar to that of a traditional corporation or limited liability company (LLC).
DSTs are pass-through entities for tax purposes. This means that income and losses pass through to the individual investors, who report these on their personal tax returns. Pass-through taxation can be advantageous for avoiding double taxation, a common issue in traditional C-corporations.
Limitations of the Delaware Statutory Trust Act
One of the main limitations is the requirement for a trust agreement, which can be costly and time-consuming to create. Additionally, the act does not provide the same level of protection for creditors as a traditional corporation.
Furthermore, the lack of uniformity in state laws and the potential for conflict in inter-state operations can pose challenges for businesses utilizing the Delaware Statutory Trust Act. Read more limitations below.
Lack of Control
Investors in a DST have limited control over the trust’s management and decision-making. The trustee handles these matters, which can be a drawback for those who want to participate in the operation of the trust’s assets.
DSTs are relatively illiquid investments. Unlike publicly traded assets, they can be challenging to sell on short notice, making them less suitable for investors who require quick access to their capital.
DSTs have a finite lifespan, 30-35 years. At the end of this period, the trust must either sell its assets or undergo a 1031 exchange to defer capital gains taxes. This limitation can be a drawback for investors seeking long-term ownership of real estate.
Consider the Delaware Statutory Trust Act
The Delaware Statutory Trust Act offers many benefits for businesses looking to organize as a trust in the state of Delaware. However, it is crucial to understand its limitations and consult a legal professional for guidance. Consider the advantages, potential risks and legal considerations to make the best decision for your company.
Contact a trusted attorney today to learn more and explore the possibilities for your business.
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