The history of the DST traces back to the sixteenth century, where the concept of a business trust for property ownership was established under English common law. English landowners utilized trusts for over four centuries, empowering family attorneys with fiduciary powers to hold property titles and ensure smooth asset transfer from one generation to the next. This practice not only minimized taxation but also provided a high level of security.
In feudal England, the King’s Chapel took on the responsibility of issuing official documents, including royal writs that initiated common law proceedings. Over time, this evolved into the Court of the Chancery, which served as a judicial institution offering remedies due to the limitations and rigidity of common law courts. The Court of the Chancery held its sessions in the Great Hall attached to the houses of parliament in Westminster.
While the English Chancellor relied on common law, they also incorporated the simplicity and adaptability of ecclesiastical courts. This allowed them to make decisions based on common sense and conscience, enabling flexibility in cases where strict application of common law could lead to adversity or inequality. In contrast, English common law lacked this flexibility as it relied solely on precedent. The statutory law developed under the Court of the Chancery introduced a more compassionate and conscientious approach to matters of land, property, and estate.
In 1792, when the American State of Delaware was formed, the Second Delaware Constitution (Article VI) separated equity jurisdiction from common law and entrusted it to the Chancellor and the Courts of Chancery throughout the state. However, it wasn’t until 1947 that the common law of Delaware began recognizing the statutory trust. Eventually, in 1988, the Delaware Statutory Trust Act (originally known as the Delaware Business Trust Act) was enacted into law.
The Delaware State Bar Association’s committee, comprising primarily corporate finance lawyers, drafted the Act with the aim of restructuring the legal framework to enhance the practicality of business trusts in contemporary financing transactions. By replacing prejudiced concepts from common law trusts, the Act included new provisions that facilitated negotiations and contracts between trustees and trustors concerning liabilities and trust management.
The Delaware statutory trust’s framework is unparalleled in terms of its flexibility, predictability, and permissiveness. It offers significant advantages to syndicated DSTs, particularly when it comes to holding real estate under the Business Trust Act compared to common law trusts. For instance, the Act allows for the limitation of powers typically granted to trustees under common law. This limitation is crucial to fulfill the IRS Revenue Ruling requirement, preventing the trustee from acting as a deemed general partner and jeopardizing eligibility for IRC § 1031 tax-deferred exchanges. Additionally, Delaware trust law provides comprehensive statutory provisions regarding creditor rights in trust property and trustee liability to third parties. This enables trustees in real estate DSTs to sign non-recourse carve-outs, ensuring truly non-recourse debt for DST investors (assuming the subject property is leveraged).
Moreover, the Delaware Court of Chancery is renowned for its expertise in resolving complex corporate law disputes and is equally skilled in handling common law trust disagreements. It possesses jurisdiction over DST interests, the rights and responsibilities of trustees and beneficial owners, and the interpretation of contractual agreements. These attributes make Delaware an ideal jurisdiction for forming common law trusts for syndicated real estate offerings and other commercial transactions. Since 2000, Delaware statutory trusts have been widely utilized for thousands of common law business trusts, as well as for replacing other business entities in activities such as real estate holding, mutual funds, mezzanine financing, real estate investment trusts (REITs), and securitizations.
Delaware case law establishes DST as the preferred vehicle for 1031 exchange investments. The flexible design of a DST operating within the Delaware Statutory Trust Act allows investors to shape and adapt the trust’s framework to meet the requirements of an IRS private letter ruling. This flexibility provides investors with a trust structure that grants direct real estate interests without the need to create a business entity, thus qualifying for preferential tax treatment under § 1031 of the Internal Revenue Code, as formalized in Revenue Ruling 2004-86.