Some worries never make it into the estate documents. One I hear more often than you might expect goes something like this: “If we leave the kids the rental properties, will they sell them and spend the money?”
It is an uncomfortable thing to say out loud about people you love. It is also a legitimate planning concern, and pretending otherwise does not serve anyone. Parents who spent decades building something want it to keep providing for their family, not to become a one-time payout.
In a companion post, I explained how a 1031 exchange into a Delaware statutory trust can let you sell a long-held rental, defer the capital gains tax, and retire from being a landlord. This post covers the part of that strategy people rarely lead with: 1031 exchange estate planning, and why the structure of a DST quietly can implement a strategy that matters for your family after you are gone.
The tax side: deferred can become eliminated
When you complete a 1031 exchange, the capital gains tax is deferred, not forgiven. The deferred gain follows the investment, and if you eventually sell without exchanging again, the bill comes due.
Here is where estate planning changes the picture. Under current law, when you die, your heirs receive a step-up in cost basis. The value of your DST interest resets to its value at your death.
That means the exchange strategy has a natural endpoint. You can keep exchanging from one investment to the next for as long as you live, deferring the tax at each step, and if you still hold the investment at death, the deferred tax largely disappears for your family. Decades of appreciation pass to your children without the capital gains bill you spent years avoiding.
This is a significant reason the strategy appeals to people in their sixties and seventies specifically. The younger investor asks how to get money out of a DST. The retiree doing legacy planning often has no intention of getting it out at all.
The structure side: a built-in waiting period
Now to the worry from the opening of this post.
A DST interest is not like a brokerage account or an inherited house. It cannot be sold on a whim. The trust holds real property (storage units, senior housing, etc.) that typically runs six to eight years before refinancing or sale.
For your own liquidity, that is the strategy’s biggest limitation, and I make sure that’s factored into your plan. For a parent worried about a fast liquidation, the same feature reads very differently. An heir who inherits a DST interest inherits an income stream with a built-in waiting period, not a lump sum. The monthly distributions continue, when declared, providing steady support. What the heir cannot do is call someone on Tuesday and cash out by Friday.
Nobody had to write a restriction into a trust document or have an awkward conversation to make that true, at least for as long as the trust holds the property. It is simply how the investment works, and it buys the family years, but not a plan. If what you actually want is control over how and when your heirs receive money long after the DST sells, you need to make an appointment with your estate attorney.
There is a second structural benefit worth naming. Your heirs inherit professionally managed real estate, not a rental house that one of them now has to manage, insure, and maintain, possibly from three states away. Anyone who has watched siblings inherit a property together knows how much friction that removes.
When the trust does sell, each heir chooses
Eventually the DST’s property is sold. At that point, something useful happens: each heir decides independently what to do with their share.
One child can complete their own 1031 exchange and keep the deferral going for another cycle. Another can take the cash, and because of the step-up in basis at your death, the tax on that cash may be modest. Nobody has to agree with their siblings. Nobody is forced to co-own anything.
Compare that to leaving three children one rental house. Someone wants to keep it, someone needs the money, someone lives far away and just wants it resolved. The DST structure dissolves that conflict before it starts.
The honest caveats
A DST is a useful estate planning complement. It is not an estate plan, and it has limits worth stating plainly:
- The illiquidity binds you too. During the 6-8 years, you cannot access this equity on demand. We can resolve this problem through a 721 Exchange to be further discussed in a companion post.
- It is not a control instrument. A trust drafted by an estate attorney can direct how and when heirs receive assets with real precision. A DST only slows liquidation until the property sells. If control is the primary goal, you need the attorney, not just the investment.
- Current law is not permanent law. The step-up in basis has been debated in Congress before and could change. Plans should be revisited as law evolves, which is one reason your plan gets reviewed every year.
- Oregon has its own estate tax, and the step-up doesn’t erase it. Oregon’s exemption is $1 million, and a stepped-up DST interest still counts toward your gross estate.
- Your documents still matter. How the DST interest is titled, and how it coordinates with your will, trust, and beneficiary designations are important. This is a conversation for your advisor and your estate attorney together, and coordinating with estate attorneys and CPAs is a standard part of how I work with clients.
What this looks like at Thistle Wealth
Legacy conversations are some of the most important ones I have with clients, and they are rarely about the numbers alone. They are about what you want your years of work to do for the people you love, and what you are afraid it might do instead.
When a DST fits, it usually fits as one piece of a larger plan: your income needs first, your tax picture second, your family’s situation third. And because Thistle Wealth is fee-only, I receive no commission on DST investments, so the only question on the table is whether the strategy serves your plan and your family.
If you are holding investment property and wondering what it should become, for your retirement and for your kids, start with the short form on my contact page. It gives me a sense of what you are hoping for before we talk, so the conversation starts where it matters.
DST investments are private placement securities available only to accredited investors, offered exclusively by private placement memorandum. They are illiquid, distributions are not guaranteed, and it is possible to lose principal. A 1031 exchange involves strict rules and deadlines, and a particular investment may not qualify for tax-deferred treatment. Tax treatment, including the step-up in basis, reflects current law and may change. Consult your tax advisor and estate attorney about your specific situation.
This article is for general educational purposes only and is not personalized financial, tax, legal, or investment advice. Your situation is unique and may call for different strategies than those described here. Please consult with a qualified professional who can provide guidance tailored to your specific circumstances. All investing involves risk, including potential loss of principal.
