How Heirs Inherit DST Interests: Estate Planning, Step-Up in Basis, and Family Wealth Transfer
Real estate has created more family wealth than almost any other asset class. However, that wealth is often reduced at the point of inheritance when heirs discover that decades of deferred capital gains and depreciation recapture can trigger major tax liabilities, sometimes forcing distressed property sales.
Cerulli Associates projects that nearly $124 trillion in assets will transfer across generations through 2048. For accredited investors holding Delaware Statutory Trust (DST) interests, the estate planning decisions made today can significantly impact how much wealth ultimately survives the transfer process.
DST Investment Advisors works with accredited investors navigating these challenges because the structure of a Delaware Statutory Trust changes the inheritance equation in ways many investors and families have not fully explored.
This guide explains:
- How DST interests transfer to heirs
- How the step-up in basis under IRC Section 1014 works
- Why DSTs offer estate planning advantages over directly held real estate
- Important updates under the One Big Beautiful Bill Act of 2025
The Numbers Behind the Great Wealth Transfer
The scale of generational wealth transfer currently taking place in the United States is unprecedented.
Baby boomers currently hold approximately 51.8% of total U.S. wealth, representing nearly $78.55 trillion in assets. A substantial portion of that wealth is tied to real estate, including apartment communities, net lease properties, commercial buildings, and income-producing investment assets that have appreciated significantly over time.
Key Wealth Transfer Statistics
- $124 trillion projected wealth transfer through 2048
(Cerulli Associates) - $297.8 billion inherited by 91 heirs in 2025 alone, up 36% year-over-year
(UBS Billionaire Ambitions Report, 2025) - $15 million per-person federal estate tax exemption effective January 1, 2026
(One Big Beautiful Bill Act, 2025) - $45.6 trillion projected Millennial inheritance over the next 25 years
(Glenmede / Cerulli, 2025)
For families with substantial real estate holdings, the challenge is not simply transferring assets. The real challenge is transferring them efficiently without creating unnecessary tax burdens that reduce long-term family wealth.
IRC Section 1014: Understanding the Step-Up in Basis
Under Internal Revenue Code Section 1014(a)(1), when an asset transfers to an heir after the owner’s death, the heir’s cost basis is “stepped up” to the asset’s fair market value on the date of death.
The impact can be significant because any capital gains accumulated during the original owner’s lifetime are effectively eliminated for the inheriting beneficiary.
Example
An investor purchases a multifamily property in 1995 for $800,000.
By 2026, the property is worth $4.2 million.
If the owner sold the property during their lifetime, they would potentially owe taxes on:
- $3.4 million in capital appreciation
- Depreciation recapture
Instead, the property passes to their children through inheritance.
The children receive a new cost basis of $4.2 million. If they immediately sell the property at that value, they generally owe no capital gains tax on the appreciation accumulated during the original owner’s lifetime.
This step-up in basis is one of the most powerful tax advantages available in estate planning, and it applies to DST interests just as it does to directly held real estate.
New Estate Tax Rules Under the One Big Beautiful Bill Act (2025)
A major estate planning development occurred with the passage of the One Big Beautiful Bill Act, signed into law on July 4, 2025.
The legislation permanently increased the federal estate and gift tax exemption to:
- $15 million per individual
- $30 million for married couples
The changes become effective January 1, 2026, and the exemption will be indexed for inflation beginning in 2027.
Previously, the scheduled expiration of the Tax Cuts and Jobs Act (TCJA) would have reduced the exemption to approximately $7 million.
For many DST investors, the increased exemption removes federal estate tax as a primary concern and further strengthens the value of the step-up in basis strategy.
However, state-level estate taxes still vary significantly and should be reviewed carefully with qualified estate planning counsel.
How DST Interests Transfer at Death
A Delaware Statutory Trust is a separate legal entity established under Delaware law.
Investors own fractional beneficial interests in the trust rather than direct title to the real estate itself. This distinction simplifies the inheritance process compared to directly owned property or tenancy-in-common (TIC) structures.
When a DST investor passes away:
- The beneficial interest transfers to named beneficiaries
- The transfer occurs through the estate or revocable living trust
- No deed transfer of the underlying real estate is required
- The DST sponsor updates ownership records administratively
This streamlined process avoids many complications associated with inherited real estate, including deed transfers, co-owner negotiations, and property management disputes.
The heir’s stepped-up basis is determined using the fair market value of the DST interest on the date of death. DST sponsors or asset managers typically provide valuation estimates for estate planning and tax reporting purposes.
Why DSTs Can Be Advantageous for Multi-Generational Wealth Transfer
Directly held investment properties often create complications when transferred to multiple heirs.
Common challenges include:
- Disagreements over whether to sell or hold
- Unequal liquidity needs among beneficiaries
- Ongoing management responsibilities
- Complex title transfers
- Potential co-ownership disputes
DST ownership addresses many of these issues structurally.
Comparison: Direct Ownership vs. DST Interests
Direct Property Ownership
- Complex division among heirs
- Potential partition disputes
- Active management responsibilities
- Deed transfers required
- Higher risk of family conflict
DST Beneficial Interests
- Fractional interests can be divided precisely
- Passive ownership structure
- Streamlined administrative transfer process
- Professional management continues uninterrupted
- Reduced risk of co-ownership disputes
The flexibility of DST structures also allows investors to customize succession planning more efficiently.
For example, an investor holding interests in multiple DST offerings may allocate separate DSTs to different heirs or divide interests proportionally according to estate planning objectives.
The “Swap Till You Drop” Strategy
Many real estate investors use a long-term tax strategy commonly referred to as “swap till you drop.”
The strategy involves:
- Using repeated 1031 exchanges throughout life
- Continuously deferring capital gains taxes
- Reinvesting into replacement properties, including DSTs
- Passing the final DST interest to heirs at death
- Receiving a full step-up in basis under IRC Section 1014
The result is that decades of deferred capital gains taxes and depreciation recapture may be permanently eliminated for heirs.
This approach can help investors:
- Preserve more equity
- Generate passive retirement income
- Simplify estate administration
- Transfer tax-efficient assets to future generations
What Heirs Should Know After Inheriting a DST Interest
Heirs inheriting DST interests should understand several important administrative and tax considerations.
Important Steps After Inheritance
Obtain a Date-of-Death Valuation
The executor or successor trustee should request a valuation from the DST sponsor establishing the fair market value of the interest at the time of death.
Retain Documentation
The valuation documentation should be preserved throughout ownership and for at least three years following any future sale.
Understand Liquidity Options
Depending on the DST offering, heirs may have options such as:
- Holding the DST interest for passive income
- Selling the interest
- Pursuing a 721 UPREIT conversion, if available
Continue Receiving Passive Income
DSTs remain professionally managed after inheritance, meaning heirs do not assume landlord duties or property management responsibilities.
Frequently Asked Questions
Do heirs receive a step-up on the basis of inherited DST interests?
Yes. Under IRC Section 1014(a)(1), inherited DST interests receive a stepped-up basis equal to the fair market value of the interest on the date of death.
How are DST interests divided among multiple heirs?
DST interests are fractional investments and can be divided proportionally among beneficiaries according to estate planning instructions outlined in a will or trust.
What changed with the 2025 estate tax law?
The One Big Beautiful Bill Act permanently increased the federal estate and gift tax exemption to $15 million per individual and $30 million per married couple effective January 1, 2026.
Do heirs need to manage the property after inheritance?
No. DST investments remain fully passive, and professional management continues regardless of ownership changes.
Can heirs complete a 1031 exchange after inheriting a DST interest?
Potentially, yes. An heir may be able to complete a 1031 exchange after selling an inherited DST interest, depending on the structure and timing involved. Professional tax guidance is strongly recommended.
What documentation establishes the stepped-up basis?
The estate executor or trustee should obtain a date-of-death valuation from the DST sponsor or asset manager.
What is the “swap till you drop” strategy?
It is a long-term tax strategy involving repeated 1031 exchanges during the investor’s lifetime, followed by a full step-up in basis when the DST interest transfers to heirs at death.
Working with Advisors Who Understand the Full Picture
Effective succession planning for DST investors requires coordination between:
- Estate planning attorneys
- CPAs
- Investment advisors
Key considerations include:
- How DST interests are titled
- Total estate size
- Applicable estate tax exposure
- Long-term family objectives
- Heirs’ future plans for inherited interests
At DST Investment Advisors, our fiduciary approach to passive real estate investing includes guidance on generational wealth transfer and succession planning.
We help accredited investors understand not only the current tax-deferral and income benefits of DST ownership, but also how those investments may support long-term family wealth preservation strategies.
Ready to Build a Wealth Transfer Strategy Around Your DST Holdings?
Schedule a complimentary consultation with our team to explore how DST interests may support efficient, tax-advantaged generational wealth transfer planning.
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