Asset protection is often cited as a benefit of Delaware Statutory Trusts (DSTs), but the term is frequently misunderstood.
DSTs do not create immunity from liability. They do, however, introduce structural features that can limit an investor’s exposure when compared to direct ownership. Understanding what those protections are, and what they are not, is essential before relying on a DST for risk mitigation.
Asset protection in a DST comes from structure, not from avoidance.
How Ownership Structure Affects Liability
In a DST, investors hold beneficial interests in a trust rather than direct ownership of real estate.
This distinction matters. Legal claims related to the property are generally directed at the trust and its assets, not at individual investors. Investors are not personally responsible for property-level obligations beyond their invested capital.
This separation does not eliminate risk. It limits its scope.
Non-Recourse Debt and Investor Exposure
Most DST properties are financed with non-recourse debt.
Non-recourse financing means lenders typically have claims against the property itself, not against the personal assets of investors. This structure can materially reduce downside exposure in distressed scenarios.
Debt terms still matter. Loan covenants, carve-outs, and guarantees should be reviewed carefully, even in non-recourse structures.
Operational Control and Liability Isolation
DST investors are passive by design. They do not participate in management or operational decisions.
This lack of control also limits liability. Investors are not exposed to claims arising from day-to-day operations, tenant disputes, or property management decisions.
Passive ownership reduces involvement risk, but it also reduces flexibility.
What Asset Protection Does Not Mean
DSTs do not shield investors from all risk.
They do not protect against:
Asset protection refers to legal exposure, not investment outcomes.
The Role of Sponsor and Structure
The degree of asset protection depends on how the DST is structured and managed.
Proper entity formation, insurance coverage, and adherence to trust formalities all matter. Sponsor discipline plays a central role in maintaining these protections.
Asset protection works only when the structure is respected throughout the life of the investment.
Conclusion
DSTs can provide meaningful asset protection through structural separation, non-recourse financing, and passive ownership. These features can reduce personal liability compared to direct ownership.
They do not eliminate risk. They define its boundaries.
A structured planning discussion can help clarify whether a DST’s asset protection characteristics align with an investor’s broader risk management strategy.
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