You’ve probably seen an article about “The Great Wealth Transfer,” and you’ve surely heard the old adage, “Don’t look a gift horse in the mouth.” But many of those on the receiving end of the transfer have some reservations. We’ll discuss the possible downside of this transfer of wealth and explore solutions.
What is The Great Wealth Transfer?
The Great Wealth Transfer is the biggest transfer of assets in history. An estimated $84.4 trillion will pass from older generations to younger ones. The breakdown looks like this:
- Baby Boomers (those born between 1946 and 1964) are expected to transfer $53 trillion, and the Silent Generation (1928 and 1945) will pass down $15.8 trillion.
- The recipients are largely Gen X (1965-1980), Millennials (1981-1996), and Gen Z (1997-2012).
- The transfer will take place over the next 20 years.
- $72 trillion will go to heirs, and the rest will go to charity.
- The transfer will happen via wills, trusts, and gifts.
- About 24% of this wealth is real estate, primary residences, vacation homes, rental properties, and commercial assets.
What’s the Problem?
Not all recipients of this largesse are thrilled. Even the Gen Xers who made Nirvana’s “Whatever, nevermind “ refrain the motto for their generation are rattled.
If you have Boomer parents, you might understand. All of those years, the Baby Boomers were acquiring assets, they were acquiring stuff, too. Lots of it. CDs, cassette tapes, DVDs, VHS tapes, weird little tchotchkes, doznes of coffee mugs, every National Geographic ever printed, the complete Franklin Mint Royal Wedding Commemorative Decorative Plates Collection, their parents and other family members’ stuff, all the stuff you left behind when you moved out, and all the stuff your siblings left behind when they moved out.
When your parents are gone, all of that stuff is yours to deal with. Add to that, many of you are part of the “Sandwich Generation.” Those doing some level of care for elderly parents, in-laws, or other family members while also taking care of minor children, and in most cases, still working too.
While it may be overwhelming, all of this inherited “stuff” can be dispatched pretty quickly, especially if you’re not the sentimental type. And many of the assets, about 55%, are liquid or easily convertible, like cash and stocks.
It’s the rest that’s a problem. The other 45% is not as liquid, including the 24% that is real estate, as cited earlier. You can’t just call Marie Kondo in to get rid of your parents’ many real estate holdings. They are now your responsibility and your problem. A blessing and a curse, as they say.
You Didn’t Sign Up For This
You’re busy. Your kids are still at home. You’re still working. You may be caring for family members. The last thing you want to do is become a landlord.
A Landlord’s Work Never Ends
Being a landlord involves a lot more than kicking back and letting that rental income roll in.
1. Time and Stress
Managing rental properties is a hands-on job. Landlords must handle:
- Tenant issues (late payments, complaints, evictions)
- Maintenance and repairs (leaky roofs, broken appliances, emergencies)
- Legal compliance (fair housing laws, lease agreements, local regulations)
For someone with a full-time career or limited real estate experience, this can quickly become a major source of stress.
2. Financial Risks
Even profitable properties come with risks:
- Vacancy losses (rental income stops when a unit is empty)
- Unexpected expenses (major repairs, property damage)
- Liability exposure (tenant lawsuits, injuries on the property)
Unlike stocks or bonds, real estate is illiquid—selling quickly in a crisis isn’t always an option.
3. Emotional Attachment vs. Practical Realities
Many heirs feel sentimental about their parents’ property but struggle with the reality of managing it. Keeping a family home as a rental might seem honorable, but if it becomes a financial drain, selling could be the wiser choice.
The Problem with Selling Outright: Capital Gains Taxes
If you sell inherited property, you could face a hefty capital gains tax bill. While inherited real estate receives a step-up in basis (meaning taxes are calculated from the property’s value at the time of inheritance, not the original purchase price), any appreciation after that point is taxable.
For example:
- Your parents bought a property for $200,000.
- At their passing, it was worth $500,000 (your new tax basis).
- If you sell later for $600,000, you owe capital gains tax on the $100,000 profit.
A 1031 exchange allows you to defer these taxes by reinvesting the proceeds into a like-kind property. But what if you don’t want to be a landlord? That’s where a DST comes in.
The 1031 Exchange DST Solution
A Delaware Statutory Trust (DST) is a passive real estate investment structure that qualifies for 1031 exchanges. Instead of buying another rental property, you invest in a professionally managed trust that owns large-scale real estate (apartment complexes, medical offices, industrial warehouses, etc.).
Benefits of a DST for Inherited Property Owners
1. No Landlord Responsibilities
- A DST sponsor handles all management (leasing, maintenance, taxes).
- You receive passive income without dealing with tenants or repairs.
2. Diversification
- Instead of owning one property, you invest in a portfolio of institutional-grade assets.
- Reduces risk compared to single-property ownership.
3. Tax Deferral
- A 1031 exchange into a DST defers capital gains taxes, preserving more wealth for reinvestment.
4. Estate Planning Advantages
- DST interests can be passed to heirs with a step-up in basis, potentially eliminating capital gains taxes upon inheritance.
How It Works
- Sell the inherited property and identify a DST within 45 days.
- Reinvest the proceeds into the DST within 180 days.
- Receive monthly or quarterly distributions from the trust’s rental income.
- Defer capital gains taxes indefinitely (or until you sell the DST interest without another exchange).
Who Is a Good Fit for a DST?
- Heirs who want passive income without property management.
- Investors nearing retirement who prefer hands-off investments.
- Those looking to diversify beyond a single rental property.
Potential Drawbacks to Consider
- Limited liquidity (DSTs are long-term investments).
- Fees (sponsors charge management fees).
- No control over property decisions.
Final Thoughts
Inheriting real estate doesn’t mean you’re obligated to become a landlord. If the idea of managing properties sounds unappealing, a 1031 exchange into a DST offers a smart exit strategy—letting you defer taxes, generate passive income, and avoid the headaches of direct ownership.
Before making a decision, consult a 1031 exchange specialist to ensure this strategy aligns with your long-term goals. For many heirs, it’s the perfect balance of wealth preservation and freedom.
An Elevated View
Here at Perch Wealth, we specialize in 1031 exchange replacement properties and Delaware Statutory Trusts (DSTs). Contact us today to learn more about how you can leverage this powerful tax deferral strategy to diversify your portfolio and preserve your hard-earned wealth.
