Wyoming Statutory Trust vs. Delaware Statutory Trust

Asset protection isn't easy, especially if you are a California-based real estate investor. The good news for you is that LLCs aren't your only option. A Wyoming Statutory Trust, for example.

Using LLCs is a last resort for the California investor when looking for comprehensive asset protection. The $800 per year franchise taxes probably make a non-starter for you as you seek to compartmentalize every asset you own.

Does this sound like you?

The truth is that you don't need LLCs for protection in California. Also, you can use trusts that function just like traditional LLCs and Series LLCs. That's important as a real estate investor because these trusts provide:

To protect real estate investors like yourself, you might consider reliable and proven options, like the Wyoming Statutory Trust and the Delaware Statutory Trust.

Read on so you can evaluate the Wyoming vs. Delaware Statutory Trust, then decide which one is right for you.

Wyoming Statutory Trust: A Unique Tool for Savvy Investors

The Wyoming Statutory Trust and Missouri Statutory Trust function like LLCs, but they are trusts.

If you use the Wyoming Statutory trust for protection, you can:

Since you create these trusts with anonymity through the use of a nominee trustee, you can anonymously own both:

We recommend using an attorney to create the Wyoming Statutory Trust. Your attorney should also serve as the nominee trustee to ensure your anonymity. Your attorney protects you and your trust with attorney/client privilege as a trustee.

Valuable Evaluation of Pros and Cons

The Wyoming Trust may be the right trust for you if you have fewer properties or have no plans to grow.

The upsides to the Wyoming Statutory Trust include:

Wyoming privacy laws do not require the registration of trust agreements. That means privacy about you, your family, assets, and your estate plan.

You should be aware of the limitations of the Wyoming Statutory Trust. The main issue with the Wyoming trust is the complexity it adds to scalability. It may turn out that this trust proves too complex and expensive to provide the proper protection for you.

The first is management. Management of each trust requires:

You would have a multitude of entities that may each require their tax reporting and filing. The amount of reporting on the entities can be an operational nightmare as you grow.

The second limitation deals with scalability. As you scale, you will be financially responsible for:

What follows is more information to help you decide on the merits of the Wyoming Statutory Trust vs. Delaware Statutory Trust.

Delaware Statutory Trust: Proven Asset Protection

The Delaware Statutory Trust functions like a Series LLC, but it is a trust. That means the Delaware Trust might be for you if you have multiple properties to protect and you have plans to grow your business.

The Delaware Trust allows you to:

An attorney is acting as nominee trustee and masks the actual ownership.

Promising Security from Delaware's Trust

The upside to the Delaware Statutory Trust includes:

The trust allows you to scale freely without additional operational complexity or tax filings.

Everything in your life should stay precisely the same as if you managed everything through a single entity that you wholly owned.

The primary downside is that the Delaware Statutory Trust cannot hold any active businesses such as typical commercial businesses, and you cannot "flip" your investments.

The limit on commercial businesses and the inability to "flip" properties may not fit your specific situation. Still, the Delaware Trust is a solid option in many investing cases.

We know the decision is an important one for you to make. Read our "Step-By-Step Statutory Trust Beginner's Guide" for more information.

The Bottom Line: Wyoming Statutory Trust vs. Delaware Statutory Trust

The Wyoming Statutory Trust is an excellent option if you have a single asset and don't plan on acquiring more.

If you are an investor with intentions to scale, then the additional upfront costs of a Delaware Statutory Trust will pay dividends in the long run.

You want to protect your assets and ensure your financial freedom. Let us help you! Register for FREE Royal Investing Group Mentoring on Wednesdays at 12:30 pm EST to learn more.

How To Create A California LLC (And Why You May Want To Reconsider)

It doesn't matter if you're just starting out or have been investing in real estate for a while; protecting your assets is vital. If you live in California, you might be considering creating an LLC in California to protect your investments. However, not only can the process of forming a California LLC be cumbersome and confusing, but other business structures may actually provide you with better asset protection in California than an LLC.

Creating A California LLC: A Play-By-Play

Before we have a chat about your other options, let’s walk through the steps for forming an LLC in California, in case you decide it’s the right choice for you.

Step One: Register With The Secretary Of State

To create your LLC, you’ll need to register with the California Secretary of State. First, you’ll need to choose a unique name for your business and submit a Name Reservation Request Form to the Secretary of State. This submission will reserve your name of choice for 60 days.

Under California law, the LLC name must include one of the following LLC identifiers: 

Before the 60 days is up, you’ll need to file Articles of Organization (Form LLC-1) with the Secretary of State to formally register your business. 

Your Articles of Organization must include the following information:

Step Two: File A Statement of Information

Within 90 days of filing your Articles of Incorporation, you’ll also need to file a Statement of Information (Form LLC-12) with the California Secretary of State. You’ll also need to file an updated Statement of Information every two years to keep your business active.

Your Statement of Information must include the following information:

creating an llc in california: golden gate bridge

Step Three: Register With The Franchise Tax Board

On top of the taxes you’ll have to pay to Uncle Sam, you’ll also need to pay state taxes to California. To pay your California taxes, you’ll have to register with the Franchise Tax Board. To register to pay your taxes online, call the Franchise Tax Board at 1-800-353-9032 (or 1-916-845-2829 if you’re outside the U.S.) to begin the online registration process. If you prefer, you can also file your taxes by mail with Form 568.

Step Four: Register With The EDD and Request An EIN

If your LLC will have employees, you’ll need to register with the California Employment Development Department (EDD) and request an Employer Identification Number (EIN), also known as a federal tax ID, from the IRS. 

To hire legally in California, you need to register for a payroll tax account number on EDD’s website. You’ll also need to request an EIN from the IRS using Form SS-4, which you can submit online, to set up payroll and pay federal payroll taxes. Even if you don’t intend to hire employees, you may want to apply for an EIN anyway, as it can make it easier for your business to open a bank account and apply for business permits.

Step Five: Apply For A Seller’s Permit

Finally, if you intend to sell or lease any goods, products, or tangible property subject to sales tax through your LLC, you’ll need to register online for a free seller’s permit from the California Department of Tax and Fee Administration. Under California law, you need to obtain a seller’s permit and pay sales tax on items that you sell.

Other Important Steps

California law requires your LLC to have an Operating Agreement that outlines:

While California allows you to have either a verbal or written Operating Agreement, it’s strongly advised that you create a formal written Operating Agreement for your LLC to help preserve its limited liability status. Operating Agreements are internal business documents, so while you do need to have one, you don’t have to file it anywhere.

Similarly, opening a separate bank account for your business is not required, but it is an essential step for separating your business assets from your personal assets. If you commingle your assets, you may risk losing your limited liability status if your business is ever sued. 

Disadvantages Of A California LLC

The LLC has been around for a long time and is one of the most popular forms of business entity in the United States. And it's easy to see why. But there are some disadvantages to this form of ownership, too, particularly in the state of California.

A significant disadvantage of a California LLC is the high costs of starting and operating an LLC in the state. In fact, LLCs in California must pay an annual $800 tax to the Franchise Tax Board, plus additional fees if the LLC’s total income is more than $250K. 

California has also been particularly reluctant to accommodate LLCs from other states and Series LLC. If you want to start a California Series LLC, be prepared to pay $800 each year for each series. 

Alternatives To A California LLC

Other business structures can provide Golden State real estate investors with better protection than a California LLC and save your hard-earned cash at the same time.

Delaware Statutory Trusts

If you’re wondering how to avoid California’s franchise tax, the Delaware Statutory Trust (DST) may be your best option. As a trust structure created in Delaware, assets held in a DST are not subject to the $800 annual franchise tax in California. You can even use a series structure with a DST to enjoy the benefits of a series LLC without the exorbitant taxes. 

Land Trusts

Up until recently, the answer to “does California recognize land trusts?” was no. Recently, however, California began to recognize land trusts, allowing real estate investors to protect their investment properties without having to pay oppressive franchise taxes. A California land trust can also be used to hide property ownership, avoid probate, and create additional protections against California’s community property laws for married investors. You may also want to consider a title-holding land trust, commonly referred to as an Illinois Land Trust. 

California Business Trusts

IRA business trusts are an excellent alternative to a California self-directed IRA LLC, as business trusts aren’t subject to franchise taxes. As with an LLC, you maintain complete control over your assets and investments without having to pay costly custodian fees. However, it’s important to note that a California business trust doesn’t offer the asset protection you would get from an LLC. 

The DST 1031 Exchange: What Smart Real Estate Investors Know

The Delaware Statutory Trust (DST) is a bona fide legal workhorse.  For the right investors and circumstances, it’s often an excellent tool that preserves passive investment income, prevents lawsuits, and has special tax benefits for Californians. It can pull double duty for asset protection and estate planning, but that’s hardly all. 

The DST can bring even greater rewards to DST 1031 exchange real estate investors.

Real estate investors in California use the Delaware Statutory Trust  to dodge franchise taxes, escaping the state’s harsh regulations and Draconian tax enforcement agency.

But all investors (regardless of where they live) can exploit the DST for its 1031 Exchange compatibility, flexible asset protection and estate planning benefits. The DST 1031 Exchange also gives you a high degree of control over the structure’s protected assets and beneficiaries.

Consider this your quick guide to understanding how DSTs work with 1031s and your crash course into the wild, flexible, world of the Delaware Statutory Trust.

2021 UPDATE: The Biden administration has proposed the 1031 Exchange for real estate investors with incomes above $400,000. The policy proposal, entitled “The Biden Plan for Mobilizing American Talent and Heart to Create a 21st Century Caregiving and Education Workforce,” states that it will roll back "unproductive and unequal tax breaks for real estate investors with incomes over $400,000.” Experts believe the 1031 exchange program is on the chopping block for high-income earners because Biden campaign officials stated that they will take aim at “so-called like kind exchanges.”

Understanding the Essentials of the DST 1031 Exchange

So, while you can still take advantage, if you want to brush up on the basics of this structure fast, you should check out our Delaware Statutory Trust FAQs to learn about the basics of the structure. It’s the quickest way to get a comprehensive understanding, but we’ll touch on why asset protection attorneys even use these darn things in the first place.

For the moment, we’re confining this conversation to DSTs in the context of 1031 exchanges (but we’ll get to other benefits, we promise!).

All you need to know that these revocable trusts can designate many beneficiaries, a feature we'll illustrate with a whimsical example shortly. Theoretically, since you’re a beneficiary, you can hide among them for extra anonymity around your asset protection measures. But that’s far from the only perk of the DST for 1031 investors.

Delaware Statutory Trusts Go With 1031 Exchange Like Peas and Carrots

Despite their many uses, most online info about the Delaware Statutory Trust relates to estate planning or 1031 features, often vaguely. These are great structures for managing and defending 1031 investments. Why these basic concepts have become intertwined in the real estate world:

No tool is perfect though. We’ve written about the DST’s drawbacks too. It’s up to you to decide what’s best after gathering the vital information.

Can I Have More Than One Beneficiary for My Delaware Statutory Trust?

The beneficiary is anyone receiving funds from the trust structure. Not only can you have more than one, you can have dozens, even hundreds, if you so desire. So if you’re using your DST to secure the 101 homes you’ve selected for your 101 pet dachshunds, each dachshund could have its own share.

[Note: Your dachshunds would need HUMAN legal reps/guardians to express their interests--sadly they’re property under current law. But if dachshunds gain full legal rights of humans, and they may just be cunning enough to pull such a feat off, each one could own his/her DST shares independently. But you could do this same move with 101 children if you had the time, funds, and inclination to set them all up for life. Parents frequently leverage land trust appreciation to pay for expenses including college tuition for children, and you can too.]

We use this ridiculous example because you can easily imagine pulling in many JV partners, family members, and others who care about your business into your DST network as beneficiaries.

But we’re guessing you aren’t making customized estate plans by the dozen, so yes, you can have up to several hundred human beneficiaries according to the state who designed the trust. You will be one of them. So can any partners, children, or people in life you wish to do business with or support using your DST’s earnings.

Perks of Managing Beneficiaries with a Delaware Statutory Trust

Both you and your beneficiaries can benefit from the DST easily. You stay in control, pick who gets what with precision, and can modify your plans at any time.

#1 Easy to Change Your Beneficiaries

Adding a new beneficiary is easy when you’ve got a DST. Removing one is a separate process, but no harder. Let’s go over some of the best benefits of using a DST to pay out certain people as beneficiaries. 

#2 Divide DST Property Easily with Beneficial Interests

DSTs offer both a high degree of control over and tremendous flexibility for handling beneficiaries., thank the concept of beneficial interest. You can think of it as a way of issuing “shares” from your DST to reflect a person’s interest in a property, or even the whole trust, is.

The concept is known as beneficial interest in the trust. You can even have them issued for minors (though regrettably, not dachshunds as of July 2019). Parents often do to offset college or living expenses of the child beyond age 18, and you can sell/give fractions of a property to others under the same reasoning.

See? Even silly examples are important. The accuracy and control you’ll have over how your beneficial interests are distributed is unique to the DST. It’s a form of co-owing that doesn’t put you at risk and is strictly, clearly defined. Whether Johnny gets 1/16th of a single DST property or the entire trust, you’re the decider.

#3 Asset Protection Benefits of DSTs

The Delaware Statutory Trust’s compartmentalization ability makes it a fantastic choice for investors with many assets, anyone with multiple investments, or those hoping to grow rapidly. This isn’t a beginner’s tool, Californians excluded. This privately filed legally-binding agreement can theoretically protect assets in a way identical to the Delaware Series LLC.  DSTs do this by simply holding title to property for you, getting it out your name.

In fact, many of our Californian clients demand series LLCs until we convince them how much better the DST is. If you’re considering asset protection, this is by far one of the strongest individual structures available. It need not be excessively complicated, but the DST will require effective legal counsel to pull off if you want its protections guaranteed. This is particularly true for REIS or anyone wanting to try out the 1031/DST combo. Not every attorney is equally skilled, but a real estate lawyer with corporate chops or asset protection pro can handle this job easily. Pick yours wisely, because you’ll come to rely on their advice.

Estate Planning with DSTs: Create a Dynasty Trust That is Truly Immortal 

If you love the idea of your business outliving you, you can make it happen with the DST. While other tools and trusts can help estate planning for REIs, the DST comes with everything you need for a business that can outlive you. And not only that, you get to stage-direct exactly how the whole affair goes down.

When you grab that handy attorney, they can explain the full estate planning potentials in your particular situation. But most investors love the DST’s ability to become a legacy business that doesn’t rely on any one person. Your real estate empire could exist in its own right, simply passing through the hands of different “managers” as generations click by. If this idea appeals to you, take a good look at your estate plan, your options, and use our checklist to know if it’s time to update the plan.

If you proceed with buying new entities or assets, these should always be included in your estate plan. Real estate investors can use tools to account for everything, but with good asset protection, you’ll want to plan ahead for business succession or liquidation. You get to call the shots with your DST 1031, no matter how you use it.

How Real Estate Syndicators Protect Assets & Avoid Taxes

Once upon a time, only the richest and most connected investors could participate in real estate syndications. 

Today, real estate crowdfunding platforms, lower investment minimums and a wealth of project information available online all mean that real estate syndications are within reach for many investors.

But here’s the bad news: Whether they’re interested in syndication investments or directly investing in a piece of real estate on their own, many investors are at risk of a lawsuit taking all these assets from them. 

How safe are you?

Anyone looking to sue you can hire lawyers to go after an individual asset, track it back to you, then go after everything else you own.

The Delaware Statutory Trust is a great way for syndication investors (and certain other investors) to hold assets anonymously, compartmentalize every single one of them and avoid franchise taxes where they apply. 

Let’s take a closer look.

 

 

What is Real Estate Syndication?

First, let’s define some concepts. Real estate syndication (also known as property syndication) is a partnership between members who pool their resources to purchase and manage properties. 

Before the 2012 Jumpstart Our Business Startups (“JOBS”) Act, you really had to know someone who invested in private real estate deals to get in on the action. Even if you did, true syndications were secretive collaborations between the ultra-rich. The deals typically involved many millions of dollars invested in commercial real estate properties—meaning syndications were out of reach for the everyday investor.

The JOBS Act meant new securities no longer had to be registered with the Securities Exchange Commission (SEC), opening the gateway to public solicitation without registration—just so long as all investors are accredited.

So, how does real estate syndication work?

There are usually two roles in real estate syndication: the syndicator and the investor. You’ll hear different titles used. The syndicator is often called the sponsor, managing member or general partner. Investors can be called limited partners or simply members. 

So who does what? In a nutshell: Syndicators find and manage properties, while investors provide the money to buy, renovate, or operate those properties. 

Sponsors have a lot of responsibility to the investors. The syndication’s fiduciary stewardship falls on them, as do reporting and accounting. The sponsor should be able to recommend the best time to sell the property or have a predetermined exit strategy in place for the syndicate.

How Do Real Estate Syndicators Get Paid?

What does the syndicator get? The syndicator typically earns an acquisition fee (basically a commission) for bringing in the deal. Sometimes the sponsor will secure the property with a contract and put in some of the money, but they're usually the ones providing the “sweat equity.”

The passive investors/mentors usually don't want to deal with the day-to-day headaches of owning property. Aside from financing the deal, they typically don’t have many responsibilities. They typically receive a monthly or quarterly return on the investment. In addition to the monthly or quarterly return, the syndicate may pay other investors an annual "preferred return" as high as 10 percent.

A preferred return, sometimes called an investment hurdle or first money out but usually simply called the “pref,” is a way to protect the capital of limited partners in a real estate deal. Those capital investors want to get paid first. 

Let's look at an example. 

Assuming the building’s annual net operating income is $80,000, who makes what?

Each investor will get a $12,500 preferred return each, or $50,000 total. The remaining $30,000 is split five ways ($6,000 for the sponsor and each of the investors).

Investors/limited partners end up with a 7.4 percent annual return, while the sponsor makes $16,000. The sponsor can make more if he/she manages the property without paying for third-party property management.

When the members (the sponsor and the investors) want to sell, they’ll also realize whatever appreciation the property sees. In the example above, assume that in five years, the syndicate sells property for $1.5 million. The $500,000 appreciation (remember, we bought the building for $1 million) gets split five ways.

Of course, every real estate syndication is different. Sometimes the sponsor gets a smaller cut of the appreciation. Or, if the sponsor spends tons on maintenance and repairs over the lifetime of the deal, they may get a larger share. At the start of the deal, everyone would have agreed on the split based on how much work needs to be done acquiring and managing the investment.

How Does The Delaware Statutory Trust Fit In?

Real estate syndication can be a win-win for real estate investors. But if they are located in California or if the syndicate has property in California, the costs of doing business can be huge. Knowing how to avoid the California franchise tax using a Delaware Statutory Trust is a key part of the puzzle.

The DST is not included among the business structures required to pay the annual $800 franchise tax mandated by the California Franchise Tax Board. DSTs are considered estate planning tools—not a traditional company. 

Are limited liability companies (LLCs) enough to protect syndicators from lawsuits? No! The kind of asset protection syndicators need is impossible to accomplish with the LLC. We love the LLC, but  if you try to lump all of the assets inside of one LLC, you end up with a huge pool that litigious sharks can easily attack. 

With the DST you can create anonymity with the ownership of every single asset the syndicate opens. Those sharks won’t be able to discover the extent of your assets; if there's ever a lawsuit against one asset, they can't go after any of the other assets.

Your syndicate can form a Delaware Statutory Trust in Delaware and use it anywhere in the United States—including California (whether you live there or not). It's one single trust with one bank account, one EIN number, one set of accounting books. It's treated as a pass-through entity for tax purposes, meaning you can claim income on your personal income tax returns instead of a separate business tax return.

In a syndicate, each individual investor possesses his or her own share of the DST property. Any potential income, tax benefits and appreciation are part of this share.

 

Protecting Syndication Assets With Delaware Statutory Trusts

Did you know 80 percent of real estate investors will be sued in their lifetime? Don't let a frivolous lawsuit destroy your future. 

If you’re a syndication investor with properties inside of California, the DST can give you affordable anonymity and asset protection so people won’t even know that you're a good target to come after in the first place. 

The DST can also diversify equity to reduce your risk exposure in the event of a lawsuit by giving you both anonymity and lawsuit protection. A series structure makes it infinitely scalable at no additional costs, no matter how many assets you acquire. Incorporating new real estate investments into the structure is quick and easy. 

As we’ve seen, syndication gives investors an opportunity to invest in high-value properties.  When a Delaware Statutory Trust is leveraged, real estate syndicates often eliminate the liability for the individual investors altogether. When a DST acquires assets, investors can purchase beneficial shares, meaning they become beneficiaries of the DST and direct partial owners of the real estate asset. The trust takes on all property liability.

Syndicators can compartmentalize every single asset underneath its own entity structure by creating an infinite number of child trusts for free. This gives the real estate syndicate infinite scalability every single asset compartmentalized—one asset per child trust.

 

When Delaware Statutory Trust Trustees' Hands Are Tied: 7 DST 'Deadly Sins'

The Delaware Statutory Trust (DST) is an exceptional investment vehicle. It offers monthly hassle-free income and a more diverse investment portfolio. Managed under the supervision of a trustee, it combines asset protection, estate planning, and personal control.

However, Internal Revenue Ruling 2004-86 names seven deadly sins that limit the DST trustee's power. Below is a list of these prohibited acts, along with an explanation of how the DST can help the investor.

Basics of the DST

The Delaware Statutory Trust (DST) is a formal legal structure that can have multiple beneficial owners, with an underlying trust structure owning the real estate.

The structure can be seen like a “parent” and “child” …. The DST is the parent and each series beneath it is the child. Each series is treated as if it were its own entity, which provides you the same type of asset protection as individual LLCs holding each entity.

A properly structured DST is a haven for California investors looking to avoid franchise tax.  You may elect that it be taxed as an LLC, trust or as a pass-through entity depending upon the manner in which it is formed.

Estate planning is simplified with the DST. The DST can act just like a living trust.  Since all of the assets are underneath one umbrella of control, it becomes exceptionally simple for your heirs to manage. The DST can simply distribute assets to the beneficiaries upon your death or divide ownership interest to your liking. The DST can take advantage of all available tax avoidance strategies.

With the DST you never lose control of your assets. The DST allows you to restrict the ability of the Trustee to act. In fact, the DST can be constructed so that the Trustee cannot act at all and instead all of their powers are conferred upon you as a “managing Trustee." As such, you maintain complete control with the safety of knowing that somebody else cannot unexpectedly sell your property.

DST 7 'Deadly Sins' That Limit The Trustee's Powers

The IRS has specified seven deadly sins that limit the DST trustee's power. Let's look at them one by one.

#1 No future equity contribution is permitted

When you acquire beneficial interests in a DST, you get a percentage of ownership. If a trustee decides to accept additional contributions to the DST after the offering closed, the original investors' ownership percentages will be diluted, decreasing their claim to the DST's assets.

That's why the DST trustee is restricted from borrowing new funds or renegotiating the terms of the existing loans. Trustees are not allowed to assume greater obligations because it can hurt the beneficiaries’ interests.

#2 The DST Trustee May Not Borrow new funds or Renegotiate existing loans

Trustees are not permitted to assume greater obligations because it can lead to a significant impact on the beneficiaries’ interests. Remember, DST beneficiaries do not have the right to vote on operating decisions, and loans are liabilities.

When you invest in a DST, the sponsor will disclose the loan amounts due. Do your due diligence and understand how the liabilities impact the returns before finalizing the investment.

#3 Trustees Can't reinvest proceeds from the sale of DST investments

All proceeds earned by the DST must be distributed to the beneficiaries—not reinvested. Beneficiaries have the right to determine how to use the capital earned from their DST investment. When the assets of a DST are sold, the DST sponsor may create a new DST offering, giving beneficiaries the option to reinvest with the sponsor, but the investor can cash out or reinvest elsewhere.

#4 Capital Expenditures Are Limited

Trustees may spend money to maintain the real estate property and its value, but they can't risk the beneficiaries’ investment to enhance the property when there is no guarantee that the cost of the upgrade will be recovered at the time of sale.

To put it another way: Trustees may reasonably maintain the real estate property and its value, but capital expenditures are limited to standard repair and maintenance, minor non-structural capital improvements and any expenses required by law.

#5 Cash must be invested in short-term debt obligations

Liquid cash retained in the DST between distribution dates must be invested in short-term debt obligations. An investment in a short-term debt obligation can easily be converted back into cash that can be distributed to beneficiaries. As such, it is considered a cash equivalent. This allows the trustee to increase the value of the DST on behalf of the investors without risking the DST's value.

#6 Cash should be allocated to the beneficiaries on a current basis

DSTs can keep cash reserves on hand. This is to help with unexpected expenses, property management, and repairs. However, earnings and proceeds must be distributed to the beneficiaries within the expected timeframe.

This protects the beneficiaries' rights to receive their income in a timely manner and prevents trustee fraud.

#7 The DST Trustee May Not renegotiate Leases

DSTs operate well with long-term leases to creditworthy tenants on a "triple-net" basis (meaning tenants are responsible for paying property taxes, building insurance, and some maintenance expenses, on top of rent and utilities).

A master-lease structure to hold multifamily, student and senior housing, hospitality, and self-storage facilities are also great for DSTs. These leases provide a more secure investment than year-by-year multi-tenant contracts.

Because the IRS prohibits a trustee from renegotiating existing leases or starting new leases, beneficiaries can be assured that trustees will not make risky leasing decisions. Exceptions are allowed in the case of a tenant bankruptcy or insolvency.

The Bottom Line For DST Trustees

These seven deadly sins are in place to allow DSTs to qualify as suitable investments for the purpose of a tax-deferred 1031 exchange. DSTs have benefits for investors, but can create challenges for trustees.

Remember: if a DST is in danger of losing a property because the seven deadly sins prohibit the trustee from taking necessary actions, the state of Delaware permits the DST to convert to a Limited Liability Company ("LLC"), assuming a provision was listed in the origination documents. DSTs are excellent investment vehicles, but you must complete due diligence and choose the right kind of DST for better and secure returns.

How A Delaware Statutory Trust Attorney Can Help Your Investing Strategy

Delaware has long been known as the preferred jurisdiction for corporations. Did you know the “First State” is also recognized as a leader in the area of statutory trusts? 

In 1988 Delaware adopted the Delaware Business Trust Act, which became the Delaware Statutory Trust Act (the “DST Act”) in 2002. This legislation overruled the principles of common law trusts. which were deemed disadvantageous. The new rules authorized a high degree of freedom of contract between the trustor and the trustee in determining their respective liabilities and the manner in which a trust (a “Delaware Statutory Trust”) could be administered.

While other states have each enacted their own versions of the act, Delaware's has evolved over the years and remains the most advantageous for investors all over the country.

Properly set up by an experienced attorney, a DST is easy to form and maintain. Delaware residency is not necessary; all business decisions of the trust may be delegated to out-of-state co-trustees and managers. Additionally, there are no annual fees or filing requirements—simply a one-time fee upon the filing of the certificate of trust.

Why is the DST useful for investors based or doing business in California?

Short answer: The Delaware Statutory Trust is seen as an estate planning tool. As such, it is not subject to the California state franchise tax that an LLC would pay.

What about dispute resolution? The Delaware Court of Chancery is generally regarded as the preeminent business court in the United States. It has jurisdiction over trust and fiduciary matters as long as the trust agreement contains certain required language, which your lawyer can help you with.

A Delaware Statutory Trust comes with tax flexibility. For example, the trust may qualify as a RIC (registered investment company), a FASIT (financial asset securitization investment trust), a REMIC (real estate mortgage investment conduit) or a REIT (real estate investment trust).

As a “bankruptcy remote” entity, the DST protects individual beneficiaries from liens against the property, giving greater security against judgement. DSTs are typically financed with non-recourse debt, which limits a lender’s remedies to the DST’s underlying property.

Is it contractual flexibility you seek? The parties to the trust are able to dictate matters such as management and economic rights of owners, duties of managers, indemnification, mergers and other management and operational issues.

Beneficial owners of a DST enjoy the same liability protections as stockholders of Delaware corporations. We’re talking limited liability here. Trustees and other managers are not personally liable to third parties for acts, omissions or obligations of the DST.

Getting Help From a Qualified Delaware Statutory Trust Attorney

You should have dependable legal counsel before entering into any 1031 Exchange or Delaware Statutory Trust property exchange. We often hear about investors forming entities then not using them appropriately or failing to maintain compliance. This is less likely to happen when you form your structures under the supervision of a qualified professional.

Hire an attorney with a thorough understanding of the essential statutory requirements for formation, maintenance, and termination of a Delaware Statutory Trust. There are other options available, and your lawyer should help you decide which of these entities can meet the needs of the trust owners, creditors, and management.

If you’re considering an interest in a Delaware statutory trust, particularly in the context of a 1031 exchange, you need an attorney who is current with important developments in the world of tax, business and finance. He or she should know about tenant-in-common (TIC) and other DST structures. These offerings are often structured so that investors can successfully achieve tax deferred exchange treatment.

Delaware Statutory Trusts: Rate of Return, Tax Treatment, and More

First thing to know: A Delaware Statutory Trust (DST) can be used anywhere in the U.S. (not just in the state of Delaware). 

A DST is a legally-recognized trust in which property is held, managed, and invested. DSTs allow investors to pool together their 1031 exchange proceeds into the trust, making it an attractive investment option. 

DSTs are commonly organized and sold (appropriated) as securities that must be acquired via a securities agent, or broker. DST brokers ordinarily work with sponsors to help investors make an informed choice about whether or not DST property proprietorship interest is good for you.

We point out the Delaware Statutory Trust advantages primarily for California investors because it allows them to save money on taxes. If you’re an investor with, say, 1-3 properties and you’re looking for budget conscious options, the Series LLC may be the solution you seek.

That said, the DST is available to investors from all locations. Advantages include:

Delaware Statutory Trust Rate Of Return

The typical range you can expect to see on DST investments will usually be a fixed percentage based on the expectations on projections of the DST portfolio of properties. The rate of return  is anywhere from 5-9% on your cash-on-cash monthly distributions. 

One factor to consider is Delaware Statutory Trust appreciation rate of return, which is impacted by supply and demand and is often the most overlooked yield on your investment. A 1031 DST is typically held for 10 years or more, during which time you should see an appreciation—unless there’s been an economic downturn—in the double digits. 

How are Delaware Statutory Trust Investments Taxed?

Investors should understand Delaware Statutory Trust tax treatment and go over various DST taxation topics with their CPA and tax attorney prior to making any investment decisions.

When you purchase an interest in a DST 1031 exchange property, you will get a year-end operating statement that shows their pro-rata portion of the property's rental income and expenses. Your CPA will enter the numbers into Schedule E of your tax return, along with any other rental and commercial investments you own. 

Depreciation Deductions 

Your basis in property is a specific value assigned to property at various points in time. It's used in determining your periodic depreciation deduction for the property, and in computing gain or loss when the property is disposed of.

With a 1031 exchange, if you fully depreciated the property you sold, the basis from the property you recently sold will carry forward into the new DST property you purchase. If you still have basis in the property you sold, or if you purchased a greater value in the DST properties than you had in the property you sold, you can take advantage of depreciation deductions to shelter the income from the DST properties.

State Tax Treatment

When owning DST properties out of state, you will need to file state income tax returns in that state unless the property is in a state with no income tax filing requirements, such as Texas or Florida. 

Future 1031 Exchanges 

When a DST investment property eventually sells, you are free to purchase any other type of like kind real estate. “Like-kind property” generally means both the original and replacement properties must be of “the same nature or character, even if they differ in grade or quality.” In terms of real estate investing, you can exchange almost any type of property, as long as it’s not personal property. Many investors end up 1031 exchanging back into more DST properties when it is time to reinvest.

Purchasing Equal of Greater Value

Many investors that are at or near retirement have already paid off their properties in full. Taking on more debt is not wise, especially considering the 1031 exchange rules. One of the 1031 exchange rules requires investors to purchase property of equal or greater value.That’s why investors who have paid off their properties in full should invest in DST properties that are all-cash/debt-free if they are able to do so—not using leverage/loans reduces the risk of loss.

What Is A DST 1031 Property And Why Should I Care?

As we’ve seen, a Delaware Statutory Trust is an entity used to hold title to investment real estate. A Limited Liability Company (LLC) can also hold title to real estate; however, a DST 1031 Property will qualify as “like kind” exchange replacement property for a 1031 exchange. 

“Like-kind property” generally means both the original and replacement properties must be of “the same nature or character, even if they differ in grade or quality.” In terms of real estate investing, you can exchange almost any type of property, as long as it’s not personal property.

What Is A Delaware Statutory Trust?

A Delaware Statutory Trust (DST) is a vehicle for passive real estate ownership. “Passive” means that you (the investor) are removed from the day in, day out headaches of property management such as dealing with tenants, collecting rents, maintaining the property, etc. 

The DST an also diversify equity to reduce your risk exposure in the event of a lawsuit. This, a Delaware Statutory Trust in California gives you both anonymity and lawsuit protection. A Series structure makes it infinitely scalable at no additional costs, no matter how many assets you acquire. Incorporating new real estate investments into the structure is quick and easy. Each individual investor possesses his or her own share of the DST property. Any potential income, tax benefits and appreciation are part of this share.

How Does A Delaware Statutory Trust Work?

Delaware statutory trusts, derived from Delaware statutory law, are a separate legal entity qualifying under Section 1031 as a tax-deferred exchange. DSTs are considered a preferred investment vehicle for passive 1031 Exchange investors (more on these in a minute) and direct (non-1031) investors. 

The real estate sponsor acquires a property under the DST umbrella and opens up the trust for investors to purchase a beneficial interest. Most DST investments are assets that your average real estate investors could not otherwise afford. However, by pooling their assets, DST investors may benefit from a professionally managed, potentially institutional quality property. These investors can deposit their 1031 Exchange proceeds into the DST or purchase an interest in the DST directly.

What Is A DST 1031?

In 2004, the IRS (via Revenue Ruling 2004-86) specified how to structure a DST to qualify as replacement property for 1031 Exchanges. This allowed the DST to own 100 percent of the fee simple interest in the underlying real estate, with up to 100 investors to participate as beneficial owners of the property.

If you sell a property to invest in a DST, you can defer the capital gains tax through a 1031 exchange. You have 45 days to identify replacement property or else you are going to be slapped with the capital gains tax and/or the Depreciation Recapture Tax, along with state taxes and sometimes a NIIT (Medicare surtax). 

If you’re an accredited investor, you can defer taxes by investing your money into another property within a specific timeframe. This property replacement is called a 1031 exchange.

Note: The Security and Exchange Commission (SEC) defines an accredited investor as an individual with a net worth of at least $1 million (excluding the equity in your home) or net income the last two years of $200,000 ($300,000 if joint income with spouse) and with a reasonable expectation of equal or greater earnings in the current calendar year. 

Thanks to IRC section 1031, investors can postpone paying taxes by reinvesting proceeds in similar property as part of a qualifying like-kind exchange.

What Is A DST Exchange?

A “DST Exchange” is the same as the tax strategy outlined above. The term “1031 Exchange” is defined under section 1031 of the IRS Code. To put it simply, this strategy allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long another “like-kind property” is purchased with the profit gained by the sale of the first property.

DST Offerings/1031 Exchange Properties

As mentioned, DST offerings might include high-value commercial real estate that the private investor isn’t typically able to afford. The property could be a 500-unit apartment building, a 200,000 square-foot office property, or a shopping center.  Other types of DST 1031 exchange properties include self-storage buildings or medical facilities. These properties typically have long-term lease contracts with the tenants. 

Most DSTs are set up by real estate syndicators or private investment corporations. Even though the beneficiary of a Delaware Statutory Trust has no management responsibilities, some due diligence on the tenants and the particular property is required. The trustee and the management company selected are also important

Financing a DST Property

The financing used on DST 1031 properties is typically non-recourse to the investor, meaning the lender’s only remedy in the case of a default is the subject property itself. The lender is not able to pursue the investor’s other assets beyond the subject property. So, in the case of a major tenant bankruptcy, marketwide recession or depression, you (the investor) could lose your entire principal investment amount, but your other assets would be protected from the lender. 

Internal Revenue Code Section 1031 defines an investor’s exchange requirements of taking on “equal or greater debt.” However, in order to mitigate the risk of using financing when purchasing properties, some DST 1031 properties are offered all-cash, without financing. You can find 1031 exchange DST portfolios with minimum investment requirements in your price range.

Can You 1031 Out Of A DST? 

Yes, you can 1031 exchange out of a DST. Two scenarios for this to occur would include:

Scenario One: When the DST property itself goes “full cycle” (meaning the property is sold on behalf of investors), you can exchange out. Once the DST sponsor has sold the asset (per the DST business plan) you and any other individual investor will enjoy the same options you had when you first exchanged into the DST. This means you can exchange into any other type of like property, which you would then own and manage. At this point you could exchange into more DSTs or simply pay taxes.

Scenario Two: When an individual investor wants to sell out of their DST position before the DST property itself goes full cycle. This scenario is a bit more tricky. DSTs are considered illiquid investments; There is no public market where an investor can sell their ownership interests in a DST. That's why you should only purchase a DST via a 1031 exchange if you can hold the investment for 5-10 years or more. There may be secondary markets available if you want to sell early, but all the same rules apply as though you were selling a traditional investment property.

The DST 1031 Exchange: What Smart Real Estate Investors Know

The Delaware Statutory Trust (DST) is a bona fide legal workhorse.  For the right investors and circumstances, it’s often an excellent tool that preserves passive investment income, prevents lawsuits, and has special tax benefits for Californians. It can pull double duty for asset protection and estate planning, but that’s hardly all. 

The DST can bring even greater rewards to DST 1031 exchange real estate investors.

Real estate investors in California use the Delaware Statutory Trust  to dodge franchise taxes, escaping the state’s harsh regulations and Draconian tax enforcement agency.

But all investors (regardless of where they live) can exploit the DST for its 1031 Exchange compatibility, flexible asset protection and estate planning benefits. The DST 1031 Exchange also gives you a high degree of control over the structure’s protected assets and beneficiaries.

Consider this your quick guide to understanding how DSTs work with 1031s and your crash course into the wild, flexible, world of the Delaware Statutory Trust.

Understanding the Essentials of the DST 1031 Exchange

If you want to brush up on the basics of this structure fast, you should check out our Delaware Statutory Trust FAQs to learn about the basics of the structure. It’s the quickest way to get a comprehensive understanding, but we’ll touch on why asset protection attorneys even use these darn things in the first place.

For the moment, we’re confining this conversation to DSTs in the context of 1031 exchanges (but we’ll get to other benefits, we promise!).

All you need to know that these revocable trusts can designate many beneficiaries, a feature we'll illustrate with a whimsical example shortly. Theoretically, since you’re a beneficiary, you can hide among them for extra anonymity around your asset protection measures. But that’s far from the only perk of the DST for 1031 investors.

Delaware Statutory Trusts Go With 1031 Exchange Like Peas and Carrots

Despite their many uses, most online info about the Delaware Statutory Trust relates to estate planning or 1031 features, often vaguely. These are great structures for managing and defending 1031 investments. Why these basic concepts have become intertwined in the real estate world:

No tool is perfect though. We’ve written about the DST’s drawbacks too. It’s up to you to decide what’s best after gathering the vital information.

Can I Have More Than One Beneficiary for My Delaware Statutory Trust?

The beneficiary is anyone receiving funds from the trust structure. Not only can you have more than one, you can have dozens, even hundreds, if you so desire. So if you’re using your DST to secure the 101 homes you’ve selected for your 101 pet dachshunds, each dachshund could have its own share.

[Note: Your dachshunds would need HUMAN legal reps/guardians to express their interests--sadly they’re property under current law. But if dachshunds gain full legal rights of humans, and they may just be cunning enough to pull such a feat off, each one could own his/her DST shares independently. But you could do this same move with 101 children if you had the time, funds, and inclination to set them all up for life. Parents frequently leverage land trust appreciation to pay for expenses including college tuition for children, and you can too.]

We use this ridiculous example because you can easily imagine pulling in many JV partners, family members, and others who care about your business into your DST network as beneficiaries.

But we’re guessing you aren’t making customized estate plans by the dozen, so yes, you can have up to several hundred human beneficiaries according to the state who designed the trust. You will be one of them. So can any partners, children, or people in life you wish to do business with or support using your DST’s earnings.

Perks of Managing Beneficiaries with a Delaware Statutory Trust

Both you and your beneficiaries can benefit from the DST easily. You stay in control, pick who gets what with precision, and can modify your plans at any time.

#1 Easy to Change Your Beneficiaries

Adding a new beneficiary is easy when you’ve got a DST. Removing one is a separate process, but no harder. Let’s go over some of the best benefits of using a DST to pay out certain people as beneficiaries. 

#2 Divide DST Property Easily with Beneficial Interests

DSTs offer both a high degree of control over and tremendous flexibility for handling beneficiaries., thank the concept of beneficial interest. You can think of it as a way of issuing “shares” from your DST to reflect a person’s interest in a property, or even the whole trust, is.

The concept is known as beneficial interest in the trust. You can even have them issued for minors (though regrettably, not dachshunds as of July 2019). Parents often do to offset college or living expenses of the child beyond age 18, and you can sell/give fractions of a property to others under the same reasoning.

See? Even silly examples are important. The accuracy and control you’ll have over how your beneficial interests are distributed is unique to the DST. It’s a form of co-owing that doesn’t put you at risk and is strictly, clearly defined. Whether Johnny gets 1/16th of a single DST property or the entire trust, you’re the decider.

#3 Asset Protection Benefits of DSTs

The Delaware Statutory Trust’s compartmentalization ability makes it a fantastic choice for investors with many assets, anyone with multiple investments, or those hoping to grow rapidly. This isn’t a beginner’s tool, Californians excluded. This privately filed legally-binding agreement can theoretically protect assets in a way identical to the Delaware Series LLC.  DSTs do this by simply holding title to property for you, getting it out your name.

In fact, many of our Californian clients demand series LLCs until we convince them how much better the DST is. If you’re considering asset protection, this is by far one of the strongest individual structures available. It need not be excessively complicated, but the DST will require effective legal counsel to pull off if you want its protections guaranteed. This is particularly true for REIS or anyone wanting to try out the 1031/DST combo. Not every attorney is equally skilled, but a real estate lawyer with corporate chops or asset protection pro can handle this job easily. Pick yours wisely, because you’ll come to rely on their advice.

Estate Planning with DSTs: Create a Dynasty Trust That is Truly Immortal 

If you love the idea of your business outliving you, you can make it happen with the DST. While other tools and trusts can help estate planning for REIs, the DST comes with everything you need for a business that can outlive you. And not only that, you get to stage-direct exactly how the whole affair goes down.

When you grab that handy attorney, they can explain the full estate planning potentials in your particular situation. But most investors love the DST’s ability to become a legacy business that doesn’t rely on any one person. Your real estate empire could exist in its own right, simply passing through the hands of different “managers” as generations click by. If this idea appeals to you, take a good look at your estate plan, your options, and use our checklist to know if it’s time to update the plan.

If you proceed with buying new entities or assets, these should always be included in your estate plan. Real estate investors can use tools to account for everything, but with good asset protection, you’ll want to plan ahead for business succession or liquidation. You get to call the shots with your DST 1031, no matter how you use it.

The Disadvantages of Delaware Statutory Trust (DST) 1031 Exchange Properties

The Delaware Statutory Trust is a mighty vehicle, but just as with any other legal tool, neither the DST, 1031, or power combo of both is without flaw. You may already be familiar with the benefits of 1031 exchanges for real estate asset protection. You may have seen our article about Delaware Statutory Trust advantages for investors. But today, we’re going to talk about Delaware Statutory Trust pros and cons.

Relationship Between the Delaware Statutory Trust and 1031 Exchanges

For the uninitiated, let’s briefly touch on why these concepts overlap. It isn’t for no reason that investors have spent over $50 million since 2004 on these types of property acquisitions. That's the year IRS recognized the Delaware Statutory Trust as an entity that could participate in “like-kind” or 1031 exchanges.

While some investors see DSTs and 1031 Exchanges as a “one or the other” proposition, others find value in pairing the structures, particularly where long-term investing or capital gains deferment are primary goals. That said, this type of deal structure isn’t without limits, which we’ll spell out in greater detail now.

DST 1031 Limit #1: You Have to Hang on To the Property For Years

Generally, to meet the criteria of the 1031 exchange, investors must hang on to the property for a matter of years. For this reason these real estate assets aren’t as easily liquidated, say, in a financial emergency. They’re great for those playing the long-game, but shorter-term investors may want to consider alternative strategies.

The average 1031 property is held for upwards of five years as a capital gains tax deferment strategy. Learn more about how this method works from our prior educational piece, your go-to guide to controlling capital gains costs.

DST 1031 Limit #2: You Don’t Have Maximum Direct Control Over DST Investments

Investors who are accustomed to the total control of say, a self-directed retirement account or even more traditionally controlled/owned property, may be uncomfortable with the DST with 1031 model. Here’s why.

When Uncle Sam okayed DSTs for participation in 1031 Exchange transactions, they placed direct regulatory limits on beneficial owners of the DSTs. That means you, dear investor. The Taxman breaks it down in the Internal Revenue Code, but allow us to paraphrase and spare you that riveting read. Basically, you aren’t allowed to have “direct operational control”--their words, not ours--or even simple decision-making authority over the properties involved. The object of the law is to keep you from getting your own hands too close to the investment. Many investors are not tolerant to such restrictions and feel suffocated by this limitation even though there are ways to maintain control with the help of your attorney.

DST 1031 Limit #3: New Property Doesn’t Mean New Money

All those funds that similar new property will raise come with a huge catch: you can’t pour any capital back into the DST itself. Even new investors into the property or DST are barred from benefiting financially while the 1031 is in effect.

Sucks, right? Fortunately, this is a problem your competent legal and tax pros should be able to help you address. The right Delaware Statutory Trust Attorney can help you navigate these confusing waters. 

Delaware Statutory Trust (DST): The Benefits of the Structure

Our deep dive into the Delaware Statutory Trust (DST) continues now with what we consider some of the best news about the DST structure: the perks.

If you’ve already read up on the basics, FAQs, and relatively painless regulation breakdown, you already know some of the broad benefits. Learn a little more about this powerhouse structure’s perks.

Comprehensive, Anonymous Asset Protection

California has unique state laws and agencies that investors with interest in the state should be aware of. Your asset protection structure must be able to comply with all relevant law and regulatory measures. The Delaware Statutory Trust offers a cost-effective solution for Californians seeking an anonymous structure that defends the assets within it.

Delaware Statutory Trusts (DSTs) Offer High Levels of Anonymity

Anonymity is more or less built into the DST structure. Deeding property to the trust is a critical piece of your asset protection strategy. This is the move that gets your investment property out of your personal name. Simply not having your name on the property preserves your personal anonymity, which is important for preventing lawsuits. Investors who are successful become attractive targets for litigious types, and frankly, the only meaningful defense from this type of threat is an appropriate anonymous business structure.

Your DST is legally a separate entity from you. Yet using one conveys liability protections onto you, just as if you’d used a network of LLCs. Incorporating additional legal structures is simple, whether you want anonymous trusts as well or greater control over your estate. Adding new assets into your trust is simple, and it can indeed be incorporated into your estate plan. After all, the DST gets its special treatment in part because it is an estate planning tool.

Creative, Completely Legal Tax Savings

California’s onerous Franchise Tax is well known to investors around the country, largely by reputation. Frankly, it’s the type of subject that’s only spoken about in complaint mode.

Until now, that is.

The DST is an estate planning tool rather than a traditional corporate entity, and is treated accordingly under the law.

Because of this legal difference, the DST isn’t subject to the $800 annual expense that out-of-state LLCs and other corporate structures are.

You read that correctly. It’s exempt. The DST is viewed by the state, including the Franchise Tax Board (FTB), as an estate planning tool rather than a corporation. Legally speaking, you can use the DST as both an estate planning device and an asset protection structure. In the meantime, that’s $800 that gets to stay in your pockets or business profits.

Compartmentalization and Control Prevent Lawsuits

When you use a Delaware Statutory Trust structure to protect your real estate investments properly, each asset is compartmentalized. It allows you complete control, while your assets stay away from you and one another. In fact, they’re completely separate for liability purposes, which is one way the DST prevents lawsuits.

Even if an asset within one Series is threatened legally--a task good asset protection makes tough to begin with--any assets in the others are safe.

The Delaware Statutory Trust Is Cheaper By Asset Than an LLC Network

California’s notorious FTB mentioned above views the DST as an estate planning tool. Most trusts are used in this process, and your DST can be too. But its savings powers are at their greatest while you’re still very much alive.

Owners of companies, whether LLCs or S-Corps are operating entities. They will pay $800 for each one. So if you have four properties in the Golden State, sticking them in four LLCs will protect your assets. But it’ll cost you $3200 in franchise taxes alone annually to maintain this clunky, unnecessarily pricey operation. The DST, on the other hand, doesn’t incur the Franchise Tax at all.

Creditor Protection and More

The DST structure doesn’t just defend your real estate investments from lawsuits. Assets within your DST are also protected from creditors. While this may not be reason alone to open up a DST, it’s certainly a nice fringe benefit if you ever encounter a financial emergency. To learn which of your assets are best protected, speak to a trusted legal expert familiar with your situation.

Delaware Statutory Trust (DST): Understanding The How, Why & The Basics

The Delaware Statutory Trust (DST) is an asset protection tool that really doesn’t get the sexy reputation it deserves. Because these babies really are fine legal vehicles for compartmentalizing assets, securing your anonymity, and keeping your wealth defended from litigious types.

The DST is particularly indispensable for California real estate investors as one of the only secure, scalable asset protection solutions that won’t cost an arm and a leg at the state level. Let’s get right into the very basics of the Delaware Statutory Trust. If you’re a California investor or even own property in California, you can’t afford not to know this information.

Why Should Californians Use A Delaware Statutory Trust?

All business entities must comply with state and local laws, which vary vastly throughout the United States. While it is always preferable to use a legal structure to remove property for your own name, there is no one-size-fits-all solution.

The closest tool we’ve found is an entity that is useful to the vast majority of investors is the Series LLC. Unless, of course, you happen to live in California.

California has famously brutal tax laws. An unprepared investor can stand to lose downright sinful amounts of profits to the state’s FTB. California’s tax law isn’t particularly kind to businesses, particularly those owned by out-of-state investors. The Delaware Statutory Trust is so remarkable for the California investor because it offers an elegant solution to both of these problems: the DST is effective and scalable without and also spares the investor some of these state taxes. DSTs don’t have to pay the $800 annual Franchise Tax owed by, say, LLCs and Series LLCs.

How the Delaware Statutory Trust Works

We touched on the Series LLC briefly above because structurally, it is very similar to the Delaware Statutory Trust. The DST actually predates and inspired the SLLC as we know it today. Both structures make use of a parent-child structure to separate assets into secure Series, even extending liability protections to real estate investments within the structure.

The ability to shelter assets inside of individual Series offers investors a high degree of protection. It’s generally best to have each major asset inside its own company--and yes, Series “count” for asset protection purposes. So if you own, say, five properties, you will have your parent DST as well as five Series beneath it. And if you acquire a sixth, it may also be deeded to the DST structure and fully protected.

Delaware Statutory Trust Basics Investors Should Understand

One major reason we discuss the structure of the DST is so that investors can understand how it protects their assets. With your assets neatly sorted into separate Series, even if you are sued, the damage is contained. Investors who follow the recommendations about using DSTs effectively can survive a lawsuit against one asset. A plaintiff could bring a suit against, say, Series B of your structure. This legal action could not affect other assets in other Series. Your DST protects other Series (and of course, the assets within them) in the event of a successful suit against one.

Of course, the best thing of all is when we can implement the right structures to stay out of court altogether. Investors seeking additional defenses may employ the power of the Anonymous Land Trust. Anonymity strengthens the protections of the DST, making it difficult to even connect you to your property. Anonymous trusts have many other benefits to enjoy as well for you to exploit.

Between the DST’s flexibility, tax perks, and high degree of asset protection, the California investor will have a hard time finding a better, cheaper entity for shielding multiple assets or a growing business from litigation. For more information, check out our additional pieces on the DST’s benefits, regulation issues, and your top Delaware Statutory Trust questions answered.

Delaware Statutory Trust FAQs: What Investors Need To Know

So far in our discussion of the Delaware Statutory Trust (DST), we’ve hit on the basics you need to know about the structure and some deeper nuances about regulatory and tax implications for California investors. But you may still have questions about this lesser-known tool. Here are some of the most common ones we get, and, of course, their answers.

Is a Delaware Statutory Trust Expensive?

Expensive is always a relative term. The simple truth is how expensive your DST is will depend on who forms it, what if any special details your asset protection plan must account for, and whether services like property transfers are included or sold separately.  As a general rule, it is true that this entity has un upfront cost similar to or higher than a Series LLC, but you do receive something for the extra expenses. The many benefits of the DST structure include some the Series LLC doesn’t. For instance, we often recommend that Series LLC owners also make use of Anonymous Land Trusts. But for DST owners, land trusts would be a redundancy. Which costs and possible uses will affect you most? Speak with an expert familiar with your circumstances to know for sure.

How Does the Delaware Statutory Trust Avoid California’s Franchise Tax?

California’s tax law can become a profit-syphon for real estate investors with assets in the state. While investors in most states can take advantage of LLCs and Series LLCs as primary asset protection tools, Californians are better suited for the DST largely because of the state’s franchise tax. LLCs, Corporations, and other types of companies must pay $800 per entity in annual franchise taxes.

The Delaware Statutory Trust, however, isn’t included among the structures that must pay this burden. Rather, because DSTs are more correctly classified as estate planning tools, and therefore need not meet the same requirements as traditional companies. But the savvy investor can still use this tool in a manner similar to the Series LLC for highly effective asset protection, all while dodging the tax obligations of the Series LLC. Perfectly legally, of course!

How Many Assets Can the Delaware Statutory Trust Secure? How Does the DST Prevent Lawsuits?

Well, this is where things get fun. The answer is simple: however many assets you have.

And each of those assets is compartmentalized for optimal protection. That means if a would-be-litigant tries to come for your trust-owned property, they’ll have an extra difficult time. Because the DST is such an excellent anonymity tool when set up appropriately by an experienced asset protection attorney, even connecting you to the property in question becomes a chore.

In practice, many asset protection tools are effective because they throw up roadblocks to stall out the lawsuit process. In our experience, a properly established DST stops lawsuits before they’re even filed.

This All Sounds Great! But I’m Not in California. Can I Still Have a Delaware Statutory Trust?

You can, sure. But it may or may not be the best structure for you. Again, the only person who should be calling the shots on asset protection structures is the legal expert of your choosing. The DST may be a great choice for you regardless, particularly if you are doing business in California.

But if you’re outside of the state with no interests there, there’s an alternative that works for a broad range of investors. The anonymity, asset protection, and operational benefits offered by the DST can be duplicated with other tools. To be precise, the Series LLC combined with Anonymous Land Trusts is a system that offers top-notch protection to investors in all other U.S. states. If you have multiple properties, investigate the Series LLC first. It uses that same parent-child structure that makes compartmentalization a snap with the DST. Anonymous Land Trusts can easily disguise company and property ownership--they go hand in hand with the Series LLC. These tools together will offer the same powers, and perhaps additional benefits, to real estate investors or business owners in other states.

Delaware Statutory Trust Law: What To Know About Your Eligibility, Rules & Regulations

To continue our comprehensive series on Delaware Statutory Trust Law and best practices, let’s dive a little deeper into the nitty gritty details of how this structure works to protect real estate investors.  

Should Real Estate Investors Use a Delaware Statutory Trust?

Anyone can have a Delaware statutory trust. An investor won’t ever be told they are “ineligible" for a DST, although the Delaware statutory trust advantages apply more to some than others. When we talk about who can benefit the most from DSTs, there are a few categories of people to keep in mind.

What Does “Doing Business in California” Mean?

California has unique state laws and agencies that investors with interest in the state should be aware of. Most of these regulations that can affect asset protection structures stem from the dreaded Franchise Tax Board (FTB). This also happens to be the agency that defines what it means to be “doing business in California.”

Since tax agencies just can’t help but write in boring, unnecessarily obtuse verbiage, we’re going to help you out with some translation. You’re free to read the full excruciating text if you’re into intellectual masochism. For the rest of us, here is both the state law and the FTB’s criteria, with plain English explanations alongside:

We’re not done yet. That’s just the basic definition of “doing business.” Even if you said no to all of the above, if you’re a member of an LLC or partnership that’s doing business in the state, you still have to play by its rules. This is particularly true if:

For these reasons, an out-of-state LLC can be “doing business” in California and subject to the $800 Franchise Tax. The DST presents an elegant way to not have to even think about this stuff.

Delaware Statutory Trust Laws Regarding Asset Protection

When you use a Delaware Statutory Trust structure to protect your real estate investments, each asset will be held in its own legal space. You retain control of your investment properties and the entire structure as its beneficiary. You technically aren’t the “owner” of the properties; the DST assumes that rule. For this reason, we often say the rich don’t own assets. They control them. The DST is one of the legal tools the wealthy have had historic access to for exactly this purpose.

Delaware Statutory Trust

There are similarities between the DST and asset protection entities that are helpful for understanding how the structure works to protect you. DSTs may sue or be sued, just like companies. But you also get to enjoy liability protections, just like the owner of an LLC or Series LLC would. Structurally, the DST is an intellectual grandparent of the Series LLC. Both tools make use of a parent-child structure illustrated in the image above.

Bottom Line: DSTs Are a California Investor’s Best Friend

As you can see, the term “California investor” applies to many more people than you’d imagine. Avoiding California's Franchise Tax may be something you need to do even if you're not from California. Get to know the DST regardless of whether you end up needing it as your ultimate asset protection solution. If nothing else, the information you learned here may help another investor you care about.

Series LLC for Real Estate Investors in California

For most real estate investors, experts recommend you consider investing through a series limited liability company (LLC). However, in the state of California, you should consider using a Delaware Statutory Trust (DST) instead. Why? Let’s take a look.

The Series DST

DSTs are not new. A DST is considered to be a statutory entity. As such, it is created through filing a Certificate of Trust with the Delaware Division of Corporations in addition to paying any regulatory fees required by the law. However, Delaware does not require the actual trust agreement to be filed. This means the trust’s owners, duties and responsibilities remain confidential and do not appear on any official state documents.

The Benefits of a DST

For California real estate investors in particular, the DST is highly beneficial.

California has been notoriously uncooperative with attempts to bring outside LLCs and Series LLC into the state. In fact, while most state permit outside Series LLCs, California will charge you $800 for each series, every year. Depending on the amount of properties you invest in, or the profits or losses you incur, this sum can add up quickly.

The Internal Revenue Service (IRS) recognizes certain businesses as “disregarded entities”. To qualify, your business must abide by three rules. First, the DST must have only one owner. This is because the IRS only recognizes “sole-proprietorships” as a disregarded entity. Second, the business itself must be separate from the individual. This if for liability purposes. (We’ll talk about how this applies to a DST below.) Third, the business is taxed through your personal taxes (Schedule C). The DST abides by all three rules and, therefore, is considered to be a disregarded entity by the IRS.

For many investors, the Series LLC offers a seemingly unique opportunity to protect investments. However, a DST can offer this same protection. A series DST allows you to establish one, “parent” trust. Beneath it, you can create an unlimited number of “child” trusts as well. Most experts will recommend that you put each investment property into a separate “child” trust to ensure all liabilities are self-contained.

As stated above, with a DST, your identity is not published when the trust is filed with the Delaware Division of Corporations. (To do this with a Series LLC, you first need to establish an Anonymous Land Trust.)

Asset Protection with DST

You may wonder how a DST helps to protect your real estate investments from lawsuits. This is where the DST really stands out. In addition to complying with California and federal tax laws, the DST provides you with an innovative legal barrier that can prevent a lawsuit before it even makes it into court.

Above, we talked about how the DST provides you with unlimited compartmentalization and anonymity. These two features inherently discourage lawsuits. When you invest in each property through separate “child” DSTs, you restrict the finances available for a court settlement. Like a Series LLC, the DST wraps each property in a liability barricade. Any lawsuit brought against one property can only take into account the value of that investment. Your personal assets, and those that are contained within other “child” DSTs, are untouchable. (As a general rule of thumb, most lawyers will not accept a real estate lawsuit that will not settle for $50,000 or more. In this sense, the DST discourages lawyers from accepting a case against you.) However, because of the blanket of anonymity created through the private nature of a DST itself, a lawyer may refuse a case against you outright. After all, to build a legal case against you, the lawyer would first need to identify who you are. The legal anonymity established with the DST makes this incredibly hard, and often, not worth the time for a lawyer to pursue.

When you combine the reduced net worth of an investment owned by a “child” DST and the difficulties of an anonymous owner – the majority of lawsuits end before you ever have to step foot in a courtroom.

Help When You Need It

We understand how important asset protection is for real estate investors in any state. We pride ourselves in our in-depth knowledge regarding asset protection, as well as our ability to help our clients find the most cost-efficient, streamlined way to keep their investments safe.

For real estate investors in California, we can help you establish a DST. We do so in a cost-effective manner, with no hidden fees. Because of our experience with tax regulations, we can help to minimize any penalties or fees and ensure the IRS treats your DST as a “disregarded entity”.

If you are a real estate investor in California, contact us today to find out how we can protect your properties together.

Why You Need A Registered Agent Service

Did you know that as a business owner, you are legally required to have a Registered Agent in the state that your real estate company is formed in? This is particularly true if you have set up an LLC or Series LLC outside of your state of residence. There are many good reasons why investors choose to set up their companies in a location they don't live in. Some states offer favorable tax treatment, including a lack of a state income tax, while others offer legal and operational benefits to owners of corporate structures. It is not unusual at all for an investor living in, say, North Carolina, to have their investment properties secured in a Nevada or Delaware Series LLC. There are a number of financial, legal, and practical reasons to structure a company outside of your state of residence. There is nothing wrong with this practice. In fact, we often recommend it for asset protection purposes - check out our free educational resource on the best states for forming a Series LLC for even more details. But real estate investors who do this must have a Registered Agent in the state where their business operations are based.

What Exactly Does A Registered Agent Do?

The Registered Agent serves a clear role that is critical to the legal standing of your real estate investment business. This is the person who will function as your legal point of contact for all of your business matters in your company's state. He or she will be responsible for receiving business documents and keeping up with all legal correspondence. To learn more, check out our previous educational article on the role of the Registered Agent.

Who Can Serve As My Registered Agent?

Fortunately, you have options when it comes to satisfying the Registered Agent requirement. These are some of your most common options:

Using an attorney has some obvious advantages over a professional Registered Agent. First, someone who is simply a Registered Agent may not have much experience in matters of law. These individuals also cannot assist you with other aspects of company formation. An experienced real estate attorney, on the other hand, will be able to help ensure your compliance across the board - not just with the Registered Agent requirement. Further, a qualified attorney will also keep track of changes in law and corporate regulations. Because the law is always evolving, it's best to have someone with the knowledge and research skills to make sure you're operating your business by the book. Some investors prefer to use a professional Registered Agent to save a few dollars, but we find having a qualified attorney to help defend your real estate empire is well worth the investment.

Why Choose Royal Legal Solutions to Serve as Your Registered Agent?

At Royal Legal Solutions, we have served as Texas Registered Agents for our clients for years. We are real estate attorneys and investors ourselves, and well aware of the legal ins-and-outs of this role. Further, an attorney is the ideal legal face of your business. Our prices for this service are lower than market average, and competitive with some "professional Registered Agents." The difference is that we have the qualifications and credentials to back it up.
If you have questions about the Registered Agent requirement, contact us today If you're considering forming a business entity such as a Series LLC in Texas, Royal Legal Solutions can also serve as your in-state representative. Don't neglect this legal requirement for your out-of-state LLC or Series LLC. Take action and stay compliant by scheduling your personalized consultation today.

State-by-State Fair Housing Agencies

The Federal Housing Act prohibits landlords from discriminating based on color, race, national origin, religion, age, disability, sex, and familial status. These attributes are referred to as a protected category. This means that you should avoid doing the following when dealing with tenants:

If a tenant believes they have experienced housing discrimination, they can always contact HUD for assistance. They can also go through the tons of housing and discrimination resources available on the HUD website. In addition, they can contact their state’s fair housing agency as detailed below. The matter may be handled by the state attorney general’s office, a civil or human rights agency, or a fair housing commission.

 

While the Federal Fair Housing Act applies in all U.S. states, there are slight state by state variances in landlord-tenant statutes. Here are some resources to guide you on how to deal with tenant discrimination in your state.

State by State Fair Housing Agencies

Alabama

Detailed information on the Alabama landlord obligations and tenant rights.

Alaska

Important fair housing resources for landlords in Alaska from the regional HUD office based in Seattle.

Arizona

An overview of the Arizona fair housing laws from the office of the Attorney General.

Arkansas

Learn about the fair housing laws and the Arkansas Civil Rights Act (1993).

California

Details about how the Department of Fair Employment and Housing in California investigates complaints on tenant discrimination.

Colorado

Read about the fair housing training given by the Civil Rights Division of Colorado.

Connecticut

Details on the manner in which the Commission on Human Rights and Opportunities deals with tenant discrimination complaints.

Delaware

Go through the fair housing laws and the diversity training program of Delaware.

District of Columbia

Learn how to go about making a tenant discrimination complaint and how long it takes at the Office of Human Rights.

Florida

The fair housing laws in Florida and how investigations are carried out.

Georgia

Read on the fair housing rights of tenants in Georgia.

Hawaii

The details of fair housing laws in Hawaii and the landlords exempted from the provisions.

Idaho

How discrimination complaints and fair housing laws are handled in the state of Idaho.

Illinois

Go through the brochures detailing the tenant discrimination laws and the complaint process in Illinois.

Indiana

Useful information on the handling of the fair housing laws by the Civil Rights Commission of Indiana.

Iowa

Find out about the protected classes under the Iowa fair housing laws.

Kansas

Important information about the fair housing laws for landlords in Kansas from the regional HUD office.

Kentucky

Find out how the Commission on Human Rights in Kentucky handles complaints about tenant discrimination.

Louisiana

Resources about the fair housing laws in Louisiana.

Maine

Here’s some information about the complaint process for tenant discrimination in Maine.

Maryland

Information and resources about fair housing from the Commission on Civil Rights in Maryland.

Massachusetts

How complaints about fair housing are handled in Massachusetts by the Commission Against Discrimination.

Michigan

How the Civil Rights Department of Michigan handles fair housing discrimination.

Minnesota

Some useful information about fair housing for landlords in Minnesota.

Mississippi

Fair housing tips for landlords in Mississippi from the Regional HUD office in Atlanta.

Missouri

A snapshot of the process of filing a discrimination complaint in Missouri.

Montana

Information about fair housing in Montana for landlords.

Nebraska

The process of filing a tenant discrimination complaint in Nebraska.

Nevada

Information from the HUD Regional office in Denver about fair housing.

New Hampshire

Learn about the New Hampshire fair housing information from the Regional HUD office in Boston.

New Jersey

The rule on Multiple Dwelling Reporting and other important information about the fair housing law in New Jersey.

New Mexico

Resources for landlords in New Mexico about fair housing regulations from the HUD regional office in Fort Worth.

New York

Tenant discrimination laws in New York and how to go about filing a complaint.

North Carolina

An overview of the state fair housing laws in North Carolina.

North Dakota

Important information about how the Human Rights Division in North Dakota handles tenant discrimination complaints.

Ohio

Tips for landlords in Ohio on how to respond to a tenant discrimination complaint.

Oklahoma

Information and resources from the HUD Regional Office in Fort Worth about fair housing laws.

Oregon

How fair housing laws are handled in Oregon.

Pennsylvania

Information about landlord discrimination and tenant rights in Pennsylvania.

Rhode Island

Fair housing laws in the state of Rhode Island.

South Carolina

Details from the HUD regional office in Atlanta about the process of filing discrimination complaints.

South Dakota

Fair housing rules for landlords in South Dakota from the HUD office based in Denver.

Tennessee

A guide on how to file complaints about tenant discrimination in Tennessee.

Texas

Valuable information about procedures and complaints about housing discrimination in Texas.

Utah

How to file housing discrimination complaints in Utah.

Vermont

Learn about housing discrimination in Vermont.

Virginia

Laws governing landlord discrimination and procedures for filing a complaint in Virginia.

Washington

A breakdown of the complaint process for tenant discrimination in Washington.

West Virginia

How tenant discrimination is handled in West Virginia by the Human Rights commission.

Wisconsin

Tips for landlords about fair housing discrimination from the HUD office in Chicago.

Wyoming

Fair housing tips for landlords in Wyoming from the HUD regional office in Denver.
At Royal Legal Solutions, we can help you navigate the legal minefield set before you in your dealings with tenants. Contact us today and we’ll help you understand and comply with all legal requirements in your state.

Dealing With Tenants Who Have an Addiction to Drugs or Alcohol

With the sheer prevalence of substance use disorders and addiction in the United States, most real estate investors will have to confront the issue of a tenant suffering from the disease of addiction at some point. The Centers for Disease Control estimate that one out of every eight of American adults are currently struggling with alcoholism, and an additional one out of ten are addicted to narcotics. Our nation is also in the midst of an increasingly fatal opioid drug crisis that has claimed thousands of lives. So, what can a landlord do when confronted with evidence of a tenant's addiction? This article will explore the rights of addicted tenants and discuss some of the basic strategies for managing such tenants.

How Your Tenant's Addiction Can Affect You

Many landlords simply do not want to deal with a tenant in active addiction. Some of these concerns are based on stigma or stereotypes about people who use drugs and alcohol. Others are more practical. It is often true that a person struggling with substance abuse is unreliable. Addiction leaks into every facet of a person's life as the disease progresses. Problems with daily tasks and finances are extremely common among alcoholics and addicts. As a person's addiction grows more severe, they are more likely to make a mess of your property, neglect their financial obligations to you, fail to report problems with the property, and even become hostile or belligerent in their communications with you.

So many landlords don't want a substance-abusing tenant in the first place. However, there are laws that protect your addicted tenant's right to housing. Knowing these laws is vital to handling your business relationship with the tenant in a fair and legal way.

Can You Evict a Tenant Over Their Addiction?

Upon discovering that a tenant is an alcoholic or addict, many landlords want to evict the person immediately to avoid some of the consequences discussed above. However, addiction is a recognized disability under the Fair Housing Act. This federal law was designed to ensure that people with disabilities are not discriminated against. While discrimination certainly still occurs, engaging in discrimination as a landlord could land you in court. Even restricting access to your home based on suspicion that your tenant has a current or former addiction could expose you to liability.

Without fair housing laws, people with mental and physical disabilities would not be able to access housing. So, what can you do in the case of addiction, as it is considered a disability?

Do Discrimination Laws Mean I Have to Put Up With Bad Tenant Behavior?

Discrimination laws are designed to protect groups of people, not their behaviors. A simple analogy might be to consider a tenant who is blind. You cannot evict the tenant for their blindness, but if that same blind tenant happens to be bashing holes in your wall with a sledgehammer or otherwise violating their lease, you can indeed evict them based on the behavior.

Behaviors that are against the law are not protected by discrimination laws. For instance, a person who is using and dealing cocaine in your home is committing multiple crimes. If the person is using a substance illegally, that's a whole different ball of wax than a person whose drinking habits or legal prescription drug use you might not personally approve of.

What to Do if You Suspect Your Tenant Is Abusing Drugs or Alcohol

These six practical tips can help you navigate your relationship with an addicted tenant.

1. Understand the Difference Between Active and Former Addiction.

Landlords should be aware of addiction recovery. People recover from alcoholism and addiction often, meaning they no longer use drugs or alcohol. People in recovery often make great tenants, as they have addressed their problems. Understanding this distinction will help you, but the remainder of this article will discuss active users.

2. Screen All Applicants Fairly.

Treat all applicants equally to avoid discrimination accusations. If you're concerned about drug and alcohol use, ask all applicants the same questions. The little old lady with blue hair and the 20-something in a sketchy trench coat with circles under his eyes should get identical screening processes.

3. Be Aware of Your Own Biases.

Stigma against addiction alone is not a reason to take action against a tenant. Everyone has biases of some sort, particularly with how common these problems are. Don't take out your feelings about an alcoholic family member or a tenant without evidence.

4. Document Evidence You Find Troubling.

Focus on the behavior, not the person. Never rely on gossip. Just because a neighbor says they saw your tenant at the methadone clinic or an NA Meeting doesn't mean it's true. These behaviors are also normal for people in recovery, who generally abstain from drugs and alcohol altogether.
If you're concerned about a tenant's behavior, collect appropriate evidence. If maintenance sees drug paraphernalia, ask for a photograph. Take pictures of property damage.

5. Take Action Against Dangerous Tenants.

The law does not give any tenant the right to engage in behavior that is violent, destructive, or dangerous to others. Profound destruction of property, threats to neighbors, and regular drunken fights that wake the neighbors or summon the police are not behaviors you should tolerate. When out of your depth or in immediate danger, call law enforcement for help. Contact an attorney if you're uncertain of the best course of action.

6. Be Willing to Make Only Reasonable Accommodations.

Of course, this goes for tenants with any type of disability. Allowing a tenant with limited mobility to install a ramp or shower bars isn't just the kind thing to do--you may be legally obligated to make such accommodations.

However, active addicts are notorious for manipulations. If a tenant requests something outlandish or unfeasible based on their disability status for addiction alone, you don't have to cower or cave. The hard and fast rule for accommodation requests is that they must be both reasonable and directly related to the disability. You don't have to do anything absurd, like allow the addicted tenant to not pay their rent on time because they "need" the money to fund their habit. Just say no. When confused about the law, get professional help.
The bottom line here is simple. Treat the tenant with compassion, but be firm in your boundaries. Boundaries are essential for handling active addicts. If a tenant confides in you that they are in recovery, take care to treat them the same as you would any other. But never tolerate behavior that puts you or your property in danger.

Landlord-Tenant Statutes, State by State

Wise real estate investors know the importance of guarding against lawsuits. You may already employ an asset protection strategy to protect your investments. Even so, it is always a good idea to be familiar with the laws governing landlord-tenant relationships in your state. You can search your state's website to read the text of the most current statutes, but we realize you're busy and probably don't want to spend your free time deciphering legalize. So we're here to help you understand the most common types of state statutes in plain English.

Federal Laws All Real Estate Investors Should Know

There are federal laws that apply to all landlords and tenants, regardless of where they live in the United States. If you're a landlord, here are some of the most critical federal laws to be aware of:


While these laws are universal, the details vary depending on state. Let's dive into some common statutes and how they are worded in different states.


Landlord-Tenant Laws That Vary By State

While each state has hundreds of pages of law governing the rights and obligations of both landlords and tenants, we're going to cover some of the basics here. Many of these are the same types of a statutes, with different details. Below, we will cover some of the most common types of statutes and provide resources for you to review how they may affect your rental properties.

Security Deposit Limits and Lawsuits

Nearly every state has regulations regarding security deposits. Some of the most common types of statutes will place a hard limit on how much a landlord can require a tenant pay for a security deposit. Ordinarily, the limit is calculated based on rent. While some states will have a dollar amount maximum security deposit, many more simply say deposits may not exceed 1-2 months worth of rent.

Security deposit statutes also outline the circumstances under which a landlord may keep the deposit. Similarly, each state has a finite limit on how long a landlord may take to return a security deposit. These can range anywhere from a week to 60 calendar days.

Disputes over security deposits and their return typically occur in Small Claims Court. Most states will restrict the amount of money that a tenant can recover in damages to anywhere from $1,000-$15,000. Some states, such as Connecticut, have no limit at all on how much a tenant can recover in these types of lawsuits. Occasionally, suits are brought in different venues. In Florida, these types of disputes are settled by the Magistrate's Court. Similarly, security deposit suits in Delaware are handled in Justice of the Peace Court.

Late Rent and Bounced Checks

Bounced check and late rental fees are a common practice. The purpose of these laws is to encourage tenants to pay rent in a timely manner. Some states allow for a "grace period" for tenants to pay late rent before eviction proceedings begin. Florida and Georgia have both guaranteed tenants a right to a three-day period. This allows the tenant to make the payment without threat of immediate eviction.

Eviction Issues: How Long Do Tenants Have to Move Out?

Some common causes of eviction include:


Regardless of your location, you will generally have some time to remove your belongings from the property. How much time will depend on your state's eviction statutes.

"Repair-and-Deduct" or Other Living Condition Issues

If your home needs a vital repair (such as for a leaky roof or a water heater), it is generally the landlord's obligation to attend to this. If a landlord neglects these responsibilities, many states allow tenants to deduct the cost of making a necessary repair from the rent. This concept is known as "repair-and-deduct" rights. Tenants can even sue the landlord for the cost and inconvenience caused if they are forced to make such repairs. Repair-and-deduct rights are not universal. Check this list of state statutes to see if your area offers these rights.

Bottom Line: Understand Your State Laws

That wasn't too painful, was it? Of course, the law is always adapting. Everything that is factual at the time of this writing is subject to change, and by no means is this a conclusive list of the real estate law that may affect you. It would be impossible, for instance, to account for all local ordinances in this space. For this reason, we recommend that real estate investors build a dream team that includes a CPA and an attorney to ensure total legal and tax compliance. A qualified real estate attorney can help you understand the nuances of landlord-tenant law as they apply to your particular investments.

At Royal Legal Solutions, our attorneys aren't just lawyers, but fellow investors. We're here to help you understand and comply with the legal obligations you face as an investor. Begin building your real estate dream team by consulting with one of our real estate attorneys today.
 

The Basics of Creating a Series LLC

When it comes to creating your own business or even forming one that already exists and putting it under your name, there are a few things you need to know.

You may want to form your business under an LLC or a Series LLC. An LLC stands for Limited Liability Corporation and it is slightly different from a Series LLC. The only difference between the two LLCs is that a Series LLC is protection for multiple LLCs. (Note: A Series LLC is sometimes called an SLLC.)

When forming a series LLC, the first thing you need to do in most states is to register with the Secretary of the State you are in. This filing will cost you a fee. However, there is much more to it than that. Read on!

Things You Need to Get Your Series LLC Started

Although not all states accept Series LLCs, those that do accept them require a few things before you get started:

One other thing you must do when forming a Series LLC is to make it clear that you are creating a Series LLC. However, it does differ from each state when registering and whether or not you have to notify them that you are filing for a Series LLC. In certain states like Utah, Texas, Delaware, Tennessee, and Oklahoma, it is a requirement that you notify officials that you are creating a Series LLC with seperate rights on each one. However, how much detail you do have to provide for it will depend on the state you are filing for one in.

Once all of your documents are filed on your LLC, you are officially in business.

Big Considerations to Take When Naming Your Land Trust

Today I’ll shed some light on an aspect of land trust that may seem so simple, it’s often overlooked. The naming of a land trust shouldn’t take much time, but it should be done with some care.

The main thing to consider when naming your trust should be maintaining privacy. Below are some naming tips for anyone considering a land trust. Start with our guide (What Is A Land Trust?), then follow these do’s and don’ts to keep the anonymity of your land trust intact.

Think Like the Opposition

It’s human nature to dislike thinking about potential fraudsters or angry ex-business partners or even worse, ex-spouses. After all, if you go about your business and personal life with integrity, nobody should ever be out to get you right?

Unfortunately, simply looking like you have wealth or something of value to go after my be reason enough for someone to target you. This is why you don’t want your name or any other personal information revealed in the naming of your land trust.

One of the main attractions of a land trust is that it’s a vehicle for anonymous property ownership and purchases. Listing your name as your land trust name can jeopardize that privacy. You risk having your name show up online or in records connected to your property. You make yourself an easier and a desirable target since you’re now linked to something of value, which is your property.

Creative Trust Names Are Best

There’s no need to form some crazy system of code names. However, being lazy and simply naming your land trust as your full legal name can backfire. Don’t be afraid to be creative with naming your land trust. For instance, you can name your land trust to sound like a vague fictional company, unrelated to anything in your personal or professional life.

Don’t Rely on a Lazy Advisor

Sadly, some advisors by default will recommend that you name your land trust as your full legal name or address. A busy advisor may not have the time or creativity to invest in this seemingly small detail.

Take control of this component of setting up your land trust. First, brainstorm a handful of names. Then, look through your list and ask yourself if any of those name reveal anything that could jeopardize your privacy or make you stand out as an attractive target. Your land trust name should pass this test, before it’s listed on your trust documents.

Set up Your Land Trust

The do’s and don’ts of naming your land trust boil down to maintaining privacy and thinking ahead. Our legal team can assist you with the nitty gritty details of naming your trust, land trust basics, and your larger estate planning and asset protection goals. Contact us today for a consultation.

What States Are Permitting Series LLCs?

The Series LLC is beloved by investors and business people for its versatility and a broad range of benefits. However, it isn't a universal structure yet. Not all states allow the in-state formation of Series LLCs. Below, we'll go over which states do not permit Series LLCs. We'll also tell you what you can do if you live in one of those states. Don't worry--you can still form a Series LLC. Keep reading to learn how.

States that Offer Series LLCs

The Series LLC was initially pioneered by Delaware, a famously pro-business state. Even today, Delaware remains a popular state for entity formation. Other states followed in Delaware's footsteps, and today you can get a Series LLC in Texas, Tennessee, Utah, Nevada, Illinois, Oklahoma, and Iowa.

Though not technically a state, residents of Puerto Rico also have the option to form a Series LLC without ever leaving the island.

States That Don't Permit Series LLCs

As of this writing, the only state that doesn't allow the formation of an in-state Series LLC is California. California has specific and strict regulations governing business in general, and there is currently no such thing as a California Series LLC. Traditional LLCs are common, as are other types of entities and agreements. We've written about special considerations for California real estate investors before.

If your state doesn't offer a Series LLC, don't slam your hand down on the panic button just yet. There's a way to get around the restrictions of your location, easily and 100% legally.

How to Form a Series LLC From Any State

Fortunately, your Series LLC doesn't have to be formed in your state of residence. This means, provided you're a U.S. citizen, you can form an out-of-state Series LLC.

The following are the most popular states for forming a Series LLC:

Each of these options comes with specific operational, judicial, and tax benefits. Which option will be best for you depends on which features and perks you'll get the most out of. For more details, refer to our previous article on the best states for forming a Series LLC.

After you've selected a state and formed your LLC, you will be able to register the company with your state of residence. Even California allows its residents to register a Nevada or Texas Series LLC and conduct business within California. Of course, these laws will vary based on where you live. Each state will have its own regulations that dictate what you and your company must do to be in compliance with the law. You can get an idea of what you'll need to do by doing some basic research online.

However, the wisest course of action is to seek the guidance of an attorney with experience in entity formation, and ideally, experience with Series LLC in particular. At Royal Legal Solutions, we routinely help our clients select, form, and manage the best type of Series LLC for their individual situations. If you have questions about the best option for you or are ready to get started, don't hesitate. Reach out to us and schedule your Series LLC consultation.

Asset Protection For Real Estate Investors in California

Real estate is big business all over the country, but savvy California investors must be aware of the limitations and unique concerns they face under state law. While California is a popular place for residents and investors alike due to its scenic nature and abundance of real estate opportunities. However, the state is not known for being especially pro-business. This means, you need to be aware of the information below before forming your asset protection plan. Read on to learn the importance of asset protection for your real estate investments, basics of what you will need for the most successful plan, the special circumstances of investing as a Californian, and how to get around state restrictions to grow your business at the lowest cost possible.

Why Do I Need an Asset Protection Plan?

All investors will need an asset protection plan eventually, and it's best to have one in place before you even start investing at all. The simple reason is this: without an asset protection plan, a lawsuit can absolutely ruin your life. Even if the suit is frivolous or irrational, you can still lose. You don't even have to be rich to become a target. You just have to have more than someone else. And everybody has something that is attractive to someone less successful than themselves. Unfortunately, we live in a country where 1/4 of our citizens will face a lawsuit in their lifetime. These figures are even higher for real estate investors.
As investors ourselves, we know that you work hard for your profits and properties. That is why we're so passionate about this subject. With a few simple preparations, you can be inoculated against a lawsuit that could clean you out of everything you own.

How Does Asset Protection Work?

Asset Protection works by minimizing your liability as well as the appearance of your assets' value. A good asset protection plan keeps your personal name off of your property, so that you are incredibly hard to find and nearly impossible to tie to your assets. This way, if anyone comes after you or your business, you won't look like an impressive target. Your personal assets are safe if a business asset is sued and vice versa.

In short: asset protection works by making you a pain in the butt to sue. Attorneys are money junkies. If you don't look worth their time, you're safe.

Key Asset Protection Tools for California Residents

California residents will run into unique issues as real estate investors. All investors should use an entity as the basis of their asset protection strategy. But in California, you will pay a lot more for an in-state entity. Some of the costs you will face are an $800 minimum franchise tax, higher annual fees to maintain the LLC, and unfavorable tax treatment. There are also more restrictions on how you're able to run your business. Fortunately, the following tools can help you minimize these costs, simplify your business's growth, and give you greater control over your burgeoning real estate empire. When employed together, these tools have proven time and again to be extremely effective lawsuit prevention methods as well. Let's talk about them one by one.

Series LLC from Out of State

California LLCs have high annual costs and do not offer the most effective structures for real estate investors. Fortunately, you have alternatives. You can form an LLC in a state with more favorable liability protections and overall costs. Even better, you can form a Series LLC. This entity will allow you to develop your real estate investments infinitely, streamline your business, and serve as the key structure for your asset protection plan. The three best options for Californian investors are:

No matter which of these options you decide to go with, you will have to register an agent. This person is your point-of-contact for all legal and business matters. Think of him or her as your in-state representative for business purposes. We've written more extensively about Registered Agents and how to find them, but all you need to know for now is that Royal Legal Solutions is here to assist you through this process. We can find you an affordable agent so that you can take advantage of the best Series LLC product for you. We can even serve as your agent for a Texas LLC.

If you already have an LLC, that's fine! Our experts at Royal Legal solutions can help you incorporate your LLC into a Series LLC based in another state.

Trusts and Anonymity Protections

Anonymity is absolutely essential to the success of your asset protection strategy. As you may recall, anonymity protects you by distancing your individual means from your investments and other assets. You may be wondering what tools you will need to accomplish this. Fortunately, we offer a full-service Series LLC with Anonymity Protection. We use lesser-known legal and financial tools such as:


Of these, trusts are the most effective legal structures. Anonymous trusts work by placing the ownership of your Series LLC or other business entity in a corporate name of your choosing. Employed correctly, this effectively prevents anyone from finding any record that you even own the property in question. Your name will be nowhere to be found on the public record. Even better: if the person suing you knows for a fact you own the land, they won't be able to prove it. Land trusts serve a similar function, and can be used on their own or in conjunction with Anonymous Trusts to further distance you from your property. But land trusts also have distinct tax benefits and can be held by accounts as well as entities.
So for all our Golden State readers, are you ready to form your asset protection plan? Proactivity on your part can guarantee the success of your business and security from lawsuits in the future. If you're already investing, don't wait until it's too late: consult with a qualified attorney and develop the best asset protection strategy for you today.