The Real Threats to Your Self-Directed IRA & How to Defend Against Them

One of the many reasons real estate investors love the self-directed IRA (SDIRA)  is the control they have over both their assets and participation with traditional custodians. But many investors are also aware of the SDIRA’s relative security as an asset protection tool. If you weren’t aware of this benefit before, you are now. 

Don’t make the same mistakes other investors make. Watch out for threats to your SDIRA’s security. If you establish an SDIRA, it’s smart to do what you can to protect it; read on to learn how.

How Safe Is Your Self-Directed IRA?

When pros like attorneys discuss self-directed IRAs being “safer” than other investment vehicles, they’re referring to safety in two senses of the word. Your SDIRA isn’t “safe” from any type of attack, but it does protect you legally:

So, this article isn’t intended to suggest IRAs are inherently risky, just to remind you how not undermine its protections. The sticky reality is that for real estate investors, self-directed IRAs can be riskier when they own assets (including REI property) that have liabilities attached.

Your Biggest Threat: Prohibited Transactions Explained

The biggest way you can be a danger to yourself and your self-directed IRA is by performing prohibited transactions. The prohibited transaction rules are a gift from our buddies at the Department of Labor. Basically, there are things you can’t do in a business context with your SDIRA:

  1. Self-dealing is the term for doing business with yourself via your self-directed IRA or other qualified retirement plan (QRP). You can’t do this, frankly, because of too many opportunities for corruption.
  2. Disqualified People.The DOL isn’t dumb. They disqualify certain individuals, namely relatives, spouses, and other types of people you might form “sweetheart deals” with like business partners. So to keep everyone playing fair, plan participants can’t allow their plan to make transactions with anyone the DOL labels a “disqualified person.” Expect to pay hefty penalties if you do.

For your convenience, we’ve compiled an educational resource about avoiding prohibited transactions, complete with examples. Our prohibited transaction resources can help you educate yourself to the point you avoid engaging in such transactions with your self-directed IRA. The only downside to the SDIRA’s freedom from custodians is such freedom means you are responsible for dodging prohibited transactions.

How to Protect Your Self-Directed IRA

You have additional options for protecting your IRAs. For those of us concerned about our real estate assets, the liability-limiting powers of the SDIRA LLC offer an elegant fix.

Consider a Self-Directed IRA LLC for Liability Protection

The ideal legal tool for a long-term SDIRA owning REI is the SDIRA LLC. This variation of the retirement plan is hybridized into an entity, a more secure option for investors.

The SDIRA LLC is an alternative to the IRA Business trust, another option for IRA-owned entities. Real estate investors are attracted to the LLC option because of its strong liability protections. Using an SDIRA LLC gets investors the flexibility to buy real estate with IRA funds and the protection of an LLC, or the best of both worlds.

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.

Series LLC for Real Estate Investors in Connecticut

There’s now denying that citizens of Connecticut are innovators, with nearly 400 years of history dating all the way back to Colonial times. While most Americans are aware the state is deeply interwoven with early American history, the actual achievements of the Constitution State are not always recognized. After all, Connecticut is both one of our original 13 colonies and home to both the world’s first telephone book and the world’s first nuclear submarine. So we know not to underestimate the sheer brainpower and drive of our Connecticut REIs.

If you’ve wondered how you can get a Series LLC, we’ve got answers. Here’s the real skinny on the Series LLC for Connecticut real estate investors.

Is There a Connecticut Series LLC?

Connecticut has yet to join the club and adopt the Series LLC. They've held out on this issue while 17 other states and Puerto Rico adopted their own. We're not surprised to see the state that Colt Firearms calls home resisting, but you can still have your entity.

Fortunately, neither your hands or finances are bound by your state’s borders.  You can form your Series LLC in any state that permits one.

What’s the Connecticut Investor Who Wants the Series LLC to do?

Recall the state motto of Connecticut: "He who is transplanted still sustains." Well, in the case of real estate investing, the individual who willingly transplants their real estate company to another state. Just because you live or own property in Connecticut does not mean that you are stuck there legally. You're a United States Citizen, so enjoy that freedom and wander into a better jurisdiction for real estate investors business owners.

You, like any investor, can actually select the Series LLC of your choosing based on the benefits that are available in your chosen state of formation. Studying some of the Series LLC options can be helpful in making this decision.

What Are The Connecticut Investor’s Series LLC Choices?

So of our current Series LLC choices, which ones are the best for you?

At the time of this writing, we consider these states to some of those we advise investors to consider for their Series LLC formation include:

Research these states, and compare their benefits and drawbacks. Of course, a legal professional familiar with asset protection will be best suited to help you, but coming in with ideas can save time and money. We hope Connecticut investors now have a better grasp of their true choices for Series LLCs.

What Is Corporate Compliance and Why It’s Important For Investors

If you go through the effort of forming, building, and growing a company, you want to be sure to do everything you can to protect your business. One thing you simply can’t afford to ignore as a business owner is compliance. Let’s talk a bit more about what corporate compliance means, involves, and looks like.

What is Corporate Compliance?

Broadly speaking, corporate compliance describes how closely your company adheres to the law and any other policies it should be following. You can break it down into two basic categories:

Internal and External Compliance: What You Actually Need to Worry About

And don’t worry, that headline’s not a tease. We’re seriously going to show you how to not give a single solitary F-bomb about compliance. 

Internal compliance matters because it allows you to control your “in-house” liabilities, such as setting up the proper type of company, asset protection, contractor and property manager issues, and much more about your day-to-day.

External compliance, on the other hand, is more focused on the legal pieces of your company needs. This is just one of several reasons why attorneys offer services to assist. Attorneys can help you satisfy the most critical pieces of external compliance, which in our opinion are:

Of course, pros are happy to give you tips too, but generally good ones don’t do it for free. Paid consultations give you a competent real estate support team. This is especially important for ...

Both concepts of compliance are vital and can be offerings of full-service corporate compliance firms or agencies. Let’s dive into why you might think about using one, and your alternatives if you’d rather not pay.

Why Your Company’s Compliance is Crucial

The consequences of noncompliance aren’t pretty. What consequences will depend on the severity and type of noncompliance, but none are pleasant. If your LLC is noncompliant because you got a LegalZoom or similar company’s weak cookie cutter LLC, it may be totally useless as a business entity and thus offering you no real lawsuit protection. With so much on the line, why play around? 

Corporate Compliance: The Real Estate Investor’s How-to Guide

While all of these rules and regulations may seem like a drag, fortunately, you don’t have to wade through all the legalese and paperwork on your own. Professionals can help you be certain of your company’s compliance, with many offering specific corporate compliance services. Let’s talk about what these services look like in real life.

Real Estate Compliance Options

Generally, here are the kinds of services you can purchase from full-service firms. The value of a full-service firm is greater for real estate investors who have more expensive time. “Expensive” by the way can be measured in numbers for most of us. Look at what you average as an hourly rate and decide if putting even one or two hours of time towards compliance is “worth it.” If you can’t get the job done for under $100-300, you absolutely want to think about full-service. Even if your hourly rate is $20, that gives you five hours a year to devote to compliance. The idea that compliance services are for “rich investors only” or those who are well on the way to success is BS, to be blunt. Here’s the quickest, but not only, reason why. 

You can pay a full-service legal firm (not an online LLC-in-a-box shop because lawyers are more effective than LegalZoom or template companies, always) very little money to have them address that list of obligations above. Moreover, investors who purchase a compliance package usually get these things:

When Discussing Your Estate Plan: What To Do With Your Remains

One of the major decisions you will make as a part of your estate plan is how you want your remains handled. Some approach this as a matter of disposal, others as an opportunity for preservation of their legacy. But the options are only getting more interesting if you’re willing to think outside of the box on this issue. For the sensitive readers, if frank discussion of death and the natural processes that accompany it makes you uncomfortable, maybe now would be a great time to check out this excellent estate planning article instead.

Still with us? Let’s get right into the nitty gritty details of some of the more novel approaches to memorializing human remains. If this news story seems a little too intense for you, check out one of our previous estate planning news pieces on celebrity deaths.

Human Composting: Return to the Earth and Create New Life

The idea may seem distasteful on the surface, but stick with it for a moment. Are cremation and burial any more glamorous? With exceptions for religious variation, most folks are fine with burial, an essentially wasteful process (absent other altruistic actions like organ donation, a very cool thing) that involves a return to the earth from whence we all came. But what if your body could continue to provide life as part of a greater ecosystem as a part of that process? Well, it can if you use a human composting service. 

While there are multiple specific methods for human composting, the process involves using natural and biodegradable materials to encourage the remains’ reintegration back into the earth. Some companies use funguses or mushrooms, while others may use a variety of organic materials.

Is Human Composting Legal?

Location will determine if human compositing is a possibility for your own estate planning needs. Those with a specific plan for where they would like their resting place to be would be wise to research well in advance about the legalities of the issue in the relevant jurisdiction. Some, but nowhere near all, states and even smaller units of government have regulations requiring either burial or cremation. Generally, human composting is type of service that is legal where offered. Private providers of such services should be able to advise where they can and cannot operate. This area of law may change in the coming years as more advances in estate planning technology inevitably occur.

Washington was the first brave state to spearhead formal legalization of human composting, thus allowing an industry to flourish.

Why Would I Consider Human Composting or Other Burial Alternatives?

Burial is expensive. Very expensive. Somewhere between $8,000 at the most bare bones to $20,000 on average. Cremation can be cheaper but still runs comparable to the low end of burial. A representative of a major human composting company went on the record to confirm the price of their total service as $5,500.

If you find human composting isn’t as desirable for you, consider some of the other interesting burial alternatives that more Americans are embracing in part to combat end-of-life costs. The LifeGem is yet another memorial novelty, though this type leaves loved ones with a carbon-pressed gem made from the naturally-occuring carbon in your body. The result is a gem that can be mounted on jewelry or other keepsakes. What do you think of these more physically conservative memorialization options? Odds are good that trends that minimize costs and add meaning to the grieving process will have plenty of room in the estate planning market.

Series LLC for Real Estate Investors in Wyoming

We love hearing from our fellow investor friends in Wyoming for a few reasons. Not only do citizens of the Cowboy State tend to be good, honest salt-of-the-earth folk, but also sharp real estate investors. So it’s no small wonder we get tons of questions about the Series LLC for Wyoming investors. It is a mighty entity. Wyomingites, here’s your quick and dirty guide.

Does Wyoming Have a Series LLC?

Wyoming is actually one of the newest adoptees of the Series LLC. They became the 18th state to legislate the entity into their existing LLC law in 2018. Big Wyoming has long been known for the powerful protections the state offers Traditional LLCs, and they extend to the Series.

That said, you need not assume that living in Wyoming means a Wyoming Series LLC is your only or best option. You can form your Series LLC in any state that permits one.

How Effective is Wyoming’s Series LLC?

We will admit that here at Royal Legal Solutions we have said we believe some states have better Series LLCs. That said, we haven’t always given Wyoming a completely fair shake. People usually ask for our top three picks, and Wyoming being such a new kid on the block has meant this is our first occasion to write in depth about the state’s entity. Generally, when folks ask us which three states we like, these are our go-to responses and reasons:

But Wyoming actually offers a very strong Series LLC. State-level asset protection laws are rather investor-generous, meaning it can be considered a top contender for some investors.

What’s the Best Series LLC for the Wyoming Investor?

We believe your Series LLC should be formed wherever serves you best personally. Wyoming investors cannot be generalized. The drawbacks and benefits of a Wyoming Series LLC vs. the alternatives we discussed above will actually vary heavily from individual to individual. What’s good for the REI goose seeking judicial protections isn’t necessarily great for the REI gander who’s content to rely on Wyoming’s strong asset protection laws.

The two best things you can do are study up on these structures and seek the advice of a qualified asset protection professional. We try to help out with regular educational materials on this badass structure for real estate investors--because we’re big believers that all REIs should at least be aware of what this entity’s capabilities are. So please feel free to get your fill of our educational resources. For example, if you haven’t yet, you should catch our short piece breaking down the biggest benefits the Series LLC gives REIs.

Benefits of Estate Planning: Give Your Heirs Control

Let’s do something folks don’t do much: Let's talk about the fun side of estate planning.

While it’s hardly a rip-roaring cocktail party subject, it’s important nonetheless. An improperly planned estate, or worse, no plan at all, complicates your already painful death for those who care about you. Here are some of our favorite benefits of estate planning, spelled out in a bit more detail.

Estate Planning Gives Your Heirs Control of Your Real Estate Business Forever

As a real estate investor, you know the importance of planning ahead for your business. If supporting your family or other loved ones is one of your investing career goals, as it is for many of us, then the kindest thing you can do for those heirs is get familiar with estate planning for real estate investors. 

Depending on what type of REI business you have, it’s fairly easy to make sure it outlives you. Some structures, like the Series LLC with its potentially unlimited lifespan, make this task easier. 

Estate Planning Empowers You to Create Your Legacy Now 

Even though we love to talk shop about our riches and portfolios, ultimately, most of us don’t want to be remembered for our money alone. Leaving your heirs a business with a clear secession plan can save them the stress of also attempting to define and preserve your legacy.

YOU are the best authority on you and how you’d like to be remembered. The worst thing you can do is not have an estate plan at all.  Heck, even if you don’t have family, friends, or even pets to provide for, you can simply give everything you own to charities close to your heart. If you want to establish a philanthropic legacy as well, many of the legal tools that asset protection experts like the Royal Legal Solutions team already use can help you make such donations. 

Frankly, if you’re successful enough to have this problem, well, nobody’s going to feel sorry for you. You’ve got RLS’s sympathies, though. But that’s because we know who gets your money if you don’t decide first: that honor goes to Uncle Sam and a small army of attorneys and accountants. Everyone’s favorite people!

Giving away all your assets to the IRS isn’t most people’s idea of a storybook ending. Again, even if you can’t think of who your heirs would be, you can still probably think of a few people you don’t mind whose lives may be dramatically improved by your generous forethought and support. 

A free property for a homeless man or sending your friend’s kid to college, really you can find something somewhere. The beauty of building your own legacy is you truly get to call the shots. Estate planning can ensure you’re remembered through your support of both people and causes dear to you for years beyond your passing. 

Benefits of The Living Trust/Pour-Over Will Combo

The go-to model that works for most investors with assets valued under $10 million is a combination of the pour-over will and living trust.  With these tools working together, you need not worry about all of those “Last Will”-only issues. You simply deed all of your assets to the living trust, which is a type of trust formed by an attorney that allows you to seamlessly hand off assets to your selected heirs. There’s no need for the agony of probate court. Click here to learn about the living trust.

As for the pour-over will, it’s a better choice as well than a “Last Will and Testament” alone. But a will alone is not a full estate plan. The pour-over will is superior, but needs the living trust to work properly. The pour-over will simply ensures any assets you have will go to the trust upon your passing. This can help avoid some of the sadder situations involving confusion regarding heirs and other unique estate planning situations. 

The good news is that setting up this type of plan is simple with proper professional help. Our needs during the end of life can be highly individualized. Working with a qualified estate planning attorney can help you determine what you need most.

Estate Planning: The FAQs

Estate planning is confusing enough for the average person. But as real estate investors, we have a host of unique concerns on top of the Average Joe/Jane. It’s true that estate planning may be stressful for anyone, but understanding estate planning for REIs is too important to ignore. Luckily, this article’s a stress-free way to learn about the topic.

Death sucks, but let’s just accept it and take a few minutes to get hip to the basics. We’ve even got an educational piece to help you out: “Estate Planning: The How the Why and The Basics” handy for you. Check it out if you feel lost at any point here. We’ll wait for you to re-join us.

Back or already familiar? Great. Let’s dive into our most common estate planning FAQs.

1. Don’t I Have to Be Really Rich to Need an Estate Plan? 

Definitely not. Everyone should create an estate plan for one simple reason. Dying without an estate plan is always more expensive (financially and emotionally) than creating a suitable, appropriate one.. 

Dying alone is expensive. Funerals are costly, any unpaid debts have to be handled, and of course, there’s your grieving family. They’re paying emotionally, spiritually, and with their time. If their time and money matters to you, creating an estate plan will at least give them a roadmap and fewer responsibilities. 

Estate planning is more humane on families and loved ones, as they’re typically the ones having to round up your credit cards, make sure bank accounts get closed, worry about life insurance and the hundreds of other details that accompany death. When you really think about all of these costs together, the amount of money spent on estate planning begins to look like nothing. 

2. Everyone Needs an Estate Plan, So Why Do Investors Have to Do Anything Different? 

Don’t forget that your business is an asset with the ability to literally outlive you, possibly indefinitely depending on its structure. But the reality is simple. Estate planning is how we can direct where anything that matters to us goes when we pass. If you have properties and asset protection structures like liability-limiting entities (LLCs, Series LLCs, Delaware Statutory Trusts, etc.), estate planning just becomes more important.

3. Isn’t a Last Will and Testament Good Enough for Estate Planning?

Again, not at all.  A full estate plan is not the same as a simple “Last Will and Testament.” Lord knows enough misinformation persists in popular culture about these documents. Those cinematic scenes we’ve all scene of some character hand-writing a last will, often upon deathbed or battlefield for dramatic flair are hilariously wrong. First of all, DIY estate planning is a bad idea. Tempting as it is to point out the many problems with these scenes, the most misleading aspect is that it glamorizes the will and makes people think that’s all there is to it.

Here’s the real deal: a will can be part of your estate plan. But you can’t rely on it alone. If you do, you’re likely to have to pass through this unfortunate soul-sucking spot called probate court.

5. What is Probate Court?

Probate Court’s a real drag. Basically, your heirs get to sit around and watch the riveting legal conversations that only the true dorks like us at Royal Legal like. During this process, you’ll be racking up fees for the Court, any attorneys or accountants needed, etc. It’s better to just avoid the whole mess altogether. And presumably to add insult to injury, the pros get paid out long before your heirs do, particularly if you attempt to DIY a will and miss a critical part. Sadly people do this because they see dramatic movie scenes of people penning Wills, etc. That’s a great way to get yourself a one-way ticket to Probate Court.

But you can avoid probate court with a real estate investor-tailored estate plan.

6. What Do Proper Estate Plans for Real Estate Investors Look LIke?

For real estate investors with under $10 Million in assets to defend, there are two fundamental tools that are essential for planning an adequate estate plan that also protects assets in life. These are the pour-over will and living trust. Let’s review both.

The living trust is a much more effective vehicle for conveying your assets directly and tax-efficiently (or even free, occasionally) to your loved ones and other heirs than the traditional “last will and testament.” Remember? That’s movie stuff. If you want real protection, you need a living trust that contains all of your assets and a pour-over will to back it up in the event you acquire assets not yet in the trust. Learn more from our living trust explainer. 

There’s much more to estate planning than these two tools, but they are universal for most plans for the majority of investors. Take the time you need to research. After all, estate planning is how you control where the rewards of your life’s labor go and provide for the ones you love. They’re worth 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. 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.

Future Retirement Health Care Costs Expected To Fluctuate

One of the reasons we save for retirement is because medical costs invariably go up with age. Saving for your own eventual care, even if you’re healthy as a horse now, is wise. But recent projections suggest you may actually want to save a little more. Cost of care is expected to continue fluctuating, and after all, there’s no such thing as too much savings. Here’s what you need to know about how to prepare.

Why Your Retirement Plan Should Include Healthcare Plans

Healthcare is a substantial cost for most of us in our golden years. These costs tend to escalate across all demographics with age. The prudent investor, therefore, should be both informed and proactive.

Consider the wide variety of things you can expect to go wrong as you age. Frankly, we will all need care to some degree. If you’re very fortunate, that period may be confined to the end of your life. But if you’re like most Americans, you’ll likely experience a slower decline in general health. This is simply the price we all pay for living rich, full lives: aging gets us all regardless.

But let’s delve a little deeper into what types of circumstances can influence your personal healthcare costs. The sad reality is simply that those who manage chronic conditions or experience catastrophic events (the sort you’d associate with hefty insurance claims--accidents, sudden events like heart attacks or strokes, etc.) will face challenges on top of those that we all must. Every person reading this has good reason to save more than what seems essential for health care. That said, knowing that costs will be higher (or lower) for you can help you prepare properly and never have to worry about getting the care you need.

What Influences Healthcare Costs?

Health is deeply personal, and often frustratingly beyond our control. Here’s a shortlist of some of the things that determine these costs.

Known by the insurance world as “pre-existing conditions,” this category can cover a broad range of items. The extent and severity of a person’s health complications is the main factor that will determine costs for health insurance and routine care. Perfectly controlled conditions may even be costly to treat for populations like chronic pain patients and diabetics, who are often dependent on medications and require more frequent doctor’s visits (often with pricey specialists). Even if you’re lucky enough to be 100% able-bodied without so much as high blood pressure, congratulations. But that can change at any moment, as mere aging causes its own health issues.

Costs for women and female-identified individuals tend to be higher. One highly comprehensive 2016 study predicted a 30-year-old healthy woman can expect to pay $120,000 more for healthcare upon retirement.

None of us are safe from this one. The simple reality that $100 today won’t be the same as the day you retire is inescapable. Certain vehicles can help protect your dollars from inflation--both your CPA and attorney should be able to give personalized advice on these matters.

While none of us can make perfect predictions, it’s generally wise to estimate costs and figure in a 10-20% “buffer” for the unexpected. Just like when you’re building a pro forma for an investment. Your future care is absolutely a type of investment. Let’s look at some smart ways to plan ahead.

The Solo 401(k): The Healthcare Payment Tool You Didn’t Expect

Building up a retirement savings account sufficiently is no small feat. So it’s completely fair to use every single tool at your disposal. The thing is, most of the tools you can use aren’t going to be advertised as healthcare solutions. The Solo 401(k) is a precise example of this type of tool: underrated, under-used, and underappreciated. Well, by most. You and I are about to know better.

The Solo 401(k) isn’t really that different from your typical 401(k) account. The essential feature that makes a Solo 401(k) a viable healthcare savings vehicle is Checkbook Control. Checkbook Control is finance slang for the ability to make nontraditional investments. While most accounts are going to be confined exclusively to the offerings of the institution in question, this isn’t so with self-directed accounts.

Note: Don’t let terms confuse you too badly here. The self-directed 401(k) is the same thing as the Solo-K. You may see variations in spelling or even fancy verbiage thrown around, but it’s the same type of Qualified Retirement Plan. There are however other self-directed accounts, but they tend to be IRAs. You can learn more about the self-directed IRA LLC and the IRA-Owned Self-Directed Business Trust right here on the Royal Legal Solutions site. These vehicles may also prove to be effective choices for you, as they share many key benefits. Learning about all of your retirement options, time permitting, is always a smart idea.

The solo-K can help you beef up your retirement savings easily because it confers these benefits (among many others):

  1. Flexibility. Solo-K’s may be used alongside other traditional retirement plans.
  2. Remarkably high contribution limits.
  3. Endless opportunities for diversification of retirement dollars.
  4. Tax-deferred and Roth options.
  5. May be used as a part of your real estate business.
  6. May play a role in your asset and creditor protection plan.

Smart Retirement Planning: Your Solution to Future Uncertainty

Amidst both the expected fluctuations and life’s unexpected curveballs, the smart play is to do what you can to get the most out of your retirement savings. Of course, this begins with planning ahead. If you need some general retirement saving advice, check out this resource of tips that can help at any age. But let’s take the time to glance at some methods for saving.

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 Virginia

Where you live certainly can influence your Series LLC options, and which states you should consider forming your company in. If you plan to use a Series LLC holding company, you may have in-state options--but whether these are worthwhile, let alone your best, is a decision that must be made with the help of an attorney.

Yet time and again we get questions about what asset protection looks like in a given state. The truth in Virginia is the same as everywhere else. In reality, the Series LLC for Virginia investors offers many benefits and can take many forms.

Is the Series LLC Offered in Virginia?

The Series LLC isn’t ubiquitous by any stretch. Not all U.S. states have legislation defining this entity, therefore many investors will necessarily form beyond their state’s borders. This is a common, valid, and safe strategy.

For Virginia investors, the first question is typically whether there is a Virginia Series LLC. In short: no. But you need not be confined simply because your state’s business legislature has yet to get with the program.

Which Series LLC Structures Are Great for Virginia Real Estate Investors?

Let’s just begin with the assumption that the Series LLC will be helpful to you, either now or in the future. It is for essentially any investor who has multiple assets or plans to scale up over time. You still have some choices to make.

You can choose which state’s “rules” you’d like to play by. We have some pretty well-known opinions on the best states for forming LLCs, but will elaborate a bit here wtih the Virginia real estate investor in mind.

Weigh your options, and above all, get the opinions of the experts you trust most.

Virginia Investors: Get the Series LLC that is Right for You

Your Series LLC should above all be tailored to you and formed with the assistance of a  qualified real estate asset protection attorney. If asset protection is even a partial motive in setting up your company, it’s best to work with an expert. In the meantime, you can always educate yourself. We like educated clients, and find investors who are more informed about the structure advocate better for themselves as well. Feel free to use our free resources to bone up on the benefits of the Series LLC.

5 Times in Life to Update an Estate Plan

When asked by someone without an estate plan when they should plan their estate, we tend to give a variation of the answer, “Right away.” But updating your estate plan is a little more complex. There are major life events that are critical times to update your estate plan and make any necessary adjustments.

1: You Got Married

Congratulations! But before you tie the knot, you’ll likely want to ensure your intended spouse will be a part of your estate plan. Spouses are often beneficiaries of wills and life insurance and may be listed on titles to shared investments or homes. For this reason, it is particularly important to update your plan if this isn’t your first wedding. You don’t want things going to your ex that is more appropriate for your current spouse. Even for first marriages, your spouse may not be fully protected or presumed to be an heir if the plan omits them.

2: You Had a Child

Kids, accompanied by marriage or not, really do change everything. One massive reason children can affect estate planning is because this documentation lets you dictate guardianship: who gets your children if you and the co-parent both pass away? It’s a situation nobody wants to be in, but one to plan for. Otherwise, the judgment call could be left up to the state. States also have different laws about whether “natural children” are heirs. Keeping your plan current is critical if you want to retain control.

Your children turning 18 also matters. As adults, they can directly inherit assets, and your plan should evolve accordingly.

3: You Got Divorced or Were Widowed

Removing an ex from estate planning documents is one of many legal considerations during a divorce. All changes in marital status, including a spouse’s death, should at least be cause for reviewing if not amending your estate plan. The detail to focus on is where a former spouse may be a beneficiary, and skilled estate planning attorneys can also inform you of other concerns for your unique situation.

4: You Bought or Sold a Home or Other Major Asset

This includes investment properties and is one major reason why estate planning for real estate investors is approached differently. Those with investment properties may consider the living trust and pour-over will, which an attorney can craft to ensure the seamless transition of assets without the need for probate court. A new home of any kind can drive up your estate’s value, but fortunately, asset protection strategies including titling property to a land trust may help prevent this and other potential legal issues surrounding titling.

5: You Got a New Business

Whether you started or purchased the business, understand it’s also an asset. You’ll need to decide who owns the business, and a succession plan is wise for particularly successful and profitable businesses. If you want to make decisions around your legacy without incurring unnecessary probate court fees, updating your estate plan is vital.

Series LLC For Real Estate Investors In Texas

The Lone Star State is a great place to live, love, and work. In fact, we like this state so much that our firm is based deep in the heart of Texas in Austin. If you’ve lived in Texas long enough, someone has inevitably told you about how everything is bigger here. It just so happens that the same is true of Series LLC benefits.

Texas Series LLCs Are Among the Strongest

The Series LLC isn’t universally structured. The entity is defined and legally controlled at the state level. In fact, not all states have Series LLCs. But Texans are fortunate to have a local option for the Series LLC. If you live in Texas, you won’t need to pay any additional fees that non-Texan investors would expect.

How Does the Texas Series LLC Benefit Real Estate Investors?

We at Royal Legal think this entity kicks ass for a few reasons. Here are just a few of our favorites:

  1. Texas Series LLCs are protected by strong state laws. You can’t be held liable for the actions of your LLC and vice versa.
  2. Forms the core of your asset protection plan by limiting liability and compartmentalizing your assets into Series.
  3. Stops lawsuits dead in their tracks. You don’t own assets. The entity you control, your Series LLC in this case, does.
  4. Streamlines business dramatically. Organizing and bookkeeping is simple, too. You can normally keep doing whatever you were before.
  5. No special requirements for meetings, minutes, or other red tape.
  6. No state income taxes--at all! You’ll have to let the Comptroller know once a year that you have “no taxes due.” Our staff can even help you out with this task.

But the benefits hardly stop there. Learn more about how the Series LLC protects your assets now.

Get Your Texas Series LLC Sooner Rather Than Later

If all of this sounds fantastic to you, we advise proactivity. So even if you’re brand new to investing, it’s not too early to start constructing your asset protection plan. We’ve said it before and we’ll say it again: the law truly favors the proactive. If you wait for a lawsuit threat to strike, it’ll be too late to get your assets into the safety of the Series LLC structure. If you’re ready to learn more about how this entity can help you in particular, consult with one of our experts.

Need Help With Your Operating Agreement? Common Problems + Remedies

Your operating agreement is one of the first documents your attorney will draft when forming your LLC. Learn more about the common problems in operating agreements and their remedies below.

Common Oversights in Operating Agreements

The vast majority of the time, the problems in LLC operating agreements come down to language that is vague, irrelevant to your particular business situation, or ambiguous in any way can create real-world problems for your LLC.

Here are some common issues, along with examples of phrases to watch out for in your operating agreement.

Decision-Making Powers

LLC members must have a procedure for decision making. When an LLC has multiple members, some decisions may be made by majority. While you can specify unanimous consent under certain circumstances, clearly defining what constitutes a “majority” clarifies your agreement. Decide with your fellow members whether you want to define majority as a percentage of ownership or by number of members.

Another common problematic clause is one which states that any member may do business with the LLC absent any restriction. This can create issues if a member abuses this freedom. To avoid potential problems, specify that any member of the LLC must get majority approval before performing any transaction directly with the LLC.

Managerial Powers

These issues are particularly important for multi-member LLCs. When an LLC is formed, the operating agreement must spell out who the Manager is, how a Manager is selected, and what degree of control they have over the LLC. To learn more, see What Is The Difference Between An Authorized Member And A Manager In An LLC?

Unfortunately, clauses that give too much power to a Manager may be abused at the expense of other members or the company. A good operating agreement keeps managerial powers in check in the following ways:

Bottom line: any clause that has the potential for abuse of power will catch the attention of a seasoned real estate attorney. Lawyers who do not regularly form LLCs may be aware of the necessary parts of a legally-binding operating agreement, but are more likely to overlook these nuances.

Avoid Operating Agreement Problems: Get Help From a Qualified Attorney

operating agreements are simply an example, albeit an important one, of the many documents that should be reviewed by a trained legal professional. Many prospective clients ask us if their local attorney will be sufficient for this. Most of the time, the wisest thing to do is hire legal counsel with specific experience creating LLCs for real estate asset protection purposes.

While any attorney is certainly better than no attorney, we recommend a skilled asset protection attorney who knows how to help investors like you. Because we have our own experience crafting deals and planning for worst-case scenarios, we draw on our experience as both investors and attorneys when counseling clients.

Common Problems In Operating Agreements + Remedies

Your Operating Agreement is one of the first documents your attorney will draft when forming your LLC. Learn more about the common problems in Operating Agreements and their remedies below.

Common Oversights in Operating Agreements

The vast majority of the time, the problems in Operating Agreements come down to wording Language that is vague, irrelevant to your situation, or ambiguous in any way can create real-world problems for your LLC. Here are some common issues, along with examples of phrases to watch out for in your Operating Agreement.

Decision-Making Powers

LLC members must have a procedure for decision making. When an LLC has multiple members, some decisions may be made by majority. While you can specify unanimous consent under certain circumstances, clearly defining what constitutes a “majority” clarifies your agreement. Decide with your fellow members whether you want to define majority as a percentage of ownership or by number of members.

Another common problematic clause is one which states that any member may do business with the LLC absent any restriction. This can create issues if a member abuses this freedom. To avoid potential problems, specify that any member of the LLC must get majority approval before performing any transaction directly with the LLC.

Managerial Powers

These issues are particularly important for multi-member LLCs. When an LLC is formed, the Operating Agreement must spell out who the Manager is, how a Manager is selected, and what degree of control they have over the LLC. To learn more, see What Is The Difference Between An Authorized Member And A Manager In An LLC?

Unfortunately, clauses that give too much power to a Manager may be abused at the expense of other members or the company. A good Operating Agreement keeps managerial powers in check in the following ways:

Bottom line: any clause that has the potential for abuse of power will catch the attention of a seasoned real estate attorney. Lawyers who do not regularly form LLCs may be aware of the necessary parts of a legally-binding Operating Agreement, but are more likely to overlook these nuances.

Avoid Operating Agreement Problems: Get Help From a Qualified Attorney

Operating Agreements are simply an example, albeit an important one, of the many documents that should be reviewed by a trained legal professional. Many prospective clients ask us if their local attorney will be sufficient for this. Most of the time, the wisest thing to do is hire legal counsel with specific experience creating LLCs for real estate asset protection purposes. While any attorney is certainly better than no attorney, the asset protection experts at Royal Legal Solutions are investors like you. Because we have our own experience crafting deals and planning for worst-case scenarios, we draw on our experience as both investors and attorneys when counseling clients.

Intelligent Ways to Work With A Real Estate Investment Sponsor

In the world of crowdfunded real estate, many investors feel lucky to get an offer for sponsorship at all. Some get so excited that they overlook details that may later come back to eat into their profits. The reality is that you do you have the luxury of being picky about your sponsors. In fact, you have to be. Not everyone is an angel investor out to selflessly help you get a leg up in the world.

Real estate sponsors, of course, must have something to gain from the transaction. This is only natural and fair, but some purporting to help you may be using dirty tricks for their own selfish ends without your knowledge. This article is here to let you know about some of the most common traps investors fall into so that you can avoid becoming the next sucker.

Today, we are going to talk about three major dealbreakers that you should watch out for when seeking sponsors for your next real estate deal. We will also give you some tips to avoid dishonest deals, and more information on how to protect yourself as a crowdfunded real estate investor.

Let's dive right in.

Dealbreaker #1: Capital Calls After The Initial Investment

A capital call is basically the right to demand money from you. While these are a normal part of crowdfunded investing, legitimate deals will not come with repeated capital calls. This principle applies whether you're dealing with a peer sponsor or a crowdfunding platform.

Demands for money that just don't seem right are a sign that the sponsor intends to make money off of you as well (or instead) of the investment. Just say no.

None of this information should scare you off of crowdfunding online. Check out Adam's article on the best ways to raise capital online for more information on safer, smarter ways to get the funds you need.

Dealbreaker #2: Lack of Transparency

You don't want to deal with anyone who has something to hide. There are two issues you must be crystal clear on with any deal:

  1. Right to Inspect Books. As a business partner, you have the right to review the records of your business. Most states have enshrined this into law. However, some shady "sponsors" may attempt to have you sign a waiver of these rights. Don't do it. If you're even presented with such a waiver, the potential sponsor deserves a hard pass. Think about it: what possible motivation could a sponsor have for not wanting you to be able to see the books on your own investment? I can think of many, but none of them are good.
  2. Membership Rights. You need to clearly understand the rights you have on your investment. A sponsor who is cagey on this matter is likely angling for an unfair split. This problem can be easily resolved with an ironclad Partnership or Operating Agreement. I tell my clients to form an LLC, then help them craft the perfect Operating Agreement for their needs.A sponsor who is willing to sit down with you and an attorney to create an Operating Agreement is a good sign. They are showing you a willingness to collaborate--an important quality in a business partner. The opposite is also true. Anyone resisting a transparent agreement spelling out membership rights should be regarded with suspicion.

Dealbreaker #3: Unclear or Excessively Wordy Contracts and Offers

If your potential sponsor gives you an offer that is indecipherable, this can be a red flag. Whether it's an offer filled with legalese a Supreme Court Justice would need a dictionary for, or simply worded in a way you can't understand, this can turn into a big problem.

How You Can Protect Yourself

A bad contract doesn't necessarily mean the sponsor is duplicitous. There are a broad range of reasons why an offer may be unclear (we're looking at you, free Google contracts). So before you bail, try the following strategies.

Do Your Homework on Potential Real Estate Sponsors

If you've ever wanted to play detective, now is the time. Here are some tips for researching your potential sponsor.

Look at Their Record

Never take someone's word that their ventures are always successful. Research the person offering to sponsor your investment thoroughly. You can get started yourself by reviewing their online presence. Social media, reviews of companies the sponsor owns, and a quick public records search of their name and companies they claim to own. At a minimum, you are checking to see that they are who they claim to be.

Connecting with your local investment community can also give you more insight into your potential sponsor. Ask around among other investors to get an idea of the person's reputation. You may hear some gossip, so take that with a grain of salt. But if you can find someone who has actually dealt with your potential sponsor before, that individual could give you a very clear idea of what it's like to do business with the sponsor.

Finally, you can directly ask your sponsor about previous deals, then fact check their claims. An attorney can be a huge help here. For instance, if your sponsor claims to own something, your attorney can investigate these more thoroughly than you can. A good attorney can do things like check tax returns to verify whether the sponsor's previous investments were as profitable as claimed.

Don't rely on a single piece of information. Take everything you learn as a whole to get a good idea of whether your potential sponsor is the kind of person you want to deal with.

Ask Questions

Successful real estate investors ask questions. Lots of questions. If this feels rude to you, allow me to be blunt: get over it.

Actively investigating potential investments and those offering to sponsor them is vital to ensuring your deal goes through the way you want it to.  In addition to knowing what you should ask about potential investments, it's also critical to know how to handle potential sponsors.

It's best to be direct with your questions. Dancing around the subject in an effort to be polite is a waste of everyone's (possibly very expensive) time.

It's important to note that how a sponsor reacts to questions can tell you a lot about their motivations and character. If a sponsor is evasive or vague when you ask questions, then it may be time to move on. If a sponsor gets aggressive or defensive when questioned tactfully, get out. Even if they aren't trying to hide anything, you don't want to be stuck in a business relationship with someone who flies off the handle in a normal conversation.
If a person can't handle the pressure of an ordinary business conversation, odds are good they will react even worse to the inevitable stresses of managing real estate investments. Move on to someone with a cooler head, if only to guarantee smoother, more pleasant interactions.

Bottom Line: Be Willing to Walk Away From a Bad Sponsor

When you're looking for someone to sponsor your investment, the search can feel desperate. This is particularly true if you are new to crowd funded real estate, or even real estate in general. You may even perceive that you're in a position of no power. But this simply isn't true. You always have the power to walk away. And if you detect any of the red flags mentioned above, you likely should.

Unscrupulous people can smell desperation like sharks can smell blood in water. Even if you have yet to make your first investment, patience and thorough investigation of potential sponsors will pay off in the long run. No sponsor at all is better than a dishonest or questionable sponsor.

If you still have questions, or want to learn more about protecting your assets as a crowdfunded real estate investor, schedule your consultation with Scott Smith, Esq. here.

When Was The Last Time You Updated Your Living Trust?

For those of you who already have living trusts, congratulations—you are certainly on the right track when it comes to estate planning.  But how do you know when to update your living trust?

By the way, if you don’t have one yet, this article is worth a read ...

What is a Living Trust For?

As a real estate investor, you may have many properties that you will pass on to your heirs. The living trust can help you ensure a seamless transition upon your passing.  A living trust is an estate planning tool. It may be helpful to think of the revocable living trust as a large lockbox that holds your assets. The trust’s “job” is to hold title for the properties. Estate planning attorneys use living trusts as a way to avoid probate court.

When a living trust is created, a trustee will be named to control the assets for you. You can think of your trustee as the person who has the key to your “lockbox.”  Your role is simply to be the beneficiary of your trust. You may direct your trustee to buy, sell, or transfer assets into or out of the trust.

How a Living Trust Compares With a Will

The will may be the most widely recognized estate planning tool, but a living trust is far superior to a will alone. Wills would have to go through probate court, which means your grieving loved ones would be navigating a maze of red tape before receiving anything from the estate.

The living trust allows for the control of the assets to immediately pass to the designated heir, as opposed to getting caught up in probate court by passing through an ordinary will. With this method, you can breathe easy knowing that mortgage payments are made, rents are collected, insurance premiums are paid, etc. 

The living trust ensures that your property is not lost or diminished in value, which are both highly likely occurrences if the properties are caught in probate court. It has the added benefit of keeping the value of the home out of the taxable portion of your estate.

Living trusts are easier to modify than wills, but harder to challenge legally. Trusts are also private, meaning using a living trust would remove your name from the public record. You would no longer own the property but retain control as the beneficiary of the trust.

Interested in learning more? Check out our article,Living Trust or Last Will and Testament: Which is Better for Real Estate Investors?

The Ideal Solution: Living Trust and Pour-Over Will

For real estate investors who may be buying and selling assets frequently, it is important to know that you would normally update your estate plan each time you make a significant purchase or sale. This could present a challenge for an active investor with many properties, but that problem can be easily addressed by simply using a pour-over will. The pour-over will passes all property you own into your living trust upon your death.

For the real estate investor, a pour-will pairs well with the living trust to ensure a smooth, private transition of your assets. Using these tools together is a smart move.

Estate Planning is Part of Your Asset Protection Plan

Estate planning is a critical part of your asset protection plan. When you plan your estate, you’re empowering yourself to take control of your legacy. 

Living Trust Versus A Will: What’s the Benefits For REI?

Many investors don’t even know how crucial it is to have an estate plan. While planning for the unexpected is uncomfortable at times, it is essential for all of us. Yet the real estate investor has even more reason to be vigilant about estate planning. Whether you own a single investment property or an impressive and costly portfolio, surely you want your real estate assets to be passed onto your loved ones and chosen heirs.

Today we will focus on some common FAQs about two of the most well-known estate planning documents: wills and living trusts. Read on to learn about what these legal documents have in common, what they do differently, and what these tools really look like in action.

If you don’t pick out your heirs, the U.S. government is all too happy to hang on to your hard-earned assets and find a use of their choosing for your valuables. Even investors with no family can likely think of a cause closer to their heart than Uncle Sam. Still, brilliant people with legal access die without estate plans often. Why? We have a pretty good working theory.

Death isn’t fun to acknowledge or look at, let alone admit will happen to us. But we can’t change its inevitability. That part is beyond our control. So, we turn our focus to what we can control. What we can do is take control of our legacy today and ensure our desires will be carried out no matter what.

The benefits of estate planning include giving you power now, while you are alive. Planning gives you the peace of mind of knowing that even if misfortune strikes, your business will live on and your chosen heirs will be taken care of. It takes some of the fear, and the sense of “forever,” out of death. 

The Basics: Wills Vs. Trusts

Let’s start at the very beginning. For our purposes, that means making sure we are clear on what these estate planning tools are and what they do.

Breaking Down Wills

There are many different types of wills. We raise the issue to make the point that when most people think of a will, they are usually referring to the most common and easiest type of will for the average person to draft, a variation on the Simple Will.  The requirements for and components of these wills are straightforward:

Wills aren’t bad, but they can cause problems when relied upon alone. These criteria may seem basic, but every single one can go awry. Even the first can be challenged after your death. So, let’s look at the living trust to see what it has to offer.

Breaking Down Living Trusts

Living trusts are established by private trust agreements. This type of revocable trust is one you can form today, but deed property titles into for years to come. In this sense, it’s also an asset protection tool. Living trusts also allow you to name a trusted confidant to manage your real estate assets if you ever can’t while alive, say because of a medical emergency. Perhaps most importantly, because this tool avoids probate, your heirs will receive their share far faster with no surprise fees.

Similarities Between the Will and Living Trust

Essentially, each of these options gives you a legal way to direct where specific assets go upon passing. Both also allow for the possibility of naming a guardian for minor children. A will has this option, while a living trust would need to be set up properly (in conjunction with a pour-over will) to achieve this goal.

The similarities end there, however. Let’s take a look at the crucial differences between these tools before exploring which option is best for the real estate investor.

Differences Between the Will and Living Trust

There are many crucial distinctions between the living trust and the will. The differences touch on everything from legal and business differences to the costs you can expect to pay for your estate plan.

Wills must be probated, while living trusts bypass this process. The living trust offers greater anonymity for real estate investors, even after their passing. Your heirs will also benefit from this privacy. Probate court records are public, while trust filings are private. The probate court would never be involved in handling matters pertaining to your trust. Where a will names an executor, a living trust names a successor trustee. While both are involved in administering the estate, your trustee’s actions aren’t in the probate court’s purview.

Wills may be cheaper upfront, but you get what you pay for. The money you “save” could lead to more costly heartache for your heirs, particularly if you truly cheap out and write it yourself. Resist that urge. True, living trusts are more expensive to establish, but you’ll be far more protected. They can’t be contested or held up in probate court for months, even years--a fate all too normal for those who die with only a “Last Will and Testament.”  Your heirs won’t have to worry about paying out lawyers and accountants or fighting for their fair share if your living trust leaves no room for ambiguity. This is just one more reason to get professional help for your estate plan.

Which Tool is Best for the Real Estate Investor?

Because of the additional benefits conferred by the living trust, we often recommend that our real estate investor clients use this tool instead of a traditional will alone. While we’ve hit on the basic features, an example may help illustrate the differences in real life.

Example: Meet The Identical Twins With Different Estate Plans

Amy and Caroline are 36-year-old identical twin real estate investors. The twins got started investing together, even splitting profits and losses. They grew their businesses, yet happened to always have the same number of assets, each with the same value.

But Amy and Caroline didn’t do everything exactly the same. Although their financial conditions and portfolios were dead ringers just like the sisters, the women disagreed about how to handle estate planning. The two made their appointments to address the issue the same day. Each sister had five chosen beneficiaries, but neither included the other.

Amy read online that the will is the oldest and most accepted document available, and partially to save money, she used a consultation with a lawyer to draft a will. She spent some time googling a cheap attorney, and found one who agreed to create a document that listed her existing assets. The price was right and she felt secure. “I’m young,” Amy reasoned: “I’ll update it later.”

Caroline, however, is more cautious. She spent more time researching her options and learned about living trusts and estate planning for real estate investors. She spent some time looking for references for an estate planning attorney with real estate experience, narrowed down her candidates, and opted for an attorney who was also an investor. This lawyer spent some time with Caroline looking at her full situation and providing thoughtful feedback. He agreed to form her living trust and advised that she use a pour-over will, a tool which ensured all of her assets would be added to the living trust. She spent more upfront than her sister, but also would not need to come back to update a will (and pay the necessary legal fees) like her sister would. Caroline also took advantage of the lawyer’s estate planning review services, which meant her lawyer ensured compliance and made suggestions twice annually.

What Happens if Tragedy Strikes?

Now let’s see what would happen for our sisters if they were to pass away suddenly. No actual twins were harmed in the making of this example.

Five years after drafting her will, Amy has essentially forgotten about the document. During those years she got married, had two children, acquired three new investment properties, and got busy with life. She is driving to work on an uneventful morning. Out of nowhere, her small sedan is T-boned by an 18-wheeler. She passes away immediately upon impact. Amy’s five-year-old will is her only estate planning document.

First, her will would have to be probated no matter what. Things get darker, though. She listed beneficiaries before her marriage and kids existed, and while there are legal ways to sort these things out, they are expensive and time-consuming processes for her already-grieving family to handle. Further, not all of her assets are accounted for in that will. The investments she had purchased since weren’t listed because the will wasn’t updated, creating yet another issue for the court. Sorting out these details usually means legal and accounting fees are deducted from the estate while the heirs, both listed and presumed, wait. Sometimes they fight. Amy’s family would be in a much better position if she had followed her sister’s lead.

Suppose Caroline also started a family and grew her portfolio in the five years since making her plan. Now let’s suppose she’s fatally struck by lightning. Her heirs won’t be attending probate court like Amy’s, because she used the power combination of a pour-over will, living trust, and closely involved attorney. Her family was included in her trust agreement, and even though her last investment hadn’t been formally listed in her documents before she passed on, the pour-over will ensure all assets went into her living trust for distribution.

You Can Have it All: Using a Pour-Over Will With a Living Trust

While a living trust clearly beats a will alone, the pour-over will combined with a living trust is the gold standard for the vast majority of our clients. The pour-over will is superior to the simpler will solution mentioned above because it accounts for all assets you control at the time of your death. Any you hadn’t added are “poured” into your living trust, offering a smooth business transition option that also takes care of your heirs.

 

To learn more, check out our article, What Is The Difference Between A Will And A Trust?

 

Series LLC For Real Estate Investors In Massachusetts

For the uninitiated, the Series LLC boasts many benefits, ranging in uses from streamlining your business to simplifying taxes. But if you’re here, you’ve likely heard about the structure’s unique asset protection benefits. Believe the hype. This structure is a powerful entity that is suitable for the vast majority of investors we speak with. But there’s always confusion around location, which we hope to clear up a bit today.

Real estate investors in Massachusetts always want to know whether their state offers the Series LLC first. Well, your wish is our command. We’ll answer that question first, and go into greater depth about the best ways for you to  form your Series LLC as a Massachusetts real estate investor.

Can I Get a Massachusetts Series LLC?

Massachusetts currently has no Series LLC legislation. An understanding of how a state adopts a Series LLC may be helpful. Like all LLCs, the Series LLC is controlled at the state level. All fifty states, including the Commonwealth of Massachusetts, offer a Traditional LLC. So typically, when a state adds a Series option, all they need to do is incorporate the Series LLC and the rules it must follow into their existing LLC legislation.

Massachusetts hasn’t, but that’s okay. One of the beautiful things about the Series LLC is that if your state doesn’t offer it, or you don’t like your state’s rules, you can play by a different state’s rules instead. Let’s dive into that a little more.

The Texas Series LLC: The Smart Solution For the Massachusetts Investor

No matter where you live, you always have the option to form a Series LLC elsewhere. A Series LLC is as strong as the state it’s formed in, precisely because the state laws discussed above determine how well the entity protects your assets. Fortunately, we’ve gone ahead and done the research on all fifty states, and of course, their pros and cons.

This research and our years of experience forming and implementing the Series LLC in a real estate context have shown us that the Texas Series LLC is generally the best option for Massachusetts investors. Considering you have your pick from the entire country, why not go with the best?

The Texas Series LLC is dirt-cheap, with one filing fee of $300 and no state income tax. Texas has some of the mightiest asset protection laws in America and strong charging order protection. All that’s on top of the fact that it’s the last asset-holding entity you’ll need to buy, since you can add assets and grow indefinitely. It’s convenient, too. Our firm offers end-to-end service where we assist with everything you need, from formation and filing through property transfers.

Royal Legal Solutions is Here For Your Series LLC Needs

The Series LLC experts at Royal Legal Solutions are among the best in the asset protection field. Our attorneys, advisors, and other team members work hard to bring you the latest and most accurate information. We also know how to take your whole situation into account and reject the ideas of cookie-cutter entities or asset protection plans. Personal details and your level of exposure will dictate whether you may need additional tools or special attention to certain legal details to become truly judgment-proof. If you’re ready to put fear of lawsuits in the rearview and learn what the Series LLC can do for you, schedule your consultation now.