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.
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.
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.
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.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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