The Delaware Statutory Trust (DST) is a tool wise real estate investors use to avoid the dreaded Franchise Tax that eats into the profits of LLCs. The California investor achieves protection based on two concepts:
- Insulating the assets and keeping them separate from one another by using a Shell Company, and
- masking the assets from any provable relationship between you personally or the Shell Company.
There are even more good reasons to use this structure. The DST provides the following additional benefits:
- Ability to scale up free of extra charges
- Simplification of tax filings
- Access to loan and financing options
- Ability to maintain traditional book- and record-keeping practices.
The beauty of this structure is all the effort is upfront. Once it’s in place, you’ll barely even know it’s there and be back to business as usual.
What is the Best Type of Company For Real Estate Investors in California?
As a real estate investor, you have several options for company structure. But we’ve found the best for asset protection for the California investor is the Delaware Statutory Trust (DST).Of course, investors from any state can take advantage of this tool, but California state restrictions on business make it ideal for Golden State residents. Its structure is similar to that of the Series LLC.
A simple way to understand the DST is to compare it to a parent and its children. The DST itself plays the role of the mother and father, rolled into one. Unlike human parents, Octomom notwithstanding, it can reproduce forever. In this case, the children are referred to as “Series.” Despite the fact that the DST is its own legal entity with a single filing and tax return, each child receives the same protections as a Traditional LLC. This includes, of course, liability protections. This image gives you an idea of how this works:
As you can see, each Series can contain one or more assets. Creating a new Series is simple and can be done in a matter of minutes. For a more detailed explanation, take a look at our piece on the Series LLC Structure. The same information applies to the DST.
How Does the DST Stop Lawsuits?
The DST stops lawsuits by sapping any motivation an attorney would have to file one at all. Further, it places a nice, clear boundary on how much a litigious person could collect from you in court. What does this actually look like? Well, when you use a DST structure, even if someone does sue you, they’re only able to “go after” the relevant asset in the Series. To borrow from our example above, let’s say an angry tenant tries to sue you for a problem related to your rental condo in Series 1. Even if he/she is successful, only the condo is on the line. Your other assets in Series 2, 3, and the Holding Company are safe–as is anything you own personally.
Believe it or not, this is actually the worst-case scenario. A well-implemented DST will kill the suit before it’s even filed. This comes back to the motivation issue mentioned above. Think about it: what motivation does anyone ever have to file a lawsuit? You might think of things like indignant rage, pure spite, etc., but the only motivation that matters for attorneys is cash-money. Or valuable assets that can be converted into cash-money.
Even if the person initiating the suit is madder than hell, few attorneys will play ball if they have nothing to gain from winning. Believe me, as an attorney, I have much more profitable ways to spend my time than chasing after someone who doesn’t have much for me to recover in judgment.
This is why my asset protection strategies attack recovery. It’s easy enough to win a judgment, but on its own, it’s like getting a gold star from the court: nice ego boost, but ultimately worthless. If the gold star is just a sticker, it actually costs the attorney precious and expensive time to pursue you. The gold star is only good if it’s backed by actual gold, meaning, a valuable asset to convert into the cash we all know and love.
Roll with me on this: would you spend time researching a project at YOUR job that you weren’t sure you’re getting paid for? Hell no! Attorneys are even more hawkish than the average professional in this regard. We aren’t going to waste money investigating you, let alone waltzing into court to sue you, if it’s going to cost us more than we could win. There are many, many more tasks that we can bill for and receive certain payment. Without representation, even the most vindictive plaintiff doesn’t stand a snowball’s chance in hell of winning the judgment.
How Does the Anonymous Trust Play Into An Asset Protection Plan?
Anonymous Trusts help you drive home the point that you aren’t worth coming after. Their job is to disguise the ownership of the asset in the first place. These Anonymous Trusts will ultimately hold the assets.
Remember the research phase that comes before any lawsuit we discussed above? This is where the Anonymous Trust pulls its weight in your asset protection plan. In the internet age, it’s pretty easy to figure out who owns a piece of property. County Clerk records are public record, and list the owners of a given property. Anyone with an internet connection can search these.
Usually, these records will clearly show the name of the owner of the property. But if you use this strategy, the trust’s name will be listed instead. And you can name that trust whatever you want. So when anyone, including a potential opposing attorney, goes to research the property, they’ll see it is owned by “The XYZ Can’t Find Me Trust” rather than a person. Your name is kept out of the whole affair. And to file a lawsuit, the litigant needs a name.
Where Do I Come in if the DST is Holding My Assets?
Trusts, including the example “XYZ Can’t Find Me Trust” are made up of three parts: a Grantor, a Trustee, and a Beneficiary. The Trust above will have Big Daddy Holding DST as the Grantor, you as the Trustee, and the set of Series as the beneficiary. You maintain control of the Anonymous Trust, Holding Company, and the Series, but none of these bear your name. This is simply the way the legal structure is set up.
Ordinarily, the trustee and the beneficiary cannot be the same person. The use of the structure outlined above keeps you, the individual with a name, from being both. Instead, the legal structures you control stand in. So your interests are represented regardless. Even if the trust itself is scrutinized in court, the worst-case scenario is that the trust is “merged.” When this happens, your assets just return to the original DST.
How Does Bookkeeping and Accounting Work for My DST Structure?
Proper record-keeping and vigilance on your part is essential for preventing the DST from being compromised. In legalese, this is called “piercing.” When a court pierces the structure, it can dismantle. You don’t want that, because it would allow the court to treat all of the Series as one, instead of separate.
The DST must abide by several legal requirements. These include a valid trust agreement, initial and current filing with Delaware, a Delaware Registered Agent, and keeping in line with laws and IRS regulations governing the structure.
Our firm takes care of the trust agreement and ensures your DST is complying with these requirements. But you have a part too. Your job is to maintain accurate and responsible records.
Record-keeping for the DST structure is simple, and you’re most likely using a structure that works if you err on the side of traditional bookkeeping methods. The DST structure above will require you to stay on top of the books for each individual Series. Remember, the power here is in the fact that you are treating them as separate companies. This means separate bank accounts, as well as treating them as different in your bookkeeping software. Generally, this just means identifying any money flowing in or out as belonging to that particular Series in your accounting software.
How Do I Set Up My Delaware Statutory Trust?
We’ve got you covered. Royal Legal Solutions provides comprehensive Delaware Statutory Trust and Anonymous Land Trust services. As an attorney and investor myself, I founded Royal Legal Solutions to help investors like you. While I specialize in asset protection, my other practice areas include estate and retirement planning. Over the years, I’ve helped many clients set up DSTs and Anonymous Trusts to establish a solid foundation for their asset protection plans.
If you’re ready to get started, contact me directly. Together, we can build your real estate empire into a judgment-proof fortress.
Obligatory Disclaimer: Folks, this is an educational article, not direct legal advice. I’m indeed an attorney, but reading this does not make me YOUR attorney. If you need help, retain a good lawyer of your own choosing. Thanks!