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.
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.
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.
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.
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.
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.
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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