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.

• California investors. This doesn’t mean you have to live there, but simply be doing business in California. More on that detail below.
• Investors with multiple properties or rapidly scaling businesses.
• Investors seeking a high degree of security in their asset protection plan.
• High-earning or high net worth individuals  

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:

• “Engage in any transaction in California for the purpose of financial gain or profit.”  Are you making money in California? If so, check.
• “Are incorporated or organized in California.” Was your business formed in the state? If yes, you’re checking this box.
• “Have qualified or registered to do business in California.” You’d know.

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:

• The LLC is in California and runs operations there.
• Sales in California meet or exceed 25% of all sales or $50,000--whichever is less. The same goes for real property owned by the LLC. If it’s over ¼ of all of the company’s property or $50,000 in value, you’re doing business in California.
• The amount paid in California by the LLC for compensation exceeds $50,000 or 25% of the total compensation the entity pays.

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.

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.