The Delaware Statutory Trust: What Real Estate Investors Need to Know

In This Article

Let’s take a look at Delaware statutory trust law to find opportunities for real estate investors.

How Does a DST Help Investors?

Every investor is eligible for a Delaware statutory trust—anyone is eligible for one—but some investors are better served by one than others. Among those who may see more advantages are:

• Anyone doing business in California. (More on that detail below.)
• Investors holding multiple properties or seeing growth at a rapid scale.
• Investors looking for high security in their asset protection plan.
• High-earning and high net worth individuals.

Related: Lawsuits Are a Big Business—Here’s How to Shut Them Down

Are You Doing Business in California?

Investors looking toward California should be prepared to navigate the state’s unique laws and agencies, especially the dreaded Franchise Tax Board (FTB) and its effect on asset protection structures. The FTB has final say on who is “doing business in California.”

The full text of their definition is a slog, as any tax agency’s documents would be, but we’ve translated the FTB’s criteria of what it means to be “doing business in California” into a plain English checklist.

• Do you make money in California? (“Engage in any transaction in California for the purpose of financial gain or profit.”)
• Was your business formed in California? (“Are incorporated or organized in California.”)
• Can you work or operate in the state? (“Have qualified or registered to do business in California.”)

But even if you couldn’t check any of these boxes, if you’re a member of an LLC or partnership that is doing business in the state, you can still qualify. Especially if:

• The LLC is in California and runs operations there.
• At least 25 % or $50,000 in sales, whichever is less, happen in California, even if the property is owned by the LLC.
• The amount of compensation in California paid by the LLC exceeds $50,000 or 25% of the total compensation paid.

So even an out-of-state organization can easily be “doing business” in California and is thus subject to the $800 franchise tax.

Related: California Investors: Why DSTs Are Better Than LLCs (Hint—Taxes!)

Bottom Line: DSTs Are a California Investor’s Best Friend

You’ve heard the phrase “the rich don’t own assets, they control them.” This is because the wealthy are protecting their real estate investments in holding structures that allow them to retain control of investment properties as a beneficiary without technically being the “owner” of a property.

If you are a California investor or simply doing business in California through partnership in an LLC, you should know how to avoid California franchise tax. A Delaware statutory trust is not included among the business structures required to pay the annual $800 franchise tax per entity because they are considered an estate planning tool and not a traditional company.

A DST is similar to other real estate asset protection entities that are helpful for protecting your assets. Like an LLC or Series LLC, a DST may sue or be sued, but you are also protected from liabilities. DST is an intellectual grandparent of the Series LLC, but both tools take advantage of a parent-child structure to provide protection.

Questions? Comments?

Let’s discuss below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.