California Investors: Why DSTs Are Better Than LLCs (Hint

Disclaimer: This article does not constitute legal advice. We recommend you seek the counsel of an attorney familiar with your specific situation and market to ensure you make the best decisions within your real estate business.

If you’re an investor learning about asset protection, it’s easy to get mixed up or receive poor advice. It’s even easier to fall into the logical trap of believing there’s a generic “best course” for all people.

After all, more than a few companies are all-too-happy to take your cash for a generic LLC, imply it’s all you need, “forget” to mention their products don’t include essentials like operating agreements or state filing fees, and toss you into the deep end of figuring out how to use the darn thing on your lonesome. Because once you’ve hit “pay” and received your docs, their work is done. They’re not your lawyers.

I am, however, a lawyer who’d like to take some time to clear up the confusion for my fellow investors here on BiggerPockets. The first thing you need to know is simple. Unlike a fly winter scarf, asset protection is not one-size-fits-all—at least if you’re doing it right.

One of the very first things to consider when developing your asset protection plan is where you live and hold property. If the word “California” appears in your answers, listen up!

This is the most essential information you need to know about the ideal structure for California residents: the Delaware Statutory Trust.

Why an LLC Might Not Be the Best Choice

Wait—aren’t you the guy who recommends Series LLCs for asset protection?

Yeah, that’s me. The Series LLC is an awesome structure for most investors. (Notice I said “most.”)

A critical point to understand about asset protection is that there is no silver bullet that works for everyone. An adequate asset protection plan is tailored to the individual, like a fine suit. The more your lawyer knows about you, the more tailored your asset protection plan can be.

When you work with a real asset protection attorney, we’re essentially doing the legal variant of crafting you an Armani-quality suit that’ll hold up so nicely you can be buried in it looking brand new. This is the strategy that defends your wealth, after all. It needs to stand the test of time.

For the California investor, though, we do know the starting point is different. Rather than isolating assets into LLCs or series within a Series LLC, we tend to recommend the California investor use a Delaware Statutory Trust (DST) instead.

In fact, understanding the Series LLC is a great starting point for understanding DSTs. Both use a parent-child structure and have infinite scalability, offering creative solutions for investors.

California investors have special concerns because of the state’s laws and tax regulations. While a Series LLC presents an ideal solution for investors in every other state, it would incur an $800 franchise tax at the very least.

The Delaware Statutory Trust is a great alternative, because it offers a similar level of protection to the Series LLC while also avoiding this tax burden. The state views DSTs as estate planning tools, which do not have to meet the same requirements as corporations or LLCs. Any investor who is doing business in California may be subject to state taxes.

**How a DST Can Benefit Investors Who Don’t Live in California**

Let’s say you invest in California, but don’t reside there. Can you use a DST?

Yep.

That’s right! You might have never set foot in California, but if you have property there—even with partners—you’re still going to have to play by California’s rules. Check with an attorney if you are in a partnership or have interest in an LLC operating in the state.

What is a DST Anyway?

At its most basic, the DST is the intellectual grandfather of the Series LLC. It uses a parent-child structure. I highly suggest you check out this previous Series LLC article for a more elaborate breakdown of this structure type and its asset protection implications. The same information is true of the DST (and I’ll be here when you get back!).

The DST is a type of trust that was among the first business structures created for asset protection purposes. Unlike a company, you have a trustee managing investments and a beneficiary (you), who receives the profits of properties held in the trust.

Like the Series LLC, it uses a parent company and many Series as asset-holding companies, sharing the liability limitation benefits. It’s an attractive alternative for Californians, because you receive the same benefits of Series LLCs (anonymity, streamlined business, tax flexibility) while escaping the requirements other companies must meet.

DSTs were designed to be low maintenance. No meetings or minutes are required, and compliance is fairly straightforward.

The DST’s structure separates your assets from you and one another. This concept is called compartmentalization and has two key purposes: making your assets harder to pursue at all and controlling the damage if one is successfully threatened and seized.

What happens to one Series need not affect the other Series or the assets within them. Of course, the above assumes a properly-formed DST, created with the aid of an experienced attorney.

Lawsuits are no joke, and you want the structure that’s best for you. If you’re in California, there’s no question that you should look into the DST, particularly if you plan to own multiple properties.

Disclaimer: This article does not constitute legal advice. We recommend you seek the counsel of an attorney familiar with your specific situation and market to ensure you make the best decisions within your real estate business.

Any additional questions I can answer for you about DSTs or LLCs?

Ask me in the comment section below!

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