In today’s episode, Toby Mathis, Esq. welcomes Carter Coons, Esq., an attorney at Anderson whose last name you may recognize… he is also the son of partner Clint Coons. Carter shares some of the benefits of utilizing a Wyoming Statutory Trusts (WSTs) as holding companies for your California LLCs to avoid the $800 per entity tax that is due annually. You’ll hear how to layer these protections to secure your anonymity and save money.
- California properties and LLCs
- How can we avoid this franchise tax?
- Wyoming Statutory Trusts (WST) are exempt
- WST as a holding company
- How does California feel about these trusts?
- Protections you can benefit from with a WST
- There is no reason that you shouldn’t take advantage of this protection
- Integrating out-of-state LLCs
- If you’re not a CA resident, all you need is the WST to own titles to your properties
- This strategy is legit, inexpensive, and has worked for decades
- Share this with someone who could benefit
Full Episode Transcript:
Toby: Hey, guys. Toby Mathis here with the Anderson Business Advisors podcast. This is a really important subject for those of you guys who live in California or who have California property, so listen closely. I have Carter Coons here. He is an attorney with Anderson, also happens to be the son of one of my partners going on 30 years, and is very knowledgeable in this area, so we’re lucky to have him.... Read Full Transcript
This is going to be the scenario; I’ll give it real clear. Let’s say that I’m somebody in California and I own three or four properties. I go see my accountant and I go see my attorney. The attorney’s going to say we need to have some asset protection. We’re going to have LLCs for those properties. Your accountant’s going to say that’s a good idea. We should have three LLCs. Let’s say we have three pieces of property; we’ll have three LLCs.
What they’re not telling you is that it’s $800 a year minimum for each one of those LLCs. The attorney then says it’s not a good idea to have California LLCs own California property, and that’s your only method of defense because the California courts like to pierce them, so we want to have a Wyoming entity as a holding. Now, you have four. You’re paying $3200 a year, and you start feeling a little bit used and abused.
Then if you sell one of those properties, you figure out that there’s up to almost a $12,000 gross receipts tax on the LLCs as well. You get sucker punched at the end of the day, and you’re just upset.
Carter is here with a solution. Carter, is there a way to avoid that scenario and avoid the payment of those franchise tax? Anybody out there that has real estate in California, you’re going to want to listen up.
Carter: Hey Toby, thanks for letting me on here and talk about this. Yeah, there is one. Importantly when it comes to the California franchise entity tax, is that a Wyoming Statutory Trust is one of those entities that’s exempt from this tax. That $800 doesn’t apply to this particular entity.
I’ll be referring to it as a WST going forward, just so it’s not a mouthful. It doesn’t sound like there’s marbles in my mouth the whole time. The thing is, these WSTs are like an LLC. They’re registered in Wyoming. They have similar protection to a Wyoming LLC or an LLC in another state, but you’re avoiding that $800 California entity franchise tax. Instead of using each of those separate California LLCs to hold title to those properties, you should be using a WST where you have one WST per property.
Now the issue is, is that yes, a WST does not offer the full protections of a Wyoming LLC, for example. To compensate for that, a Wyoming LLC—as you may have heard about it before, is like a Wyoming holding company that Toby’s talked about many times in previous videos—will serve as the sole beneficiary of each of your WSTs. You still have that Wyoming LLC protection that is known for, like the charging orders, the anonymity, all held up in that Wyoming LLC.
You may have heard, too, that California does like to impose that $800 franchise tax on entities that are owned by California residents. To get around that, to avoid that Wyoming LLC being imposed and having that $800 tax charge each year, we use a second WST as a holding company.
Now, that Wyoming LLC isn’t owned by you as a California resident. Instead, it’s owned by that exempt WST. By doing that, you’re able to avoid the taxation on up to four or three of your California LLCs that would be charged. Instead, we’d be able to silo that one $800 entity charge to your trustee of a WST.
Now you’re wondering, all right, this is a business entity. Why is there a trustee part of this WST? That’s because it’s a very unique hybrid entity where it is a business entity, but you need a trustee to act on its behalf, to have full control over these properties.
We recommend setting up a second Wyoming LLC to serve as this trustee. Because this trustee has full control over these properties, it will be doing business in California. We don’t need to register the Wyoming LLC in California because it’s merely holding title to that property through the WST.
But California will characterize that nominee Wyoming LLC as doing business. So you’re only paying one $800 fee each year instead of paying up to four. You can save up to $3200, depending on how many properties you have. We’re able to isolate and mitigate that $800 franchise tax to that one LLC for each of your WSTs.
Toby: All right, so there’s a lot to unpack here, Carter. The first of these is people have never heard of a Wyoming Statutory Trust. Is it similar to an LLC? If I was in California and I set up an LLC, is it going to give me similar protections to a traditional California LLC?
Carter: It’ll offer similar protections. Of course, it doesn’t include some external asset protections that are typically provided by a California LLC. That’s why when we set up these WSTs, we allow you to convert that WST into a Wyoming LLC. If you’re worried about maybe a lawsuit similar to a trip and fall, for example, you have that option to convert that WST into an LLC and avail the same protections as if it was an LLC.
Toby: First off, go watch Carter’s dad and my partner Clint Coons’ channel, because he breaks down the asset protection components really, really well. Go to Clint Coon’s channel and watch that if you want to get a brush up. Here it is in 10 seconds or less.
There’s liability that occurs because of the property and there’s liability that occurs because of you. If I’m driving down the car and I caused an accident, people want to take your entity away from you. If there’s a fire and it hurts somebody in a property, then it’s contained inside that box, that LLC.
What Carter’s saying—and I don’t want to put words in your mouth—it sounds like we’re using a Wyoming Statutory Trust and it’s going to contain that, just like an LLC. Is that correct?
Carter: […] words in my mouth, Toby. You just read my mind.
Toby: That’s about right. I’ve known you your whole life, so hopefully I could read your mind at this point. Now here’s the interesting part to it. The outside liability then we’re capturing that and protecting it because, like Carter says, we’re putting a layer of a Wyoming LLC still in there.
Normally, California would say, I want you to pay the $800 franchise tax. By the way, there’s a difference between being registered in a state to do business and having to pay tax in that state, so we’re not talking about registering. I heard you say that. We’re not talking about registering a Wyoming LLC in this state, but we will be registering the Wyoming Statutory Trust in California.
I’m sure those folks out there, what does California think of that? Do they allow a Wyoming Statutory Trust? Because everybody in California is going to say, I don’t even know what that is. I’ve never even heard of it.
Carter: Yeah, Just like if you were to try to register or foreign file an LLC into California, you can register that Wyoming Statutory Trust into California. It’s a very different form than foreign filing. But the nice thing about it is that it’s less expensive than it were to be foreign filing an LLC into that state, and it’s only a one-time payment as well.
Toby: Only one time, so I don’t have to do it every year?
Toby: Oh my God. Otherwise, you’re looking at $800 a year per entity. Here, we’re able to avoid at least $3200 a year if we have the Wyoming LLC holding the beneficial interests of those Wyoming Statutory Trust.
So we have the isolation of the assets. If something bad happens—there’s a trip and fall, there’s mold or something—that property is isolated in its own Wyoming Statutory Trust. If I heard you correctly, we could even convert that to an LLC at some point if there’s a liability occurrence and it’s already preexisting. That keeps that liability isolated.
Then if I do something—I get into a car accident, I hit a busload of nuns—and they’re all suing the heck out of me, I still have the protections in place of Wyoming, which prevents somebody from being able to foreclose on my interest, and they’re only going to get a charging order.
Toby: If I’m somebody in California, why the heck wouldn’t I do this? Is there any reason that if I was a real estate investor, and I lived in California, and I didn’t like the idea of the $800 a year, and especially didn’t like the idea that if I sell a property, let’s say I sell a property and I sell $5 million worth of property, it’s over $11,000 gross receipts LLC tax, and I hate both of those, is there any reason why I wouldn’t deploy this strategy to avoid that?
Carter: Unless you’re a masochist and you just want to be giving out money to California, no. I’m not seeing a reason why you wouldn’t want to use this because you’re able to avoid that California entity franchise tax along with the gross receipt tax in the situation.
Toby: Now, there’s one thing you said. You said you were going to use a Wyoming LLC, and I know that Wyoming has anonymity. I use this Wyoming LLC to be my trustee on these trusts. Nobody can see that I’m tied to these properties. Is that why you’re using it?
Carter: Yeah. Just as if you’d be using a Wyoming LLC as the holding company, the key is that with Wyoming, it doesn’t collect member or manager information. By using a Wyoming LLC as the trustee for each of these WSTs, you have complete anonymity in regards to your current ownership of that property.
Toby: So I’m still going to pay a franchise tax in this strategy for that one entity, right? But that one entity isn’t generating revenue. It’s literally just acting there as a buffer to keep your anonymity preserved, so people can’t say, I wonder what Carter Coons owns. Let me just go search and I find all these rental properties. This way, each one of those rental properties is private, right? There’s no way they could track it back to you.
Carter: No. In this case, your name would be completely off title. I know a lot of clients come up to me like, what if I close in my personal name first and then move it over? Well, anyone can be on the history of title. That just means you owned it at one point during that time.
People often buy properties and directly in the name of a WST or directly in the name of a land trust. By moving it out of your personal name into a WST, that’s not going to be indicative of the fact that you’re still the ultimate owner of this property, because there’s no reflection that this property was merely moved and it wasn’t purchased.
Toby: Now, I’m going to put on my reading of minds, and I’m going to read some of the client minds out there, the customer’s, the people-that-are-watching-this minds. Some of them are going, well wait a second. There’s still a Wyoming LLC that holds the Wyoming Statutory Trust. Why doesn’t it have to register in California? And why doesn’t it have to pay the franchise tax?
Carter: The key is that WST is already exempt from that California franchise tax. Any owner of that WST, or in this case the Wyoming holding company, isn’t going to be subject to that California franchise tax, because in addition to owning an exempt entity, you are also, as a California resident, not owning that Wyoming holding company as well.
Like I said before, as you’ve mentioned as well, is that sometimes being merely a California resident and owning that LLC, that LLC can be subject to that California $800 entity tax. To avoid that, we set you up with a second WST that owns your Wyoming holding company.
You’re seeing three layers here. You get that complete and comprehensive asset protection, along with that ability to mitigate your overall California taxes. You’ve got that WST holding company, as you like to call it. You’ve got your Wyoming holding company, and then you’ve got each WST that holds title to each of your properties. You have that anonymity, and most importantly you’re only getting hit once with an $800 franchise tax.
Toby: And you’re deliberately paying the franchise tax. You’re giving them a little piece. We always say, pigs get fat, hogs get slaughtered. You’re being a little piggish here, right? You’re saying, hey, I don’t want to pay tax on all these properties. I don’t want to pay the gross receipts tax on the sale of any of those properties, but I am willing to pay something to the state for the benefit of this protection.
That is on the entity that’s signing on behalf, and in theory it’s actually doing the management work, which is what keeps you clear. Because that’s how the franchise tax board and the board of equalization likes to hook you in. You say, oh, you’re the manager of these things, therefore anything you own has to pay tax in California.
Let’s shift gears here for a second, Carter, and say that it’s a California person. They have three properties in California, and now let’s say they have three properties in Texas. They’re in Texas and they’re like, I don’t want to use a Wyoming Statutory Trust in Texas. I don’t have to.
Can they use LLCs in Texas, blend it in with the same strategy, and still avoid the franchise tax of having to pay franchise tax on those out-of-state LLCs in Texas? We have three properties in California. We have three properties in Texas. Can we still avoid the franchise tax?
Carter: Most definitely. All we need to do is simply integrate those three Texas LLCs in the structure that we’ve been talking about. The key is that you don’t want to have a direct ownership of these out-of-state LLCs because if California catches onto that, they’re going to be charging the $800 entity tax to each of those out-of-state LLCs merely by being a California resident.
Instead, we can use that Wyoming holding company that’s already owned by your WST holding company to be the sole member of each Texas LLC. We’d set up three Texas LLCs in this case that would hold title directly to those properties. You’ve got a Texas LLC owned by a holding company that you don’t personally own, but rather an exempt WST. You’re still able to avoid those California entity taxes on each of those entities.
Toby: And it works perfect. And we’ve been doing this for years, decades even, actually. Wyoming Statutory Trust came along more recent, but we still did different versions very effectively. What you do is you pay to Caesar what is owed to Caesar. You pay to the franchise tax board what you owe, and that’s it. And you just make it to where it’s one entity as opposed to getting too crazy.
Now, I’m going to give you a third scenario. Let’s say it’s somebody like me. I live in Nevada and I live in Las Vegas. Let’s say that I own a few pieces of property in Texas. I own a few pieces of property in California. I own some properties in Nevada. Is there a structure for me where I could still avoid the franchise tax? And is it similar to what you just laid out?
Carter: Yeah. It’s a little similar. Because you’re not a California resident in this case, Toby, you don’t need that WST holding company that I’ve been stressing for all of our California viewers out there. Instead, all you need is a WST to hold title to each of your California properties because merely this is just that exempt entity that will be conducting business, that will be renting it out on your behalf.
But your mere ownership of that WST through a Wyoming holding company that would set you up with that wouldn’t be subject to that California franchise tax. Your holding company, this parent company that owns all of your other LLCs that hold title, is not doing business in California. That’s merely owning the interest in the WST that is doing business in California.
You’re able to avoid having that California entity tax imposed on each possible California LLC that would hold title two or three California properties by using a WST for each property.
Toby: Now, for somebody who’s out there listening to this and you go, these guys are crackpots, there’s no way the franchise tax board allows this. Yes, yes they do, and there are other strategies to avoid the franchise tax that work, too.
A lot of people use Delaware. We happen to not because it’s too expensive and we don’t want to have third party trustees and be dealing with all that nonsense. It just adds a price tag that makes this almost equal to the franchise tax. Maybe if you have 10 properties, it’s justifiable to go there.
This is an inexpensive workaround for somebody who has, I would probably say three or more properties. If you have one or two properties, you’re probably not too worried, Oh, I have to pay a franchise tax on my one property. It’s $800 a year. The gross receipts could be a kick in the shin.
Even there, they may want to consider just doing a Wyoming Statutory Trust and biting the bullet, and maybe being their own trustee or setting up an LLC that at least doesn’t have to pay that gross receipts tax. But for somebody who’s got 10 properties, this is an absolute no-brainer.
For somebody who has dozens of properties, no-brainer. For somebody who’s flipping properties, this is another one where we’re probably looking at it saying, hey, we do not want you sitting there flipping in an LLC, especially not a partnership or disregarded LLC. Maybe make it into an S or maybe we’re using Wyoming Statutory Trust, but it’s food for thought.
Carter, are there any other parting comments that you have that you could give advice to folks out there, that are investors, that live in California or invest in California?
Carter: Subscribe to Toby’s YouTube channel, along with my father’s as well if you want any tidbits or advice on any strategies moving forward. Toby, what you said, perfectly succinct. I think we covered most of the strategies going forward.
Toby: Perfect. Like and subscribe. If you know of anybody that’s getting killed with a franchise tax, by all means forward them this video. Have him reach out to Carter as well. We’ll put his information. We’ll make sure that Anderson’s information you can reach out and say, hey, I want that guy to make sure that I’m not getting killed in franchise taxes. Otherwise, I think you did a great job.
Carter: I appreciate you for having me on Toby.