Why an IRA-Owned LLC or Trust?

I am often asked if an IRA-owned LLC or trust makes sense. Well, like a lot of things, it depends. If your normal custodial account is working well for you, there may be little reason to add these structures. But there are situations for which you may want to consider them as covered below.

Advantages

Promoters push the IRA owned entities as a way for you to have checkbook control over your IRA funds. While it is an arguable point as to whether you should be the manager or trustee of your IRA-owned LLC or trust (we will postpone that discussion until the class next month), there are other reasons to use these entities. For example,

Privacy – These IRA-owned entities will keep individual IRA account holder’s names off the public records. This is true even for low liability paper investments such as contracts, notes, mortgages and options as well as real property ownership.

Family Investment – Such IRA-owned entities may be comprised of multiple IRAs of family members. This structure can put even small accounts to work by combining them to do bigger deals. Also, only the manager or trustee need be the decision maker and can act to fund an investment without having to involve multiple accounts and account holders. Spreading family member’s accounts over multiple deals reduces the risk one bad deal could deplete a family member’s account.

Pooled Investment of Different Types of Accounts – You may have different types of pension accounts that you would like to pool to do deals. This would allow swift action when a deal presents itself rather than having to deal with each account and coordinating them to fund the investments. An advanced idea would be to include a personal account in the mix as well. But keep in mind you will need to keep proof that you received no current benefit from the pension plan investments.

Quick Action – With all paperwork in place and funds in a local bank account, deals can be funded quickly. This benefit does not mitigate the responsibility to properly document the transaction. These records may be invaluable should your IRA-owned entity be audited.

Asset Protection – The LLC has a statutory liability shield that can protect your IRA from liabilities from ownership of real estate. Property insurance still should be the first line of defense, of course. But there are times when insurance companies deny claims or the claims are not covered.

Management & Investment Expertise – The LLC or trust can provide a way that someone with expertise can directly manage the funds without having to direct a custodian. With real estate in an IRA-owned LLC, the LLC manager can be invaluable in directly managing the property and negotiating purchases of other property by the LLC. Such streamlining also allows for simpler bookkeeping.

The IRA must set up these entities and fund them. The structure of the Operating Agreement or Trust Agreement is very important and specific to the IRA being the owner.