Do you have an exit strategy for your self directed IRA (SDIRA)?
Most clients I work with do not have an exit strategy. In fact, they had not entertained the idea. Why is this important?
IRA owners must take a required minimum distribution no later than April 15 of the year following the on in which they turn 70 1/2. The next RMD is due no later than Dec. 31 of that same year. Many SDIRAs are not liquid enough to allow the beneficial owners to take their RMDs. The good news is that, although an RMD must be calculated for each IRA, RMDs can be taken from any IRA. Cash portions of most SDIRAs do not pay enough interest to remain enticing. Most of my older clients maintain at least one IRA with a financial institution to both diversify their retirement assets and allow enough cash for RMD distributions. The key here is ensure that the financial services custodian knows the balance of the SDIRA to properly calculate the total RMD.
When someone passes away, the IRA now belongs to a new owner. In an IRA-LLC , though, the IRA itself contains only units of the subsidiary LLC. Those units can be transferred to an inherited IRA. This needs to be done carefully to avoid having the entire IRA inadvertently transferred. Seen it happen. The key here is not that someone needs to have all of the documents in place in advance of the death of the IRA owner, just be aware of potential issues.
The other issue created by the passing of an IRA owner is who has authority to transact business for the LLC. Most of my clients are the only LLC manager. It is possible for the custodian to step in and appoint someone to become the LLC manager, although that depends on the custodian and it is unlikely the custodian will undertake that role. The most likely LLC manager replacement is the beneficiary of the IRA. Is that person available? Knowledgable? Is it possible to name that person as an LLC manager from the very beginning? (saves a LOT of headaches later).
Change of Plans
Most of my exit clients come to me as a result of wanting to wind down an SDIRA but either not knowing how or making an error and received a letter from the IRS. For example, someone owns real estate, is tired of being a landlord, sells the property, places the funds in an account in the name of an LLC. Good so far. Then they open an IRA account, move funds from the LLC account to the IRA. The new custodian files the proper transfer form, but the sending custodian knows nothing of the transfer. Client receives a note from the IRS. This one is an easy fix, but will result in penalties if not handled promptly.
Another example is a someone who held a loan, perhaps secured, but the loan defaults and the security doesn’t exist. They decide to write off the loan. When the loan comes due, the custodian asks the IRA owner what happened to the principle. IRA Owner states that they wrote it off. Custodian says “prove it or we will record this as a distribution.” Then they call me. Sometimes it is too late.
Word of Advice
The bottom line of this issue is to think through what exiting from a SDIRA investment looks like, or from the entire IRA in case of death or a change of plans. The details are important. Getting it wrong runs the risk of having the IRA disqualified and taxes immediately due. If you want to get it right, call us.