Why California residents should use an SDIRA Trust (rather than an LLC)

Courtesy of the CA Franchise Tax Board
Courtesy of the CA Franchise Tax Board

I first heard of an SDIRA Trust last year when John Park of PGI Agency called me to ask whether the idea would work. I love creative thinking, yet the idea seemed odd to me at first. I did not know any custodians offering this setup for a self-directed IRA (SDIRA). We pitched the idea to two custodians and walked a mock client through their processes. The results are better than we expected for the right clients. We are now launching this concept as a combined effort. The idea should be of specific interest to California residents. Why? Glad you asked!

The CA $800 / year fee

“All LLCs (not classified as a corporation) that are doing business in California, or file an article of organization or certificate of registration with the Secretary of State must file Form 568, Limited Liability Company Return of Income, pay the annual minimum franchise tax of $800, and LLC fee (if applicable).” Thank you Franchise Tax Board.

One may always create an LLC in a different State. Warning – CA has some of the most strict “doing business in” rules in the country. Sometimes an SDIRA’s activities trigger inclusion of their out-of-State LLC under this tax.

Why pay the fee if you don’t have to? Trusts are not registered with the State and do not owe any filing or annual fees, even if the Trust does business in California.

No State Registration for an SDIRA Trust

One does not need permission of the State to create a Trust. The Trust is not a matter of public record and are not required to provide a registered agent. While this is true of any State, the registration issue is a more significant concern to California clients. California is a paper processing State. They do not offer an online registration option to create legal entities such as LLCs.

I am writing this on April 4. I checked the processing dates this morning on this CA SOS website – 3/19. Roughly two weeks. Not bad, if someone is aware of the issue and factors it into their planning. Most people who contact us are not aware of this lag time.

“How long does it take to get my LLC funded?” Our process takes about two weeks, and add another two if you are in California. Ug. The only expedite option in CA is applications dropped off in person in Sacramento with an added $15 filing fee. The same SOS website shows that they are processing in-person applications for… 3/19. Hmm. Doesn’t seem like a good use of $15 plus the extra effort to arrange for an in-person delivery.

By the way, when a postal carrier drops off the mail, isn’t that “in-person”? Don’t postal workers count as people?

Other States for an SDIRA Trust

California has the highest annual fees for LLCs. The cost of maintaining an LLC in Massachusetts and Nevada might influence someone to want a Trust as well. I am now of the opinion that most people who want local control of their IRA assets are better served by a Trust than an LLC no matter what State they live in. There are two reasons not to use a Trust with an IRA, discussed in this blog post by John Park at PGI.

If you want to discuss how you can benefit from using a Trust under your SDIRA rather than an LLC contact PGI Self-Directed.

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