IRA Trust

In IRA Trust, as an investment tool for the IRA, is a new concept for many IRA owners. Historically, for those clients who have wanted a “checkbook control” feature for their self-directed IRA investing, the IRA LLC structure has been the tool of choice.  While not well known, the IRA Trust should garner strong consideration for the IRA investor.  The IRA LLC and the IRA Trust are similar in that:

  • Both permit a “checkbook control” feature; and,
  • Appearance-wise, both look almost identical to each other in its legal construct.

All IRA account owners should understand the differences between the two plans. A trust brings distinct advantages over an LLC many IRA owners would prefer if they knew about this option.

Self Directed IRAs may now use a Trust to control their investments.

What is an IRA Trust?
What is an IRA Trust?

If you conduct internet research on the topic of an “IRA Trust”, you may become confused with seemingly contradictory information.  To help clarify, let’s start with what a self-directed (SDIRA) Trust is not.

Ed Slott and Company, America’s IRA experts, answers the question “Can I place my IRA in a Trust?” with a resounding NO.  (The Slott Report, August 28, 2015). The Slott Report is correct, in the context of the question answered.  However, they are addressing a different concept than described in this article.

Consider an IRA owner who also has a revocable living trust. Their IRA account is with a financial services company and invested in mutual funds. Rather than having that account in the name of their IRA, the individual in question wants the account titled in the name of their trust. Essentially, transfer the mutual funds from their IRA account to their trust account. The Slott Report is correct, the IRS will consider that transfer as a taxable distribution. What is the difference between that scenario, and an SDIRA Trust, where the funds end up in an account in the name of a Trust?

In this concept, the SDIRA Trust is not just any trust, certainly not someone’s personal revocable living trust, but a specifically crafted trust document in which the IRA is both grantor and beneficiary. This SDIRA Trust must be accepted by the holding custodian. The custodian signs the SDIRA Trust on behalf of the grantor.  In this SDIRA Trust, you are the trustee of the SDIRA Trust.  As trustee, you have control over the investment choices of the SDIRA Trust.  Your actions and investments, of course, must not trigger IRS Prohibited Transactions.

IRA Trust v. IRA Trust

There is a concept commonly referred to as an IRA Trust. In that idea, one creates a Trust to be the beneficiary of one’s IRA. The trust created to receive IRA assets as a beneficiary of the Trust is constructed differently than the SDIRA Trust used to manage IRA assets. Both are referred to as an IRA Trust.

The IRA beneficiary trust does not come into effect until the IRA owner passes away. The trust manages the assets for one or more beneficiaries of the trust, and can pay the taxes on the distributions or pass the taxes through to the beneficiaries.

In this SDIRA Trust concept, the IRA is both the grantor and the beneficiary of the Trust. Similar words, very different concepts. The IRA account paperwork will still include a beneficiary designation form for the IRA account itself.

If you want to use a Trust as the IRA’s beneficiary, that trust will be a completely different trust than the one used to manage the assets. Whether to make a Trust the beneficiary of your IRA is a different topic, on which you will also read varying opinions.

In this concept, the SDIRA-Trust, you are alive (yay!) and managing your IRA’s assets through the trust for the benefit of your IRA. In the other one, better referred to as an IRA Beneficiary Trust, you have passed away (ouch!) and someone else is managing your IRA’s assets for the benefit of your beneficiaries.

LLC Filing Requirements

Depending on one’s State of residence, an IRA LLC can become expensive.  There is the establishment fee, and some States have annual re-filing requirements.  Trusts are not registered with the State, thus do not incur filing fees or ongoing renewal costs.

Consider the LLC fees associated with the following States:

  • California — $70 establishment with an $800 annual fee (tax) for the LLC;
  • Florida — $125 establishment and approximately $150 per year to maintain;
  • Massachusetts — $500 establishment and $500 per year to maintain;
  • Maryland — $300 establishment and $300 per year to maintain;
  • Illinois — $500 establishment and $250 per year to maintain.

Every State has the requirement that an LLC must have a registered/statutory agent who has a physical mailing address in that State.  The registered agent can be an individual or an entity. The registered agent’s address is a matter of public record. This is the address to which people may deliver legal service documents.  If you reside in the state in which you want to set up the LLC, you may serve as the agent. If the LLC is in a different State, you will need to arrange for a registered agent, which can cost a few hundred dollars per year.

Although not common, some States aggressively collect fees, taxes, penalties, etc. for those residents who the State says should have secured the LLC in the State of residency of LLC manager.  For example, a California resident creates an LLC in neighboring Nevada to save money on the filing fee, then discovers that the California Franchise Tax Board is going to assess the $800 annual franchise board tax on the LLC anyways because they are a resident of CA.

In comparison, Trusts are not registered with a Secretary of State and, as a result, have no registration or annual renewal fees like the LLC.  This saves you money, relieves the LLC of ongoing LLC reporting requirements with the Secretary of State and removes a fear of owing more in fees and penalties to your resident State. This also creates a greater degree of privacy than offered by an LLC setup.

IRA Trust EIN Issues

Banks and financial companies typically require an LLC to present an EIN issued by the IRS to open an account. As a revocable grantor trust, an SDIRA Trust is typically not required to file for its own EIN. In an IRA-LLC, the IRA is the member and the IRA owner is the manager. The EIN, when filed correctly, reflects the IRAs ownership so that any 1099s created for recognized gains inform the IRS that those gains are not to be taxed to you as an individual.

With an IRA-Trust, the tax-deferred status of recognized gains is relayed to the IRS through a properly filled out W-9 form.

Although not a significant issue to most IRA owners, some prefer the lack of an EIN requirement for a Trust against the requirement of creating one for an LLC.

Investments Made in Other States

Every State has its own rules about when an LLC created in a different State is required to file as a foreign entity in that State. If your IRA-LLC is registered in one State, and you want to, for example, purchase real estate in a different State, does that purchase trigger a requirement to register your LLC in that State? The specific answer to that question varies to much between States to answer that question here. The hey takeaway for this point, though, is the same for any State. Trusts are not a State registered entity and thus do not have this issue.

How to Decide Whether to Use an IRA LLC or a IRA Trust

So far, this article leans toward favoring a Trust over an LLC as the preferred vehicle for those who want local control over their IRA investments and transactions. Do I ever recommend an LLC over a Trust? Yes, if the investment desired requires an LLC. I only run into this a few times.

Some jurisdictions do not seem to like a Trust owning real estate. It messes up the title insurance. I would rather pay a bit more for an LLC and forgo some privacy than mess up title insurance on an investment property. Just ask a Title company local to where you plan to purchase your property and ask of they foresee any issues with a Trust owning that real estate. If not, consider a Trust.

Here is a simple, 2-step do it yourself process:

  1. Does your investment idea lend itself to a trust or an LLC? If so, go with the investment appropriate entity.
  2. If not, review the concepts in this article and ask yourself which one you prefer.

Either way, I am here to help. You can contact me here.

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