Tired of LLC fees in your SDIRA? Use a Trust! | Frank Selden Law

Tired of LLC fees in your SDIRA? Use a Trust!

An IRA may invest its funds into a Trust the same way it does an LLC. This saves your IRA the annual LLC fee and does not require registration with the State.

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 checked the processing times this morning on this CA SOS website - 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 - roughly two weeks. 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, shouldn't that count as “in-person”? Postal Workers are people too!

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.

Reasons NOT to use an SDIRA Trust

I've discovered, mostly by trial and error, two investments for which an IRA-Trust will not work. First, clients wanting to purchase real estate in other countries (such as Mexico) will need to use an LLC because many coutnries do not recognize trusts as legal entities. Second, if you want to obtain financing in the form of a loan to your SDIRA (which will trigger unrelated debt finance income tax to the IRA), you will also need to use an LLC because lending institutions tend not to lend to trusts.

Reasons to Call Frank Selden Law

1. 100% right, 100% of the time.

2. I wrote the trust document used by a few custodians who allow an SDIRA Trust.

3. I love jokes about lawyers (and believe the profession warrants them).

Call 425.990.1021 or email me via the Contact page for more information.

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