use a TRUST with Your SDIRA! (rather than an LLC) | Frank Selden Law

use a TRUST with Your SDIRA! (rather than an LLC)

I first heard of using a Trust with an LLC when John Park of PGI Self-Directed called me to ask whether the idea would work for his clients. 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 creating this concept as a combined effort for clients in ANY State that prefer a Trust over an LLC. The idea should be of specific interest to California residents. Why? Glad you asked!

The CA $800 / year fee

Courtesy of the CA Franchise Tax Board

“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. However, CA has some of the most strict “doing business in” rules in the country. An SDIRA’s activities in CA or the manager's residence in CA can trigger even an out-of-State LLC to pay 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 dates 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. Still, it's two weeks longer than most States take to issue LLC credentials.

My SDIRA process takes about two weeks once the LLC is approved by the State. 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… same date. 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 their State of residence.

When NOT To use a Trust for Your SDIRA

There are two investment ideas that will not work with a Trust. If you are intending to create either of these investments then you will need an IRA-LLC.

Foreign Investments — Many countries, including Mexico, do not recognize a foreign trust as legal entities allowed to own real estate either directly or indirectly through a local LLC. If you intend to purchase real estate in another country with your SDIRA funds, please verify whether that country allows a Trust to own real estate before deciding whether to use a Trust or LLC.

Purchasing Real Estate Through Non-Recourse Lending – The trust is a 'grantor revocable' trust, meanign that the grantor reserves the right to revoke the trust at any time. The grantor of this trust is your IRA, under signature authority of the custodian acting at your direction. Financial institutions typically do not lend to grantor revocable trusts. If your investment idea involves financing to purchase or renovate an asset, I recommend using an LLC rather than a trust.

Bottom Line

If you already have an SDIRA account and just need a trust, contact me. If you also want help with setting up your SDIRA account, please start with PGI Self-Directed. 

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