“Trusts and trustees. 401(k) plans are funded through a trust established to hold and invest the plan’s assets. At least one trustee is appointed to have responsibility for the activities of the trust and its assets. This is a serious responsibility with considerable potential for liability. Trustees might include the business owner, an employee, or a financial or trust institution.”
A self-directed IRA may be invested (called units or membership interest) in a limited liability company provided the purchase does not run afoul with the exclusive benefit rule or the IRA prohibited transaction regulations. The same prohibited transaction rules that apply to self-directed IRA apply to an IRA LLC (also known as a checkbook IRA).
An LLC where the sole member is a self-directed IRA is deemed a single member LLC (Self Directed IRA LLC) for tax purposes which means the LLC is not required to file a federal tax return. The self-directed IRA is only required to file a tax return (Form 990T) if taxes are due (e.g. UDFI or UBIT).
While an IRA LLC is not required in order to invest in real estate, many IRA owners find it a good idea for the following reasons:
- Reason one: While IRAs are afforded bankruptcy protection under federal law, not all states afford IRAs creditor protections. As a result, an IRA is often invested in an LLC for protection from creditors.
- Reason two: Reduce IRA custodian fees since investments are made through the IRA owned LLC.
- Reason three: Reduce IRA custodian involvement since the IRA owner is the manager of the IRA owned LLC.
Keys to a Compliant Self Directed IRA LLC Operating Agreement
Require the IRA LLC facilitator to include the following pertinent items in the LLC operating agreement and to leave out terms to the contrary.
- No compensation may be paid to the manager of the IRA LLC if the manager is the IRA owner or a disqualified party.
- If the IRA/LLC manager is the IRA owner or a disqualified party or the manager, include language that specifies the manager may not receive compensation for managing the LLC.
- Include language regarding UBIT and UDFI triggers.
- Include language regarding disallowed investments.
- Include language regarding what happens in the event of death of IRA owner.