For those of you who have done research on self-directed IRAs (Tradional IRA, Roth IRA, SEP IRA), you soon find the term IRA LLC. Why?
Well, as an IRA must be “held” by an IRS-approved IRA custodian, IF the IRA account holder wants to secure fiduciary control (e.g., checkbook control) of the assets of the IRA, there has to be an entity (LLC account) which can accept the funds of the IRA for investment purposes. This IRA LLC invests the assets of the plan and, typically, the IRA account owner is the manager of the LLC which is making the investment choices for the IRA LLC. This is a critical role that is held by the IRA account manager and the manager must exercise extreme care to comply with all IRS regulations, including acting in a fiduciarily prudent manner.
However, one potential error that the IRA account holder can make is to use only the IRA LLC to purchase any and all assets (e.g., real estate property) of the plan. While the assets of the IRA LLC have extremely strong asset protection under both state and federal law, the account owner should strongly consider placing each piece of property in its own LLC. This can be done by the IRA LLC being the sole member of any and all subsequent LLC accounts utilized to hold the separate properties.
As we all know, sometimes we can be penny wise and pound foolish by trying to crimp and save on relatively minor expenses that may come back to protect us.
And, while you are at it….the LLC should not be just a shell, but rather a living document. What I mean by this is that the LLC should be formed with an accompanying LLC Operating Agreement that clearly spells out the role and responsibility of the LLC and the asset(s) it holds.
As always, the information provided is intended to be eduational in nature and is not, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You should always seek the appropriate assistance from such individuals.