Why You Should Strongly Consider an IRA Trust

There are a few reasons why you should strongly consider an IRA Trust.  Okay, let’s take the mystery out of this equation:  for the typical client establishing the IRA Trust, to them it really won’t look that much different than an IRA LLC.  Both will allow you to invest into non-traditional assets (e.g., real estate), and both will permit you to have that “checkbook control” that most IRA investors are looking for.  Both structures still must adhere and comply with all IRS rules related to IRAs, and they must comply with IRS Prohibited Transactions. So, let’s dig a bit further into why you should strongly consider an IRA Trust?

An IRA Trust vs. IRA LLC?

Harder to Establish an IRA Trust and More Expensive?

Before you make a judgement by the the statement that the IRA Trust is harder to establish and more expensive, we are going to point out why you should strongly consider an IRA Trust.  First, how is it harder to establish?  It is only harder because not every “Tom, Dick and Harry” online are selling and establishing the IRA Trust.  With a reduced number of qualified individuals preparing a Trust document, it stands to reason that it may be harder to find the service.

And, more expensive?  Well, it can be but that is because it is a specialized document prepared, in most cases by a qualified attorney who is familiar, very familiar, with the IRS code and Prohibited Transactions.  Another factor in the cost…making sure the attorney who is preparing the Trust document will defend its use if the construct of the document is questioned by the IRS.  If that were to ever occur, I think you would feel much better having that legal professional in “your back pocket”, so to speak.

So…Why You Should Strongly Consider an IRA Trust?!

Before explaining why you should strongly consider an IRA Trust, we can take a moment to explain that the IRA Trust is not necessarily for everyone.  If you are in a State with very low/reasonable LLC establishment and on-going fees, and, if you do not have any concerns with having your LLC information on public websites (e.g., mailing lists for businesses, your respective State Secretary of State), well, bluntly, you probably won’t care.

But, there is a segment of the self-directed IRA community who:

How Much Did that LLC Cost?!

  1. Live in States with very high LLC fees for  establishing and maintaining your LLC;
  2. Live in States with very high LLC fees, and you choose to form an LLC in another State to avoid paying your State fees for your LLC;
  3.  Would prefer  to not “publicize” your IRA and its LLC on the  Secretary of State websites (and who knows what other databases).

High Fees for Establishing/Maintaining Your LLC

I would love to pick on States….but, I will go easy. But, I will whisper this….if you live in States such as California, Illinois, Maryland and Massachusetts…scary!!  If you are in States with high establishment costs, you may be interested in the IRA Trust for that purpose.  Then, if the State also has high on-going, annual fees to maintain your LLC….well, folks, that all adds up.  For this reason alone, it might be worth establishing the Trust form the get-go.

Let’s use some examples:

  1.  State having an “LLC tax” up to $800 per year;
  2. Another State having an establishment fee of $500, with an on-going, annual maintenance fee of $250;
  3. One State having an establishment fee of $300, with an on-going, annual maintenance fee of $300;
  4. Still another State having an establishment fee of $500, with an on-going, annual maintenance fee of $500;
  5. States, when they believe you should have filed the LLC in your resident State, going after you for past fees, plus interest.  And, they can be very aggressive in their pursuit of what they believe is “owed” to them (e.g., just check out the State of California Franchise Tax Board).

With a 10-year cost factor, you may be spending anywhere between $3,000 – $8,000 with some of these fees made payable to your beloved State….just for the pleasure of investing otherwise tax-deferred or tax-free (Roth IRA) retirement funds.  Seems kind of crazy, eh?!

Moral of the story:  you can establish the LLC wherever you choose, but do you want to be concerned with the State possibly contacting you later saying you owe them money!  Or would you prefer to address things on the front end when establishing the LLC, and not worry about a potential letter in your mailbox!

Privacy, We Can’t Forget to Talk about Privacy!

This one doesn’t necessarily “hit your pocket book” but, for many, it is still an important consideration.  An LLC is filed with the State in which it is filed.  It becomes public domain and the LLC information is accessible by anyone. In contrast, a Trust is not publicized in the public domain.  It is not publicized on the State’s Secretary of State website. To me, this is an ancillary benefit of the Trust.  Even for those of us who don’t necessarily have the concern of having our LLC information publicized, most of us would probably agree that, all things being equal, hey, why publicize it if we don’t have to.

However, please note that the use of the IRA Trust is not hidden to the IRS.  All IRA custodians report the assets of the IRA on an annual basis through IRS Form 5498….which applies to all IRA accounts (whether self-directed or not, whether an IRA Trust or IRA LLC).

Why you should strongly consider an IRA Trust has, hopefully, been illustrated….the choice is now yours as to whether you want to establish an IRA Trust.

As always, the information provided is intended to be educational in nature.  It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice.  One must always consult with their respective professional in all such matters.