Disadvantages of an IRA Trust

In the previous blog we did a general comparison of the IRA LLC to the IRA Trust.  While the IRA LLC has, historically, been the “go to” self-directed IRA product, an IRA Trust is certainly making (and should be making) a name for itself as a possible better option.  But with what is good, many times there are potential negatives.  What are the disadvantages of an IRA Trust?  Do the potential disadvantages of an IRA Trust render it not worthy for consideration?  No, I think you will actually find that the disadvantages are not deal killers at all, rather considerations for you in determining which self-directed structure you want

Are the Disadvantages of an IRA Trust Really a Big Deal?

Probably not, so let’s get into the disadvantages:

“Newness” of an IRA Trust — The IRA Trust, while a permissible instrument to be utilized, is new to the self-directed community, the “new kid on the block”.  As a current or prospective self-directed IRA individual, this may not be a big deal to you as you already know that your current tax professional may not even be familiar with an IRA LLC; so, chances are good that the tax professional will probably not be familiar with the IRA Trust, either.

With newness, there can be hesitation or resistance.  Let’s pull down the covers and address some of these head on:

  1.  Educating Self-Directed IRA Custodians — DONE…at least with PGI!  PGI has already addressed this with a couple of the largest IRA custodians in the country.  Both have accepted the attorney-prepared IRA Trust document for use by our clients.  But, the reason I make reference to this is that there are other IRA LLC facilitators who “enter” this new arena for IRA self-direction who will need to go through all the steps that PGI and FSL (Frank Selden Law) has already taken and finalized.  You are set a ready to go with a PGI IRA-established Trust.  Finally, it’s not just the use of an approved Trust document, but also working with an IRA custodian who accepts the Trust with OR without a secured EIN.   Folks, unlike the IRA LLC where you are required to have an EIN for the LLC, you will have an option to not have an EIN for your Trust…and, it is what we would generally recommend as well.
  2. “The IRA LLC is the Gold Standard for a Self-Directed IRA” — In reading the two blogs on the IRA Trust, this probably is no longer a concern of yours.   The Trust is a valid option to the IRA LLC and, in many cases, will provide greater benefits.  An IRA Trust that, potentially, provides you greater benefits…check.  An IRA Trust that has been prepared by an expert in this field and accepted by self-directed IRA custodians…check.  An IRA Trust, that may provide additional benefits, and possibly save you money…check.  An attorney that will defend the use of the Trust document if ever questioned…check.  And, so you do not believe there is a selfish bias with this information…PGI has and will continue to work with clients in the establishment of an IRA LLC; we just happen to believe that the IRA Trust should at least be an option on the self-directed IRA “menu.”

Investments Where an IRA Trust May Not be Beneficial?

 Two downsides come to mind:

Foreign Investments — Due to the nature of the IRA Trust, foreign investments may work better through an IRA LLC structure.  The simple reason is that most foreign banks and investment companies understand or are aware of a U.S.-established LLC.  They do not really understand or recognize a Trust arrangement.   For a person intent on foreign investments, especially real estate, strong consideration should be given to an IRA LLC.

Purchasing Real Estate Through Non-Recourse Lending – If one is purchasing real estate and planning on using non-recourse financing, the lender may prefer an LLC rather than a Trust.  It is not that the IRA Trust could not secure non-recourse lending, it is just that a potential lender may not understand the construct of the IRA revocable Trust….so, in effect the IRA LLC may be the path of least resistance.

 

PGI and Frank Selden Law have partnered to provide clients with the IRA Trust as an option to the IRA LLC.  This partnership, simply, provides the client two significant benefits:

  1.  Your IRA Trust Established by an Expert with IRS Regulations — FSL cannot defend how you use your Trust, just like no one can be responsible for how you operate your IRA LLC.  You are the responsible party and must comply with all IRS regulations.  However, FSL will defend the use of the Trust document as a IRS-compliant option to the IRA LLC in its self-directed use.   Having a qualified expert defend the use of this IRA Trust document is of great, potential value to the client.
  2. Cost Savings of the IRA Trust — As we have discussed, many of you will experience cost-savings through the use of the IRA Trust rather than the IRA LLC.  The potential cost savings along with the benefits of the IRA Trust should trigger your consideration.  However, as a result of the partnership between PGI and FSL, the client will realize a fee structure that is the lowest in the industry (for the same provided service).  We are able to reduce the fee structure through shared responsibilities (think of the concept if you simply had your Trust established through a law firm with its high hourly fees).  In this structure, FSL executes all activities related to the IRA Trust construct and PGI works with the clients on all other matters related to the establishment of the IRA Trust.  You could expect to save 30 – 50% by establishing the Trust in this manner.

Under current regulations, the IRA LLC is certainly not disappearing.  We just believe that for certain individuals, the IRA Trust should be a strong consideration.

P.S. — I was wrong about 2 blogs posts on this topic.  I am sending out a 3rd blog which will simply address how one completes a W-9 when making an IRA Trust investment.