May an SDIRA use a Trust Rather than an LLC? | Frank Selden Law

May an SDIRA use a Trust Rather than an LLC?

Yes, you may use a Trust to manage your self-directed IRA’s assets. This article attempts to clarify what works and what doesn't work for an IRA to use a trust as its investment vehicle. This is a relatively unknown concept. Internet search results for “IRA Trust” may confuse you. My own search this morning resulted in several pages of results that are actually about different concepts. Click here for a larger view of the image below, 


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This is NOT merely Placing IRA assets in a Trust

Ed Slott and Company, America’s IRA experts, answer the question “Can I place my IRA in a Trust?” with a resounding NO. Ed Slott is correct. He is also describing a different concept. Someone has a revocable living trust. They have an account with a financial services company that is invested in mutual funds. Rather than having that account in the name of their IRA, the individual wants the account titled in the name of their trust. The Ed Slott article is correct, the IRS will consider that a distribution. What is the difference with my SDIRA Trust, where the funds end up in an account in the name of a Trust?

In my concept, the Trust is not just any trust, certainly not someone’s personal revocable living trust, but a specifically crafted trust document in which the IRA is both grantor and beneficiary. This SDIRA Trust must be accepted by the IRA custodian who will sign the trust on behalf of the grantor. You are allowed to be the trustee of the SDIRA Trust. As a trustee you have control over the investment choices. Your actions and investments must not trigger prohibited transactions.

Think of it this way. Most self-directed IRAs use an LLC. If you create your own LLC, in which you are the member, and you move your IRA assets into that LLC, you have just created a distribution. Instead, you direct the custodian to invest your IRA into a properly crafted LLC, in which the IRA is the member and you act as a manager. The concept under discussion today simply uses a Trust rather than an LLC.  May an SDIRA use a Trust Rather than an LLC to manage its assets? Yes, when the proper trust is created and correct processes followed.

This is NOT making a Trust your IRA Beneficiary

There is a concept commonly referred to as an IRA Trust. In this idea, one creates a Trust to be the beneficiary of one’s IRA. You can read an article describing a Trust as an IRA beneficiary here. The trust created to receive IRA assets as a beneficiary of the Trust is constructed differently than the SDIRA Trust used to manage IRA assets. The IRA beneficiary trust does not come into effect until the IRA owner passes away. The trust manages the assets for one or more beneficiaries of the trust and can pay the taxes on the distributions or pass the taxes through.

In the SDIRA Trust concept, the IRA is the beneficiary of the Trust. The IRA account paperwork will include a beneficiary designation form. If you want to use a Trust as the beneficiary, that trust will be a completely different trust than the one used to manage the assets. Whether to make a Trust the beneficiary of your IRA is a different topic, on which you will read varying opinions. In this concept, the IRA is the beneficiary of the Trust. Same words, different order, very different concepts. In this concept, you are still alive (yay!) and managing your IRA’s assets for the benefit of your IRA. In the other one, you have passed away (boo!) and someone else is managing your IRA’s assets for the benefit of its beneficiaries.

SDIRA Trust uses a Trust to Manage your SDIRA Assets

I trust that you now understand this concept better. Pun intended to demonstrate than the same words can mean different things, often with very different consequences. I created a trust document that has been accepted by IRA custodians as an acceptable investment for their IRA clients. The process of using the Trust is exactly the same as using an LLC.

Why use a Trust rather than an LLC? LLCs are a State created legal entity, with initial and annual filing requirements. States charge as much as $800 per year to maintain an LLC. Trusts are not registered with the Secretary of State. This saves your IRA money and relieves you of the ongoing LLC reporting requirements.

Is there a downside to using an SDIRA Trust? Perhaps, depending on your investment ideas. For example, if you are purchasing real estate and planning to use non-recourse financing, the lender may prefer an LLC rather than a trust. Most people will not experience any downside to using a Trust rather than an LLC.

You want your IRA-Trust to be set up correctly. Given the varying, and seemingly contradictory, information on the internet about IRAs and Trusts, you want an expert. I recommend calling John Park at PGI Agency. John will help you decide on a custodian, whether a trust or LLC will work better for your idea. I work with his clients to address taxation questions and set up the proper documents. You can contact PGI here. You are also welcome to chat with me if you want to discuss the legality of this idea.

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