Quick Fix: 2018 IRA Contribution Limits

Hello, fellow investors. Every new year, I get many questions about IRA contribution limits and what changes have taken effect. This year, there have been many more questions than usual about this subject, as well as the new tax laws.  Don't worry, there's an article in the works about how these new tax laws will impact real estate investors soon. While it would be impossible to answer all of the questions I've received in this space, I will be giving an update on the IRA Contribution Limits for 2018.

Today, we're just going to talk about a "quick fix" for your IRA and retirement concerns. We'll also show you one big way to get around the 2018 limits and make the most of your retirement savings.  Even better, you can learn all of this information in less than ten minutes.
 

2018 IRA Contribution Limits

Let's start with the good news:  IRA contribution limits remain the same in 2018 as they did in 2017 (and even as far back as 2016). Here's the quick and dirty update:

But maybe you want to contribute more. If you're ready to take your retirement account to the next level, here is our Quick Fix solution:  take advantage of a self-directed IRA LLC.
 

Why Is a Self-Directed IRA LLC Good For Me?

Self-Directed IRA LLCs  are a mouthful to talk about, so it's possible you haven't even heard of this tool at all. But they will offer you the ability to make tax-free investments without custodian consent. Since you don't need to get permission from a custodian (you are, after all, an adult--or possibly an extremely bright teenager planning retirement early), you can make the investments you want, and you can make them faster than you would if you were stuck in Traditional IRA Land. Self-directed IRA LLCs are special purpose liability companies. Yours will be fully owned and managed by you. You can lord over it and feel like a God on the weekends. The LLC can become a pass-through for tax purposes, which allows you, the owner, to assume the tax burden instead of the LLC. This gives you tax options.
 
In most cases, income and gains flow back into the IRA tax-free. You are also able to keep and funds in an LLC bank account without having to go through a custodian. These accounts operate similarly to personal checking accounts, but the company is separate from you as an individual. You have control over, and access to your money, which means greater investment flexibility.
 
You can invest in anything from your IRA LLC. And when I say anything, I mean literally anything: real estate, gold, Bitcoin, and so much more is all fair game. Your only limit is your imagination. No matter where you put your money, your income and gains flow back into your fund tax-free. You can stick it to Uncle Sam--who among us hasn't wanted to? And even better, you can maximize your contributions and plan the retirement you've fantasized about for during your working life.


Quick and Dirty Recap of Self-Directed IRA LLC Benefits

 
So, to briefly review for the scanners in the audience, when you get a Self-Directed IRA LLC:


Pretty cool, right?

That's it for today. If you have any questions about Self-Directed IRA LLCs, want to sing their praises, or want to pick an argument with me because you think I'm totally off-base, you can do so in the comments below. Let's spread the Self-Directed IRA LLC Gospel and work towards a happy, healthy, and comfortable retirement plan together.
 
 
 

Maintain Title insurance During a Property Transfer

Maintain Title insurance During a Property Transfer

Any time you transfer property you must consider the title insurance implications. Title insurance will generally be invalidated upon the transfer of the property. However, title insurance isn't invalidated if you transfer the property to a wholly owned LLC. That is, an LLC that's completely owned by you, the person that also owned the property. You also won't invalidate it if you add your spouse to title, for example. That'd be a transfer, but in that circumstance they're not going to invalidate it. You also can transfer the property to an intervivos trust where you are the settlor of that trust. This is the type of strategy that we'll be using with, inside of our anonymity land trusts when we start transferring property. My name is Scott Smith. I'm an asset protection attorney, I'm a real estate investor and I wanna help you.

How To Maintain Title Insurance During a Property Transfer

The Benefits of Series LLCs (Protection, Business Growth & More)

Real estate investing is an excellent way to put your money to work. The returns consistently outperform traditional savings and common investment vehicles, with little risk and low management.

There's only one problem. We live in the most litigious society on earth. Did you know one in four U.S. citizens will be sued in their lifetimes? Real estate investors face an even greater risk of lawsuit.

For years, the wealthy and powerful have shielded their wealth within layers of anonymous companies. Now you can do the same. The Series LLC is one of the central legal structures in any asset protection plan. Let's look at the benefits of using one.

A Traditional Limited Liability Company Isn't Enough To Protect Your Assets

Property in your name leaves you open to losing it all: Litigation doesn’t even have to have anything to do with your property in order to wipe you out. If you have property in your name, or even worse, in a general partnership, and are found liable in a car wreck or other random accident, you could lose everything. Insurance is not going to stop a plaintiff from going after anything and everything you own to repay damages for extensive hospital bills or a wrongful death action.

Property in a traditional LLC or corporation isn’t much better. You are in a little better shape if you have all your assets in one traditional LLC or corporation. In that case, lawsuits against you personally can’t normally touch your business assets. But if you have all your assets in one LLC, and there is a slip and fall at one of your properties that results in serious injury or death, a plaintiff can go after all your properties. It doesn’t matter that your other properties are unrelated to the incident.

Insurance Won't Protect Your Investments

Insurance can help with minor incidents, but it’s not going to save you from losing everything in the case of a big, catastrophic lawsuit. If someone falls through your stairs and the court finds you are at fault because of the nature of the structure or maintenance, your insurance will likely not cover you at all. And certainly, neither your property nor your automobile insurance will cover you if you are found negligent in a serious accident.

The one thing that can save you from disaster is setting up an LLC Series and Anonymous Trust. Plaintiffs can never reach all of your assets because they are owned by separate legal entities and never in your name.

How the Series LLC Structure Protects You

1. Compartmentalizes Your Risk

Setting up an LLC Series Structure legally isolates your equity into separate limited liability companies inside a holding company. Even if you lose a lawsuit, the damage is limited to a single property or asset within the individual series.

The Series LLC works for multiple types of investments. It's great for property management but is equally effective at protecting other investments like a stock portfolio.

2. Hides Your Assets

In a Series LLC, your assets are each separated into individual entities. You can add an anonymous trust to each of these entities for further protection.

Limited liability companies and other business entities are exposed to the public. Anybody can look up your company name and see what type of assets it contains. Trusts, on the other hand, do not need to list their holdings publicly. When combined with the Series LLC, it makes all of the individual holdings essentially invisible. The anonymous trusts own the LLC itself and serve as title trusts for the real estate asset.

How a Series LLC Protects You From Lawsuits

There are three pillars of any lawsuit: opportunity, incentive, and the judgement. Winning a judgement requires a good lawyer, a friendly judge or jury, and a little luck. Clearly, that isn't the pillar we want to focus on. Instead, asset protection strategies target opportunity and incentives.

1. Plaintiff Attorneys Can't Sue What Isn't There

An accident on your property plants the seed of opportunity, but it isn't enough to kick off a lawsuit. In order to put things in motion, the lawsuit attorney must be able to sue you.

An anonymous Series LLC can remove this opportunity in two ways.

Using a Shell Company: Did you know you can break your company into two separate companies? The first is an asset holding company, which isolates assets into individual entities. The second is an operations company, which manages the day-to-day affairs. With some minor adjustments to your contracts, you can require all lawsuits to be brought against the operations company. This acts as a shell company, which means even if you lose the lawsuit there is nothing of value to be lost.

Using Trusts: As mentioned previously, hiding your assets within trusts means your assets are invisible. Even if you could be sued, your opponent's legal team won't be able to find which company to bring the case against. This dramatically reduces the opportunity to bring a lawsuit against you, even if there was some event that could be used as justification for doing so.

2. Attorneys Won’t Gamble or Chase the Money

Not only does a series LLC structure legally protect your assets, because your equity is in multiple legal entities, but it also discourages most lawsuits from ever being filed. Attorneys will not take a case unless they know how they will get paid. If equity is held in multiple LLCs set up with anonymous trusts it will appear on a search that you own very little – if anything at all. Attorneys will look elsewhere for an easier payday.

Plaintiffs need to pay at least $5,000 to even start litigation, and the amount quickly escalates to over $10,000 once discovery starts. It simply does not make sense for a plaintiff to file a lawsuit when they cannot find any assets that can be seized if they win a damage award.

Series LLCs Let You Grow Your Business Forever

With the Series LLC structure, there's an operating company on top, and multiple companies beneath. We use the metaphor of "parent-child" relationships to make the point that this structure lets you have as many "kids," or Series, as you like.

Each Series is its own LLC, and you can create new ones easily as you acquire more investments or other assets. As a bonus, you save money by using a Series LLC rather than the same amount of Traditional LLCs. You pay the costs of establishing the LLC once, and only once.

Series LLCs Protect Your Valuable Assets

The Series LLC's structure isolates your assets, allowing you to have full liability protection for each one. Each asset is secured in its own Series, which functions as its own LLC.

In practice, using a Series LLC makes you very difficult, or at least highly impractical, to sue. Even if someone has a good reason and the resources to sue you, their attorney may not want to. Why? The reasons are pretty simple:

This is just the quick and dirty version. See our previous article on how the Series LLC prevents lawsuits to learn more.

Series LLCs Offer Great Tax Benefits

That's right, even Uncle Sam is kind to the Series LLC. We could write a whole article on tax benefits alone, but here are our top two.

1. Save on Business Taxes

The Series LLC is represented only in its "home state." This means, if your Series LLC is formed in a state with no sales tax, you get to skate on sales tax. For real estate investors, this means rental payments between Series aren't subject to sales tax.

The beautiful part is, you don't even have to reside in the state you form the Series LLC in. If you're itching to save on taxes, consider the Texas Series LLC. This entity will also help you save money via pass-through taxation.

2. Simplify Your Tax Returns

Even though you can have as many Series and assets as you want, you'll still only file one tax return for the whole shebang. The operating company, or parent company, is the only one that you're required to put on the form. Of course, you're still paying taxes on the "children" (Series), but it's all reported as a single entity.

Is There a Catch?

Setting up LLC protection for your real estate business is fast, cost-effective, and scalable. You can be fully protected inside of only a week! There is a one-time set-up of the series structure for the limited liability company. Then you simply purchase a title transfer for each property you want to move within the asset protection vehicle.

There is no more work for your accountant with a series LLC. Though there are separate legal entities, there is a holding company LLC which is owned by an anonymous trust. This means there is still just one tax return, one LLC filing, one EIN, and one operating agreement. After it is set up, you won’t even notice it’s there in your normal course of business.

Setting up the initial structure is inexpensive considering the massive protection you will get and its infinite scalability. You can sleep better knowing your real estate investments and passive income have full asset protection with an LLC series structure and anonymous trusts.

The 3 Most Common Asset Protection Misconceptions Explained

As a real estate investor, your most obvious goal is to make a profit. But in order to make a profit, you need to protect the wealth you've already accumulated. After all, you've gotta spend money to make money. And if you've got none to spend, you won't be able to make much.

Not only does asset protection protect the wealth you've already accumulated, but it also protects you personally. It protects your reputation, your credit score and your wealth. However, many investors seem to be getting mislead by financial advisers, CPA's and keyboard warriors as to what asset protection actually is.

Asset Protection Misconception Number 1: Insurance Protects You

You know what I hear the most from my clients, who are exclusively real estate investors? "I thought all I needed to protect my assets was a general liability insurance policy?" This couldn't be more further from the truth.

I have nothing against insurance, but when you think about it, they're almost a criminal business. When you get insurance, you're betting against yourself. An insurance company is like the house in a game of casino poker. In the end, they never lose. And even if the insurance company pays out for a claim, you still lose because they're going to raise your monthly premium.

The truth is you do need insurance. But insurance alone won't be enough to protect your assets. Insurance policies include what are called "exclusions". Insurance companies include exclusions in your contract to minimize their losses. Remember, their goal is to make a profit, just like you.

Unfortunately most people won't sit down and read these exclusions. And even if they did, they probably wouldn't be able to understand the complex legal language insurance companies use in their contracts. What these exclusions do is prevent you from suing a company for any particular reason, as outlined in the "exclusion". It could be an exclusion for something as simple as a fire caused by a microwave, to a volcanic eruption.

Most liability insurance policies will protect you from a slip and fall. That's it. When a lawsuit comes around, your insurance company will be nowhere to be found. This is why you need a real asset protection strategy. A proper asset protection strategy is supported by:

What I like about this bullet pointed list is that it shows how insurance is only one third of an asset protection strategy. If you're a real estate investor and you only have insurance, that's the equivalent of going into battle with only one third of the ammo you need.

Asset Protection Misconception Number 2: Forming A Legal Entity Guarantees Your Protection

Yes, LLC's, Trusts and Corporations do provide you with some serious legal protections. But that's only if you properly set them up and maintain them. You can't just form an LLC and do anything you want.

For example, once you have an LLC you have to be extremely careful about not mixing your business assets with your personal assets. The reason you form an LLC in the first place is to separate your business assets from your personal assets. If someone sues your LLC and the court finds out you used your business credit card for personal reasons, such as getting a haircut or going to see a movie, a judge will allow a plaintiff access to your personal assets.

So the moral of the story is, when using a legal entity like an LLC, be sure to keep careful records of your business related transactions, and never mix business with pleasure.

Asset Protection Misconception Number 3: An Asset Protection Strategy Can Be Put In Place Later and Still Protect You

I can't tell you how many times I've received a call from a real estate investor seeking to put in place an asset protection strategy after someone's just filed a lawsuit against them. Asset protection isn't like a hat you can take on and off when you please, it has to be put in place well in advance of a lawsuit. This is because there are laws that basically make transferring assets in the middle of a lawsuit illegal.

The bottom line is if you want to protect your assets to the fullest extent of the law, you need a proper asset protection strategy. And if you think an asset protection strategy isn't worth your investment, I'm going to end this article with 3 facts: Yes, an asset protection strategy will cost you thousands. But a lawsuit will cost you millions. Everyday real estate investors just like you get sued and someone hits the lottery on their assets. Don't let that happen to you.

Real Estate Asset Protection Explained: Series LLC Structure With Anonymous Trusts

A proper asset protection strategy lets you sleep easy at night even if you are sued. Below, I will share with you the secrets that will let you go about your business as usual even if you’re threatened by a lawsuit. With asset protection on your side, you’ll barely even worry about the fears that are giving other investors grey hair overnight. After implementing a proper strategy, lawsuits will never even get filed and the problem is gone before it even starts.
Asset Protection for real estate investors is premised on two parts:

  1. Isolating the assets for liability purposes inside of a Holding Company and
  2. Hiding the assets from being connected to you or the Holding Company.

Additionally, the company structure we use is scaleable at no additional costs or fees, streamlines your taxes, can be used in conjunction with traditional financing, and allows for the traditional recording keeping you are likely already using. After it is set up, you won’t even notice it’s there in your normal course of business.

Which Type of Company Should I Use to Hold My Real Estate Investments?

The best holding company for real estate asset protection is the Series LLC. You can think about the Series LLC as a Parent-Child relationship. The Series LLC is the Parent, and it can have as many children as it wants. Each child is known as a ‘Series.’ Even though the Series LLC is technically one company with one state filing and one tax return, each child Series is treated as if it were its own LLC for liability purposes.

Each Series is typically designated with its own letter, beginning with Series A. The picture below can help you understand the structure. This means that if a lawsuit is filed against Series A, it cannot impact Series B, Series C, etc. A lawsuit against Series A can only affect the assets held in Series A.

anonymous trust graph

In the diagram above, the LLC has three Series. Each Series holds only one property. REI Asset Holding LLC – Series A owns a single asset, a piece of Real Property located at 123 Main st. If someone filed a suit over that property, it would not jeopardize the properties located at 456 Main st. or 789 Main st.

Moreover, if there was a lawsuit against the owner of the parent LLC, that lawsuit could only collect against the assets of the owner - not against the assets of the LLC. Lawsuit against the owners of LLCs structured this way can only impact the owner's personal property. We recommend never holding property in your own name. This way, if a lawsuit is directed at you personally, it cannot affect your assets. They are secured inside the Series LLC structure.

How To Stop a REI Lawsuit Before It Even Starts

The Series LLC limits our downside risk in the event of a lawsuit since it limits the maximum amount we can lose, which is only the amount held in the Series. However, limiting the amount of the lawsuit is our last resort. What we want is a protection system is that stops the lawsuits before they are ever filed. This can be accomplished in three simple steps.

Step One: Understand What Motivates Real Estate Lawsuits

To stop a lawsuit before it is filed you have to take out one of the three essential pillars of a lawsuit. The essential pillars of a lawsuit, or what attorneys need to make a case worthwhile, are:

The law and the facts are generally easy to fabricate, and any decent lawyer can find a basis for a lawsuit that will survive summary judgment. The asset protection system we put in my place for our clients attacks the third leg, the recovery.

Step Two: Attack the Recovery Phase

Recovery is the ability to seize assets and get paid after winning a judgment. A judgment is worthless on its own: it's only a piece of paper. Judgments are only as valuable as the assets that can be seized with it. So, before a case is filed, an attorney will always research whether there are assets to can seize from the defendant after victory in court. If it appears that the defendant has very little or no assets, then the lawsuit isn't worth the attorney's time and effort.

The vast majority of the time, this piece of the asset protection plan alone stops the suit dead in its tracks. There are rare exceptions, such as when the client coming for your assets is angry enough to spend thousands simply to satisfy personal self-righteous spite. But in the real world, most people aren't willing to drop that kind of cash on rage alone. The wheels of justice really do rind slowly. Lawsuits take months, sometimes even years, to unfold. Anger tends to burn off far quicker.

Step Three: Make The Other Attorney Lose All Hope of Recovery With Anonymous Trusts

To show the opposing side that there will be no recovery from the lawsuit, we hide the assets using Anonymous Trusts. These Anonymous Trusts can own the LLC itself as well as serve as Title Holding Trusts for the real estate asset. The LLC typically must disclose the members of the LLC on the filing instruments called the Articles of Incorporation. However, the member listed on the filing can be an Anonymous Trust. Since the Anonymous Trust is a private document and it is not filed with the state, anybody researching the Owner or Beneficiary of the Trust will be unable to find that information in the public records.

Additionally, anyone researching the owner of the real estate asset by searching the County Clerk records will only find the name of the Anonymous Land Trust. Typically, the property owner’s name is listed on the County Clerk’s records, but in this case the owner of the property would be listed as the 123 Main St. Trust. Since the owner of Trust and the beneficiary is not registered with the state, they cannot find out that the Series LLC is the beneficiary of that Trust. For more clarity, I refer to the Anonymous Trust used for filing the LLC itself as the “Filing Agent Trust” and the Trust used for holding the real property as the “Anonymous Land Trust”. The Filing Agent Trust in the below example is the actual owner of the Series LLC.

anonymous trust graph 2
Bottom Line: A properly implemented Anonymous Trust and Series LLC structure can give you total anonymity. Your name won't appear anywhere, making even filing a lawsuit incredibly difficult.

What Should I Expect For Tax Planning?

The tax structure with the above entity is typically done in one of two ways depending on the number and type of owners. If the owner is a single individual or a married couple, then the entire structure is a pass-through entity. In these cases, you (and possibly your spouse) simply report the income on your personal income tax return under Schedule E. In cases of unmarried investor-owners, the LLC will need to file a partnership tax return.
Financing inside of a company structure should only be done once traditional personal financing is exhausted. Traditional financing  typically has better, cheaper terms than the commercial financing required if the property is purchased directly in the name of the LLC.

Once the property is purchased in your personal name, the property will need to be deeded into the company structure. Deeding the property into the company structure will violate the Due On Sale clause located in the mortgage. However, we have not seen a bank foreclose based upon the Due On Sale clause since before 1960 as long as the payments are made. I hear of lots of threats, but I have not seen any banks actually do it.

How Do I Keep Records and Make Sure My LLC Will Not Be “Pierced?”

There are several things you must do to keep an LLC from being pierced. These include filing franchise tax, having an operating agreement, and managing the money correctly. Where I see most of my clients drop the ball is on the money management and record keeping.
The recording keeping for the structure is likely very similar to what you already do for your basic accounting of the investment. For any investment, you need to know the profitability of the particular asset purchased, so you need to have records which reflect the amount of capital invested into the asset, the amount earned buy it, etc.

The Series LLC structure above will require you to maintain the records of each Series separately just as if they were separate companies. In many cases, all this requires is for you to “tag” the entries in Quickbooks so that the entry is shown in correlation to the specific company. If you do not use Quickbooks, you can get the job done with an Excel spreadsheet. But be sure to add a new entry any time you add or withdraw money from the bank account for the company. If you forget to do this a few times, it's not the end of the world. You can always go back after and “catch up” on the accounting. Court will allow this as long as it is “reasonable.” Nobody expects you to be perfect, but don’t abuse it.

 

Delaware Statutory Trust Advantages: Protect Your Assets Like the Pros

The Delaware statutory trust (DST) is a tool wise real estate investors use to avoid the dreaded franchise tax that eats into the profits of LLCs. The California investor, in particular, enjoys advantages based on two concepts:

  1. Insulating the assets and keeping them separate from one another by using a shell company
  2. Masking the assets from any provable relationship between you personally or the shell company.

There are even more good reasons to use this structure. Delaware Statutory Trust advantages also include:

The beauty of this structure is all the effort is up front. Once it's in place, you'll barely even know it's there and you can go back to business as usual.

What is the Best Type of Company For Real Estate Investors in California?

As a real estate investor, you have several options for your company structure. But we've found the best for asset protection for the California investor is the Delaware statutory trust. Note: investors from any state can take advantage of this tool, but California state restrictions on business make it ideal for Golden State residents. 

A simple way to understand the DST is to compare it to a parent and its children. The DST itself plays the role of the mother and father, rolled into one.  Unlike human parents, Octomom notwithstanding, it can reproduce forever. In this case, the children are referred to as "Series." Despite the fact that the DST is its own legal entity with a single filing and tax return, each child receives the same protections as a traditional LLC. This includes, of course, liability protections. This image gives you an idea of how this works:

delaware statutory trust advantages

As you can see, each Series can contain one or more assets. Creating a new Series is simple and can be done in a matter of minutes. For a more detailed explanation, take a look at our piece on the Series LLC Structure. The same information applies to the DST. Its structure is similar to that of the Series LLC.

How Does the Delaware Statutory Trust Stop Lawsuits?

The DST stops lawsuits by sapping any motivation an attorney would have to file one at all. Further, it places a nice, clear boundary on how much a litigious person could collect from you in court.  What does this actually look like?

Well, when you use a DST structure, even if someone does sue you, they're only able to "go after" the relevant asset in the Series.

Let's say an angry tenant tries to sue you for a problem related to your rental condo in Series 1.  Even if he/she is successful, only the condo is on the line. Your other assets in Series 2, 3, and the Holding Company are safe—and so is anything you own personally.

Believe it or not, this is actually the worst-case scenario. A well-implemented DST will kill the suit before it's even filed. This comes back to the motivation issue mentioned above. Think about it: what motivation does anyone ever have to file a lawsuit?  You might think of things like indignant rage, pure spite, etc., but the only motivation that matters for attorneys is cash-money. Or valuable assets that can be converted into cash money.

Even if the person initiating the suit is madder than hell, few attorneys will play ball if they have nothing to gain from winning. Believe me, as an attorney, I have much more profitable ways to spend my time than chasing after someone who doesn't have much for me to recover in judgment.

This is why my asset protection strategies attack recovery. It's easy enough to win a judgment, but on its own, it's like getting a gold star from the court: nice ego boost, but ultimately worthless. If the gold star is just a sticker, it actually costs the attorney precious and expensive time to pursue you. The gold star is only good if it's backed by actual gold, meaning, a valuable asset to convert into the cash we all know and love.

Roll with me on this: would you spend time researching a project at YOUR job that you weren't sure you're getting paid for? Hell no! Attorneys are even more hawkish than the average professional in this regard. We aren't going to waste money investigating you, let alone waltzing into court to sue you, if it's going to cost us more than we could win. There are many, many more tasks that we can bill for and receive certain payment. Without representation, even the most vindictive plaintiff doesn't stand a snowball's chance in hell of winning the judgment.

How Does the Anonymous Trust Play Into An Asset Protection Plan?

Anonymous Trusts help you drive home the point that you aren't worth coming after. Their job is to disguise the ownership of the asset in the first place. These Anonymous Trusts will ultimately hold the assets.

Remember the research phase that comes before any lawsuit we discussed above? Find out how to form an Anonymous Trust and it will more than pull its weight in your asset protection plan. In the internet age, it's pretty easy to figure out who owns a piece of property. County Clerk records are public record, and list the owners of a given property. Anyone with an internet connection can search these.

Usually, these records will clearly show the name of the owner of the property.  But if you use this strategy, the trust's name will be listed instead. And you can name that trust whatever you want. So when anyone, including a potential opposing attorney, goes to research the property, they'll see it is owned by "The XYZ Can't Find Me Trust" rather than a person. Your name is kept out of the whole affair. And to file a lawsuit, the litigant needs a name.

Where Do I Come in if the DST is Holding My Assets?

Trusts, including the example  "XYZ Can't Find Me Trust" are made up of several  parts. This is the DST Structure:

Parent = Delaware Statutory Trust

Child = Individual Child Series of a Delaware Statutory Trust

Land Trust = Living Trust that holds title to the real estate

Ordinarily, the trustee and the beneficiary cannot be the same person. The use of the structure outlined above keeps you, the individual with a name, from being both. Instead, the legal structures you control stand in. So your interests are represented regardless. Even if the trust itself is scrutinized in court, the worst-case scenario is that the trust is "merged." When this happens, your assets just return to the original DST.

How Does Bookkeeping Work for My DST Structure?

Proper record-keeping and vigilance on your part is essential for preventing the DST from being compromised. In legalese, this is called "piercing."  When a court pierces the structure, it can dismantle. You don't want that, because it would allow the court to treat all of the Series as one, instead of separate.

The DST must abide by several legal requirements. These include a valid trust agreement, initial and current filing with Delaware, a Delaware Registered Agent, and keeping in line with laws and IRS regulations governing the structure.

Our firm takes care of the trust agreement and ensures your DST is complying with these requirements. But you have a part too. Your job is to maintain accurate and responsible records.

Record-keeping for the DST structure is simple, and you're most likely using a structure that works if you err on the side of traditional bookkeeping methods. The DST structure above will require you to stay on top of the books for each individual Series. Remember, the power here is in the fact that you are treating them as separate companies. This means separate bank accounts, as well as treating them as different in your bookkeeping software. Generally, this just means identifying any money flowing in or out as belonging to that particular Series in your accounting software.

How Do I Set Up My Delaware Statutory Trust?

We've got you covered. Royal Legal Solutions provides comprehensive Delaware Statutory Trust and Anonymous Land Trust services. As an attorney and investor myself, I founded Royal Legal Solutions to help investors like you. While I specialize in asset protection, my other practice areas include estate and retirement planning. Over the years, I've helped many clients set up DSTs and Anonymous Trusts to establish a solid foundation for their asset protection plans.

If you're ready to get started, take our Financial Freedom Quiz where upon completing it you will have to opportunity to book a consultation. Together, we can build your real estate empire into a judgment-proof fortress.

Business Trust For Self Directed IRA With Checkbook Control

The most exciting aspect for owners of a Self-Directed IRA with checkbook control is to have more direct authority and oversight over the investment and management decisions regarding the funds and investments held in the retirement account. The driving factor is to avoid having to submit documentation for each investment transaction or transfer of funds to the IRA custodian for their review and approval. This review process can take up to 2-3 days and moreover, the custodian usually charges a fee for (1) this review and approval process and (2) the transfer of funds to the investment. Ouch! Why waste your retirement funds on such administrative overheads?

How Self-Directed IRA Business Trusts Work

One way to achieve greater discretionary and more immediate control over the funds in your self-directed IRA is to form an IRS-approved legal entity into which the funds of the IRA are invested and you as the IRA owner and the manager/trustee of that legal entity, can assume direct control over those funds by your management role with that entity. Business trusts and limited liability companies (“LLCs”) are the two types of entities typically selected for this purpose for which the self-directed IRA would transfer the funds for investment. With a Business Trust the IRA owner will serve as the Trustee. With a LLC, the IRA owner will serve as the Manager.

With a Business Trust the Checkbook IRA account makes an investment in the trust by acquiring 100% of the “beneficial interests” of the business trust. Acquiring the beneficial interests of the business trust is similar to an IRA account acquiring the “membership interests” of a limited liability company or shares of a corporation. Essentially, the term “beneficial interests” is the title for the “equity interests” in the business trust that are acquired when the investment is made in a business trust.

By acquiring 100% of the “beneficial interests” of the business Trust, the IRA account has now become both (i) the “trustor,” or “settlor,” of the business trust (i.e. the party that has transferred assets into the business trust) and (ii) the “beneficiary” (i.e. the party that holds the “beneficial interests” of the business trust).

We believe that the Business Trust is a better type of entity to choose for your self directed IRA with checkbook control for the following reasons and as illustrated here.

No Public Filing Preserves Your Full Confidentiality

When an LLC is formed, it must (1) Name and Agent for Service Of Process in the Articles Of Organization and (2) File the Articles Of Organization with the Secretary of State in the state of organization. The IRA owner is typically going to list himself or herself as the Agent. Once the filing is complete, the LLC and all details of the owner become public record and there goes the confidentiality of the owner. If there are substantial funds in the LLC transferred from the self-directed IRA, this transparency could compromise the privacy for the owner.

In contrast, there is no public filing requirement when forming a business trust. The Declaration of Trust, or Trust Agreement, remains a private and confidential document. Moreover, while the IRA owner will typically serve as the trustee of the business trust, there is no automatic publication of the name of trustee. Thus there is a higher level of privacy and confidentiality available with a business trust.

A 'True' Disregarded Entity

Both a business trust and an LLC will be classified for tax purposes as a partnership under federal and state income tax regulations. If classified as a partnership, then the business trust and LLC must file income tax returns with the IRS and the respective state agency. However, an entity classified as a partnership that has only one owner will be “disregarded as an entity separate from its owner.” Once classified as a “disregarded entity” then that entity will not have to file federal income tax returns.

A limited liability company with just one member will be classified for federal and state income tax purposes as a “disregarded entity.” With this classification, the LLC will avoid having to prepare and file a federal income tax return. But not so at the state level, at least not in California. Despite being a “disregarded entity” for California state income tax purposes, the LLC must still comply with California return filing requirements because this is method for the LLC to pay the California minimum franchise tax imposed on LLCs.

In contrast, if a business trust has only a single holder of its “beneficial interests,” it will then be classified as a “disregarded entity” and, as a result, not have to file either a federal or state income tax return. Thus the fees and costs of preparing a state income tax return, as well as a federal income tax return, are avoided.

No Registered Agent Needed In A 'Foreign Jurisdiction'

Making investments in commercial and residential real estate is quite common by owners of a Self-directed IRA with checkbook control. If that real estate investment is in a property in a state that is different than the state where the LLC is formed, then the LLC would have to file appropriate documents in that foreign state in order to "qualify to do business" in that state. For this purpose, unless the IRA owner/LLC manager has someone they know in that state, who is willing to serve as the registered agent for the LLC in that state, the LLC owner would need to hire an independent registered agent in that state just to remain compliant. Although the fees for such registered agents are in the low $100s, it is an annual expense nonetheless from your retirement funds - unnecessary overhead which can legally be avoided.

But if a Business Trust as the holding entity for the Checkbook IRA is used to make these real estate investments in states other than the IRA owner’s state of residence, there is no requirement or need to hire an agent in that “foreign” state. This is because the business trust does not have to file any documentation to “qualify to do business” in that state in order to purchase real estate for investment purposes. Thus you as the IRA owner can avoid having to pay the fees typically required with such filing as well as avoiding having to pay any annual fees to an agent in that state. These all add up in the long run as hard money that go directly to increase your account balance.

No Franchise Tax

As Wikipedia states so correctly, "Franchise tax is a tax charged by some U.S. states to corporations with a nexus (aka a filing obligation) with those states. The common feature of a state's franchise tax is that it is not based on income. "This is a mandatory requirement for any LLC that wants to be "qualified to do business" in that state. Depending on the state, these fees can be quite high, which erodes the funds in your Checkbook IRA account year after year or as long as your LLC wants to remain “qualified to do business” in that other state.

There is no such franchise tax requirement for Business Trusts.

As you can understand when a Business Trust is used as the holding entity for a self directed IRA with checkbook control, you as the Trustee and Owner can enjoy the best of both worlds - freedom to invest, divest, manage any qualified investments at any time from your retirement funds and also be able to prevent unnecessary overheads from fees, taxes and expenses with full confidentiality.

Getting Started With A Self-Directed IRA Trust

My specialty is in structuring companies to protect and hide assets in anticipation of litigation. 100% of my clients are real estate investors, and I am an investor myself. Whether you are looking to protect your personal assets, set up a self-directed IRA, or need estate planning, I can help. 

Delaware Statutory Trust Act: How to Buy an Airline at No Risk!

This is article may appeal to the amateur historians and aspiring empire builders in all of us. We're going to break down the Delaware Statutory Trust (DST) in a fun way: by explaining how you can use one to buy an airline at no risk. But first, a little legal context is necessary. We'll make this relatively painless.

"Common Law” was conceived with the Magna Carta 800 years ago.  80 years later it was born and given the name that evolved into the foundation for our U.S. Constitution, our court system, public policy, and Western Thought.  Over the past centuries, the simple and obvious concepts of justice – “what is right” - have been complicated by the invention of the printing press, the Industrial Revolution, universal suffrage, the Internet, politicians, and (coincidentally?) the need for indoor plumbing.

“Common Law”, after so much time, has yet to keep pace with society, technology, or commerce. Much like “common sense” or “common knowledge,” many laws are reduced to the individual opinion or interpretation of well-spoken lawyers, sympathetic judges or random jurors.  “Common”, when shared by anyone and everyone, quickly loses its value and becomes impotent.

Background and History of the Delaware Statutory Trust Act

“Common Law” in the U.S. had, for many years, prohibited corporations from investing in real estate ventures.  Massachusetts first recognized the concept of a Business Trust (MBT) in “Common Law”.  Because corporations were prohibited from active trade or investment in real estate, the laws were easily changed with a bit of wordplay.  As usual, in 1988, Delaware again exhibited its “business-friendly” reputation and proved why the state has more business registrations than residents.  What was the “Massachusetts Model” was improved, “codified” (put into writing), and is now commonly referred to as the “Delaware Statutory Trust Act” – or DST, for short.

There are significant similarities between a DST and an (S)LLC, Corporation, LLP, and other alphabetically “bankruptcy remote” structures that offer varying degrees of tax benefits, conservation of assets, limited liability, and anonymity.  There is one critical, primary, the distinction between a Statutory Trust and more traditional, more familiar organizational structures. DSTs were created to circumvent “Common Law” related to corporate involvement with real estate.  Corporations are “businesses”.  DSTs are not.  There are no Articles of Incorporation, required shareholders’ meetings, minutes to be recorded, or periodic reports (public information) in establishing a DST.

Both can buy and sell goods and services; both can sue and be sued.  Both may or may pay taxes.  But somewhere along the line, the Delaware legislature, the courts, and even the I.R.S. have re-invented the same language and legal foundations handed down from our English ancestors of centuries ago.

Don’t allow the title of this article, or the statutes, to mislead you.  The simplicity, flexibility, and protection of the Delaware legislation are available to residents of any state (or country), not only those who live in Delaware.  Businesses organized under other classifications can also participate.  The only restriction is that the (or at least one) Trustee and Registered Agent have a presence in the state of Delaware.

Common Delaware Statutory Trust Definitions  

1.“Governing Instrument” or “Trust Agreement”

These are interchangeable terms for the same required contract that defines a Delaware Statutory Trust (DST).  Imagine a Super Bowl with a twist: each owner, referee, team, and player are allowed to create a brand new, mutual agreement on any element of the game before the coin toss. Well, subject to the limits of public policy and existing law, participants of a DST have, essentially a blank check in exercising their “freedom of contract”.

Not enough time or space can be spent here emphasizing how critically important this first piece of paper is to the success of any DST enterprise or venture.  Due diligence, comprehensive discussions among all potential parties, and anticipation of contingencies are secondary only to consultation with, guidance from, an experienced, professional, specialist in real estate investment, current and evolving law.

To the extent that written (statutory) law is taking precedence over “Common Law”, those same codes and the courts have been very specific in emphasizing that enforceability of that contract is the primary intent and the highest priority of the enacted law.

2. More on the “Governing Instrument” or “Trust Agreement.”

This information is important enough to be re-read and independently researched by any serious investor.

In subsequent articles of this multi-part analysis, there will be more than enough terminology, with in-depth explanations and treatment:  “(Trust) Series,” “Trustee,” “REIT,”  “1031 Exchanges,” “Beneficiary / Beneficial Owner,” “Fractional Equity,” “Bankruptcy-Remote,” and many other phrases that will impress any guest at the next cocktail party.

Discussions will include numerous advantages, multiple structural variations, explanations of how a single entity can have different Trustees, Managers, and Equity Owners, and – most importantly – specific examples of just how flexible #1 can be in providing safety and anonymity in asset protection.

3. Leveraged Leasing Transactions

These can exemplify the diversity of DSTs, far beyond real estate investment.  Case in point: the financing of commercial airline inventory.  A trust is established to retain the title on the plane(s).  Management of that trust is under a DST. The carrier airline would be a designated beneficial owner, who flies and maintains the aircraft and is responsible for paying the note on the financing.  Obviously, the lender makes money as well.

So, if one of our imaginary planes gets misplaced or stolen, which party would be responsible for replacing the plane?  Well, assuming everyone had operated in good faith, the answer is no one.  The Delaware statute was designed to uphold the sanctity of the contract (Trust Agreement / Governing Instrument), which was designed to protect the respective parties.

In the world of real estate investment, matters can be much simpler.  After all, it’s very difficult to steal or lose a building.

Series LLCs (SLLC) 101: A Primer

Whoever said, “If it sounds too good to be true, it probably is,” wasn’t familiar with a Series LLC business structure, or SLLC.

Real estate investors around the nation are benefiting from this organizational framework. For many investors, the primary appeal lies in simplicity, safety and flexibility. Any nominal drawbacks can be readily addressed, or even proved to be advantageous, with the professional guidance of an asset protection specialist such as Royal Legal Solutions.

Take a few minutes to read the following overview to enhance your business or investment strategies.

SLLC Definitions

Series: 

Another term could be, “child”, “project”, “subsidiary” or “company”.  Picture a honeycomb, as in a beehive, with one or an infinite number of independent “cells”.  For our purposes, the partitions between these “cells” aren’t made of wax, but of solid steel.  Properly constructed, one unit may or may not complement the overall functions of others.  Properly constructed, none rely on others in order to function.  Each is autonomous.

LLC:

Once “series” is affixed, another term could be, “parent”, “umbrella” or “the beehive”. Now the bees enjoy economy and efficiency, but the beekeepers and bears can only attack a single, isolated, “cell”, one at a time.  All the other “cells”, the entirety of the beehive, remain in tact.

The Delaware Model:   

Barely more than 20 years ago, the Delaware Legislature, lobbied by the mutual fund industry, developed the innovative means to reduce duplicate paperwork, transparency, and liability in matters of taxation or litigation.  Presently, at least 16 states, Puerto Rico and D.C. have adopted some form of this legislation.
NOTE: With very rare exceptions, anyone can register a business of any type with any Secretary of State.  Regardless of residency, whether your legislature has adopted the Delaware Model, a variation thereof or none of the above … establishment of, investment in, an SLLC can be available to anyone.

Origins of the Series LLC

There is a unique objective of an SLLC that can provide exceptional advantages compared to a traditional LLC or any other business structure.  As referenced above, back in 1996, Delaware created the vehicle by which a single entity can be managed independently as “one” or operated as an alliance of “many” at the same time.

Texas law is essentially a mirror-image of what many refer to as, “The Delaware Series LLC” … ‘same benefits and advantages, with no requirement for annual renewal fees or paperwork.

Even in states other than Delaware and Texas, there are the same two common denominators.  Existing in the best of both worlds, an SLLC is an LLC with internal departments and an unlimited number of LLC ‘s under one ownership.  There is no distinction as to whether any “member” (“owner”) is an individual, sole proprietor / DBA, corporation, non-profit, partnership, spouse or even human or external LLC.

Some Advantages of the Series LLC

Barring any violation of law, government regulations or public policy, an SLLC Operating Agreement enjoys “maximum flexibility” and “freedom of contract”.  Members have extraordinary latitude in making their own rules and terms.

There is no pre-determined tax rate or business category. In general, membership may be able to elect to file and pay as sole proprietors, partners, corporate shareholders, non-profits or have the SLLC be the taxpayer of record.  Specifically, of course, the entity must be created in a way that is fully compliant while optimally beneficial.  Tax liability of the whole is limited to individual members’ respective risk, gain, compensation or stake as defined by the Operating Agreement.  “Double taxation” (on the SLLC and the membership) is most often avoided.

Contingent upon the state’s “shield laws”, members are generally protected from liability for the acts or debts of the SLLC.  This protection is extended to membership enrollments as few as one.  In the realm of real estate and real estate investment, each property can be treated as separate entities.  One deal gone south, one “slip and fall” lawsuit, should have no impact on the profits of other projects or the members thereof.

The economy of a Series Limited Liability Company is not “limited” to lower tax liability, or the savings in administrative manpower and paperwork.  One filing fee paid to the Texas Secretary of State will put you in business, no matter how many bees or honeycombs there are or may be subsequently added to the hive.  Unlike other states or business entities, to include Delaware, there are no “renewal fees” … annually or at any other time in the state of Texas.

Caveats  

Presently, there are about 15,000 words, about 50 pages and over 600 subsections in the Texas state statutes which govern LLC’s and SLLC’s.  No one can quantify or apply all the associated rules and regulations now in place with federal, out-of-state and foreign agencies.  (e.g., Canada doesn’t even recognize such a legal entity, but Canadians can participate in U.S. SLLC’s.)

Yet consistently, after 2 decades, the innovative “Delaware Model” (Series LLC) appears to be immune to significant litigation or legal challenges.  With only 5% of the world’s population, the U.S. is home to 80% of the planet’s lawyers.  Regardless, we’re still trying to find many legal cases in which Texas, Delaware or any states’ similar laws have even been contested. The only thing better than winning a lawsuit is never having one filed.

Yes, the fundamentals are simple, safe and flexible.  No, they aren’t “idiot-proof”.  Then again, any reasonably smart business owner can avoid any pitfalls:

Series LLC Examples: When Things Go South Legally

There is no business model that provides complete immunity from market reversals, natural disasters, or changes in laws and regulations.  Stuff happens to everyone, in every business.

And when even the best-laid plans of talented and successful business people go awry, the polygamous marriage among companies, creditors, or customers often end up in court.  Unlike holy matrimony or other business models, Series LLCs can protect all parties in advance.

Most often, with the right lawyer as “Best Man” or “Maid of Honor” chaperoning the courtship, the headaches and heartache of divorce court can be avoided altogether.

When The Series LLC Saves The Day: Two Examples

The first comes from real life: the premier, if not only, case in which a federal bankruptcy court upheld the concept and validity of SLLCs and denied a creditor’s attempt to game the system in their favor.  The second is hypothetical, but has real-life implications. After all, “happily ever after fairy tale marriages” are exactly that: fairy tales.

Regardless, all levels of state, local and federal government (courts, legislatures, regulatory agencies, the I.R.S. itself) are interpreting and enforcing myth as reality.  Judges, politicians, and bureaucrats don’t like change. They love inertia, momentum and precedent–campaign speeches notwithstanding.

Example 1: In re Dominion Ventures, LLC, No. 11-12282 (Bankr. D. Del.)

Now, it’s impossible to get two lawyers together without getting lost in a gigantic bowl of word salad or a maze of rabbit holes.  Put them in a courtroom in front of a judge (who’s also a lawyer) and things actually get simpler.  The focus and facts are limited to a relevant Reader’s Digest version.  Legalese will be kept to minimum.

Dominion, a legitimate and reputable group of businessmen, established an SLLC in full compliance with state law.  Both the “parent” company and each of the “children” cells operated independently, maintained separate accounting, and did everything “by the book.” That included using sound business practices.  One thing led to another and Dominion needed some help on credit and cash flow.  “Creditor X” to the rescue!

All that was required was a change in the original Operating Agreement and absolute veto power over all operations and decision making.  Well, the bailout didn’t prevent the boat from sinking and ultimately everyone ended up in Bankruptcy Court.  Now remember, the issues had nothing to do with SLLC legislation. Things just didn’t work out.  “Creditor X” claimed that its after-the-fact position prevented SLLC protection and that all assets of all “children” should be consolidated to satisfy the debt.

Maybe “Creditor X” should have retained a lawyer who had the experience and expertise to advise against the unenforceable loan at the altar.  At the end of the day, the assets of Dominion, its members (owners), and all other respective creditors of the individual “parents” and “children” were protected.

Example 2: Moldy Mary vs. Larry Landlord, (S) LLC

Larry Landlord bought his first duplex just after his graduation from high school.  The property wasn’t much to look at, but it was cheap and he was handy with his hands.  Four years later, a complete repainting of the exterior, and a brand new roof had improved the curb appeal.  The kitchens were remodeled.  The flooring, plumbing, and paneling were upgraded.  Weeds and dirt had been replaced with immaculate landscaping.  Prospective tenants had to get in line on a waiting list.

So, he bought another rental property. And another.  And another. All under the protection, as independent series, of an SLLC.  Tenants clamored for a space in his well-maintained, well-managed rental properties.  As many investors were knocking on the door to participate in the next project.

Eventually, Larry had expanded operations to include 14 properties (and 14 segregated series), to include 5 apartment complexes and 10 members (owners).  Each was fully compliant with state law requirements for documentation, maintaining separate bank accounts, tax filings, and accounting.  Some participants were members of a dozen common projects.  Some had invested in only one.  According to sound business practice, common sense, and the exercise of due diligence, the group hired a a highly reputable building inspector. He gave the building a comprehensive evaluation for each unit.
A sixth property, a high-rise apartment complex costing as much as all other holdings combined, came onto the market and Buster Bankroll contacted Larry.  Knowing nothing about real estate or property management, Buster wanted to invest as an absentee landlord.  Negotiations went well.  Occupancy was at 94% after the first month.

Moldy Mary was one of Larry Landlord’s very first tenants.  She’d been living in the same apartment, owned by a different series, for about 8 years.  A few years previously, after a particularly heavy rainstorm, she’d noticed water spots on her walls and a peculiar smell in her bedroom. The next day, Larry Landlord’s maintenance crew arrived, replaced a section of roofing shingles as well as some interior sheet rock.

Fast forward to 6 months later. Mary got sick. Really sick. So did her husband and three kids. Medical bills exceeded insurance limits. Neither spouse could work and lost their jobs.  The entire family was forced to leave the apartment and move in with relatives.

But to prove a point, when the family contacted Louie Litigator, lawsuits were filed the same day. Multiple, massive lawsuits. Fortunately for Larry and Buster and all other members (including those who owned Mary’s series), the SLLC was on their side.

Based on every legal protections provided to the Delaware SLLC structure only one of the choices below are NOT true.  Let us know which you chose:

  1.  Larry Litigator did an hour’s worth of research and determined that liability lies with only the series that owns Mary’s apartment. He has withdrawn from the case and the “blood-from-a-turnip" strategy.
  2.  The members of the series who own Mary’s apartment have no exposure beyond their investment.
  3. The very specific language of statutes and growing legal precedent will not threaten the assets Buster or Larry or all other members of any and all other series (or Larry Landlords, (S)LLC).

Guess in the comments section below.

Learn More About the Series LLC

Learn more about the Series LLC here on the Royal Legal Solutions website. We've written extensively about the benefits of the Series LLC, and given much more information about how the Series LLC works. We offer many more educational materials on this subject because we believe all real estate investors have the right to be informed. If you're considering forming a Series LLC, contact us for your consultation today. We'll get the job done right, and keep your head above water if things go South!

Delaware Series LLC & Tax Strategies

As a refresher, the concept of a Series LLC (Limited Liability Company) was created by the Delaware Legislature back in 1996. It's still considered the “Granddaddy” of a hybrid “parent-child” (or a brood of children) business structure in use today.

The Delaware LLC tax structure boasts many benefits. Asset protection may be the top priority among many participants and of special appeal to both rookie and professional real estate investors alike. Additional advantages include anonymity, simplicity, and flexibility.

As we described in our article, Series LLCs  101: A Primer, this legal innovation is a business model unique among sole proprietorships, partnerships, corporations, non-profits or any other LLCs. But it does share similarities to all other organizational structures.

Your Delaware Series LLC is Like a Honeycomb

Consider a beehive and honeycomb as an analogy.  In a Series LLC (SLLC), one master entity (the honeycomb) includes as many or as few “cells” as the “members” of the colony decide to create.  Each is independent, or each can be codependent.  The extent of the relationship is determined solely by the bees (investors, members, “owners”).

Ignoring all the other potential advantages and benefits of an SLLC, the focus here is on minimizing or avoiding tax liabilities by legally exploiting local, state, and federal regulations.  But before we start, a few ground rules:

  1. There are no residency requirements for members. While increasing legislation in 16 states, D.C. and Puerto Rico – with much more on the horizon – has adopted some version of the original Delaware Model in the past few years, there is no residency requirement for participation as Founders or Members. This is true whether the business, entity or individual is based in another state, territory, Canada, or Antarctica.
  2.  Tax concerns are complex and ever-changing.  There are innumerable municipal / local, over 3,000 county, 50+ state categories (fuel, sales, excise, “fees, assessments and levies” and hidden costs in the conduct of business and investment.  The “smoke and mirrors” continue in dealing with the IRS, where the average effective or, “Actual Tax Rate” (ATR) is not 35% … ‘more like 22%.
  3. These are just the basics. The following overview is not, cannot be, anything but an outline of considerations. We always recommend discussing your individual circumstances and objectives with experienced experts who specialize in the field of SLLCs and tax planning. Start with our investor quiz and we'll have the right person connect with you.

But, understandably, most folks pay most attention to the impact that the IRS makes on net revenues and income.  Since the feds are the biggest and most commonly shared threat to putting money into the bank, let’s focus on the 800-pound bear in the room.

Uncle Sam's View of Series LLCs

Think of the Taxman like a bear who wants to raid our beehive. Maybe it’s a “chicken or the egg” paradox, but regardless the of money ("honey"), the bees and the entire beehive suffer when the IRS gets involved.

The good news is that Papa Bear/Uncle Sam has consistently issued letters, opinions, and directives that incorporate language in favorable to, in support of, protecting the legal rights of  SLLC‘s and their participants.  Even with those cases wherein the treatment of each series was not at issue, U.S. Tax Courts have classified each series as a separately-regulated investment company.

Although the case at hand involved a “trust” participating in a “series trust,” the message was clear in creating solid steel walls, rather than just wax, between each cell of the honeycomb.  Whenever well-documented accounting procedures, a clear Operating Agreement, and sound business practices support the integrity of an SLLC, any and all tax benefits are due the participants.

While banks, insurance companies, statutory entities (or those owned by any government or political agency) cannot be registered as an SLLC, the IRS itself has stated that, “Generally, LLCs are not automatically included in this list, and are, therefore not required to be treated as corporations.  (Any) LLC can file “Form # yadda-yadda-yadda” to elect their business classification.”  Further provisions allow for changes of category, with 75 days notice.

Moreover, unlike most other business structures, multiple options are available to taxpaying members. Each can choose independent classifications as a non-profit, corporation, individual or as part of the “parent” LLC itself.

“Check the Box” and "passthrough LLC" returns are options available to all, as mandated by state and federal law.  With the advance guidance and advice of experts during the planning stages, individual circumstance allows for individual strategies, regardless of fellow members’ decisions.

Constitutional provisions require other states to give, ‘full faith and credit” to taxpayers who reside elsewhere.  If the legal entity is domiciled in, for example, Texas or Delaware, then Connecticut and Wyoming are obligated to honor the controlling tax laws of sister states.

As the popularity of series LLCs continues to grow exponentially, lawmakers and taxing agencies have been hard-pressed to maintain the pace.  At the same time, such states as New York (through its Department of Taxation and Finance) has already issued the opinion that, “… for the purposes of personal income tax, all of the series will be treated as ‘partnerships’, which the authors interpret to mean that each series is to be treated as a separate LLC.”

We’d be lying if any claim were made that there is a universally-applicable “silver bullet” or magical solution to the tax ramifications of any investment or enterprise.  One size does not fit all.  But no matter what your federal tax bracket, your local and state tithes, may be … whether building your first home or investing in a casino on the Las Vegas Strip … even if you’ve owned a “Mom & Pop” family business for 3 generations … series LLCs are worth exploring.

Do the homework.  Consult experienced experts who specialize in series LLC law and tax planning.  Protect the honey.

Trustee Vs. Executor: Who Do You Need For Estate Planning?

Unless you are the villain in a spy thriller, there's unlikely to be any intrigue surrounding the reading of your will. Sure, this is a great cinematic device, but a "surprise" announcement regarding your trustee or executor is neither funny nor mysterious in real life.

The events following your death will most likely be painful and dramatic enough as it is. You can ease some of the misery by planning ahead, and letting your chosen executor and trustee(s) know about their jobs ahead of time.

That said, sometimes the executor or trustee really do find out at the last minute. Whether you're in this situation or planning your own estate, this article is for you. You'll learn about the duties of both positions, and how to survive if you're picked to serve as either.

What's the Difference Between a Trustee vs. Executor For Estate Planning?

The executor represents the dearly departed. This person is tasked with administering and distributing the estate. For an executor to do their job properly, he or she must know the identities of any heir and have a solid comprehension of the will. Their main job is to ensure the deceased's wishes are carried out.

Trustees, on the other hand, have a more narrowly defined role: managing a trust. Not all estates necessarily have trusts, but many do. The first order of business for a trustee is to clarify which assets are held within a trust. Check out our asset checklist for estate planning to get started.

It's rare for all of a person's assets to be placed in a trust, so some may be stated only in the will or other documents.

In estate planning, trusts are used to clear up any possible confusion about where certain possessions go. A person may decide to use a trust to offer guidance and maintain more control over their estate. The trust's "job" is to literally own properties, cars, family heirlooms, or any other assets that the creator decides to place within it. The person who creates the trust provides for its funding. The trustee, who may be an individual or even several people, is tasked with determining how money and other assets flow in and out of the trust.

Trust executor duties include liquidating estates. Trustee duties include managing estates.

The former is usually temporary, while a trustee might serve in that capacity for years. There is rarely compensation for either. Many have tried to monetize this position, and few have succeeded. So if someone asks you to serve in either capacity, there are some things you'll want to be aware of. After all, you want to honor your deceased loved one's wishes, don't you?

If this happens to you, don't be afraid. We've got some tips on how to execute and cope with your new responsibilities.

Get Your Estate Planning Paperwork in Order

Before you do anything, you need to review any and all paperwork relating to the estate. These should cover the basics: funeral arrangements, how the deceased wants the estate managed, and preferences about matters like burial. Assuming the deceased planned ahead, there will also be a specific document cataloging valuables like heirloom necklaces or firearms. In legalese, we call this a "memorandum of personal property."

Next you need to determine the assets, which is usually only a hassle if the document above is incomplete or totally absent. If you're in such an unfortunate situation, you may need to get some help. Death leaves quite the paper trail. You're going to need to hunt down everything from the glaringly obvious like bank accounts and real estate, to the not-so-obvious assets like IRAs/401ks, and perhaps a secret vault or two if you get lucky.

Identify the Heirs

Most of the time, heirs are direct relatives. You can usually expect to see them at the funeral. Even if you don't, your paperwork from above should list any heirs. But you should know ahead of time these matters often get sticky. What if one of the heirs has died themselves? Details like this can easily go unnoticed if the most recent will is, say, ten years old. This is when it becomes your job to make a decision--one that can breed contempt under the best of circumstances. Hey, there's a reason people have tried to figure out how to get paid for theses services.,

Speaking of money, there are almost certainly going to be creditors that need to be paid. You need to guarantee that all creditor claims are taken care of from the estate. If you don't pay up, you may suffer liability. "Liability" is legalese for "an all-around bad time."

Yeah, this is a thankless job.

Deal With the Creditors

It doesn't take long for the vultures to circle. You'll have two kinds of creditors to tango with: secured and unsecured. Worry about secured creditors first. These are folks like conventional lenders. You'll want to make sure these types of creditors are notified of the deceased's passing right away. Make payments immediately, as soon as reasonably possible. This is to avoid that all-around-bad-time mentioned above.

Unsecured creditors, on the other hand, are a totally different ballgame. They have to actually come after you in the form of a claim. Unsecured creditors can include everyone from the neighborhood bookie to the (much more likely) credit card companies. Fortunately, credit card companies are fairly realistic about the fact that they're unlikely to be paid off in full. So bust out your haggling skills. There is some wiggle room about the total bill, but don't expect the company to tell you that.
While credit card companies won't break your kneecaps, they can make probate court an even bigger pain in the ass than it already is. Both types of creditors can demand and collect legal fees in a court setting. If the estate ends up in probate court, you will be obligated to alert all creditors of this fact.

Still with me? At this point, nobody will blame you for cursing whoever named you executor.

To recap: Don't mess around with secured creditors. It's a good idea to delay making unsecured creditor payments, because if a claim is never made you won't be on the hook. There's also a clock on how long these types of creditors have to make a claim at all.There’s a good chance this one is going to take care of itself by dissolving into the ether of banking bureaucracy. Now it's time for the fun part: probate court.

Probate Court For Estate Planning

The estate documents should outline exactly how the estate will be administered. Sometimes, the court has to approve certain aspects of this, such as when the family home is transferred to an heir. This is particularly common if the estate is based solely on a will (all the more reason we should all be thorough in our estate planning.)

If the estate you're dealing with is more "Jerry Springer" than "cinematic drama," you may find issues with the identities of the heirs. We're kidding. This is actually more common than most of us would think. Fortunately, it's on the court to figure this out. You've got enough on your plate. Let the judge interpret the law, or anything ambiguous for that matter. Even if you have legal chops of your own, you'll likely need a greenlight from the court to interpret much of anything.

We're approaching home base: stay with me, folks.

Income Tax Returns

That's right, you get to deal with both of life's inevitabilities in one experience: death and taxes. You'll have to file the deceased's final tax return. You'll want to be certain that you label the returns with the word "DECEASED.

As your last task, you may have to also file an estate return. This is legally required if the estate earns over $600.00 in gross income.

Final Legal Estate Planning Tips

Don't go it alone if you don't have to. We're sure you're smart, but it's unlikely that you are both an attorney and a CPA. Enlist help from the pros. The estate will assume their costs, particularly if it is a large or complex one. If you spend any of your own money in the course of your duties, the estate should reimburse you.

Be aware that this is a sensitive time for the relatives and other loved ones.The role can be as emotionally draining as it is time-consuming. But don't forget that you have a job to do, and you must do with your head and not with your heart.

If you've been tapped to act as a trustee or executor, or if you need estate planning services yourself (if only to spare your loved ones from some of this rigmarole), get help from experts who know all types of estate planning and administration issues, and who can help in a compassionate manner. Don't let your death become a big traumatic affair played out on the probate court stage.

Top 10 Retirement Savings Tips

Retirement: that sweet period of respite between work and death. If you do it right, this can be the greatest time of your life. Saving for retirement is the only way to ensure your "good years" don't suck.

There are a lot of tricks the government uses to get its hands on your hard-earned money. You’ve poured years of your life into your retirement savings, so you should keep as much of it as you can.

Think you're too young to think about this stuff? We hope you enjoy many remaining years of youth and beauty. But be advised: If you start planning for retirement early, you’ll be better prepared to keep more of your money when you've gotten a little long in the tooth.

Here are our top ten tips to keep you from parting with your hard-earned cash.

1. Avoid Early Withdrawal Penalties

A distribution from your IRA or 401k before 59 and half years old will incur a ten percent penalty. You’ll be paying taxes on it, too. That’s like getting punched in the ear and kicked in the shin at the same time. Hilarious, but it really hurts.
So, unless you need the money to keep yourself alive before sixty, you should leave it in the fund. Simple.

2. Avoid Required Minimum Distributions (RMD)

Whether you can spend it or not, your frenemies at the IRS are going to start making you take distributions after 70 and a half years old unless you’re still employed. These distributions are going to be taxed. There isn’t a lot you can do here from within a traditional retirement package.

The workaround? The Roth IRA. Unlike traditional IRAs, there are no RMDs for Roth IRAs during the account owner’s lifetime. You don’t have to take distributions. If you want to let it grow, grow it will.

3. Don’t Take Large Distributions in One Year

The money from your traditional retirement account is subject to tax at the time of distribution. If you take too much in one year, it can push you into a hire tax bracket. You’re older now. Take small nibbles. You’ll live longer.

4. Beware The Distribution Withholding

Most distributions are subject to 20% withholding by the IRS in anticipation of a tax penalty, unless you’re at the age of 59 and a half. In the case of an IRA, this might be lowered to 10%.

This is yet another reason to leave your money to grow a little longer. When you start a retirement plan, it’s long term. Think like the tortoise, not the hare.

5. Convert to a Roth IRA to Avoid Tax Penalties

Again, Roth IRAs are the real smart play. You can use tax penalties to offset income that arises when you convert traditional IRAs or 401ks to Roth accounts.

When you convert to a Roth account, you pay tax on the amount of the conversion, but believe me it’s worth it. These sexy beasts grow entirely tax free and there is no tax on distributions.

Speaking of Roth IRAs and Roth 401ks, these next five tips are exclusively for you masters who’ve already caught on.

6. Generate Passive Income With Rental Properties

Use your real estate knowledge and connections to identify the best real estate investment opportunities. Then use those properties to generate passive income that you can put toward your retirement.

7. “Designated” Roth 401ks Must Take RMDs

Yeah. Tax code is confusing. “Designated” 401(k) accounts have to take distributions. These are part of your employer plan. That’s what designated means.

If you don’t want to take money out, we’ve covered this. Roll the 401k into a Roth IRA when your reach 70 years old.

8. Distributions of Contributions Are Always Tax-Free

Unless, of course, the government decides to change things up. But for now, distributions of contributions to a Roth IRA are always tax-free. No matter your age. You pay the tax up front. You don’t pay it twice.

9. Don't Take Early Distributions of Roth IRA Earnings

Before you get too excited by the prospect of drawing money from your Roth IRA, remember that you have to be 59 and a half years of age or older and you have to have had the Roth account for five years or longer. Slow and steady wins the race.

10. Leave Your Roth IRA Alone

Because they aren’t the most tax efficient funds while they are invested, you have another reason to let your Roth IRA grow as long as possible. Tax-free accounts are the best way to earn income in the U.S. if you use them right, but using them right is a matter of being patient while your money grows.

Tax-Free Retirement Distributions

Tax-free retirement distributions are the Holy Grail.

You too can drink from the cup of financial providence.

You’ve worked hard your whole life. When you start taking distributions from your retirement funds, you’re going to start paying federal income tax on them.

There are some exceptions to state income taxes though. Several states don’t require you to pay state income tax at all. Retirement plan distributions are no different in these tax havens.

So, you could go and live in one of those states. Florida isn’t just a place where people go to die. The weather is a nice bonus, but the real reason to retire in the Sunshine State is the lack of state tax on income.

If you’re concerned with flooding, have red hair, or just hate being around retirees, you can choose from Nevada, South Dakota, Texas, Washington, Wyoming and Alaska.

Thirty-six states have partial income tax exemptions. These include:
1. Public Pensions and Retirement Plans. Distributions from federal or state employer plans are exempt from taxation in many states.
2. Private Pensions and Retirement Plans. 10 states offer full exclusions for private pensions and retirement plans. Some of them differ between pension and contributory plans. Others make no distinction.
3. IRAs. There are some states that don't tax any retirement plan distributions, including IRA distributions.
Tennessee and New Hampshire are states that do not tax wage income and therefore they do not tax retirement plan distributions of any kind. There are also numerous states that exclude a certain limit of retirement plan income from taxation. For example, Maine exempts the first $10,000 of income received from any retirement plan, including IRAs.

Bottom line, the place you live can save you money after retirement. Find out which of these tax-free paradises has a little waterfront lot with your name on it.

If you really want to ball in retirement, check out our previous article on how to buy your retirement home ahead of time. Spoiler alert: you can do this tax-free too.

Tax Disputes: Tools for Fighting Back

Getting into a fight with Uncle Sam never goes well. Just ask every country on Earth. It’s not easy to get in a financial battle with him either. The IRS is a branch of the US government solely devoted to taxing your income. It is a relentless, financially destructive force of nature.
For the most part, your IRS problems won’t be large, but in extreme cases, Uncle Sam can seize your home or garnish your wages.
You’re not helpless though. You have a few weapons of your own. Make sure you’re armed with information before you take on the IRS. Let's explore the tax dispute arsenal.

Tax Dispute Weapon #1: Appeal Process

First there is the Appeal Process. If you disagree with the decision of an IRS employee you may ask for the employee’s manager to review the case. There is such a thing as human error and some people are just jerks. If you need a second opinion, get one.
If the manager is also a jerk, you have the right to file a written appeal under the Collection Appeals Program.
At the very least, this will get you a Collection Due Process Hearing where you can challenge the taxes owed determination.
Then you just have to convince the IRS that you don’t owe the taxes they claim you owe. Piece of cake.

Tax Dispute Weapon #2: Tax Court

 
If the IRS doesn’t agree with you, you may file a petition in US Tax Court to challenge the amount due. You’ll need a lawyer here. You are in a money dispute with the US government. Don’t bring a gun to drone warfare.

Tax Dispute Weapon #3: Payment Options

If you lose an appeal with the IRS, they are going to give you an Installment Agreement. It’s a payment plan and yes, there is interest. If the amount you owe exceeds $50,000, then you must complete IRS form 9465. This is a list of all of you assets, income and debt. At this point, you should probably batten down the hatches and prepare for rough water.
The IRS isn’t totally unreasonable. After you declare your surrender, you still have some room to negotiate. You might receive an Offer in Compromise. The IRS accepts these settlements under the same circumstances as most creditors:
1. Where there is considerable doubt that you are liable for the tax.
2. Where you might not ever be financially capable of paying the tax.
3. Where your offer is in the best interest of the IRS, possibly because of the taxpayer’s economic hardship or special circumstances.
One of the reasons you want a silver-tongued attorney here is because you need to persuade the court to accept that one or all of the above situations is applicable.

 

Tax Dispute Weapon #4: Office of the Taxpayer Advocate&

You should also get to know The Office of the Taxpayer Advocate if the IRS has been uncooperative. These are your friends on the inside. Your spies in the enemy base. The Office of the Taxpayer Advocate is an independent office within the IRS whose responsibility is to the taxpayer. If you are in dispute, they are often helpful in getting responses to requests for information or decisions on appeals.
If you are going up against the IRS you are in championship fight. If you don’t know what you are doing, you could end up in serious financial trouble. If they start applying heat, get a good lawyer in your corner right away. At the very least, they can stem the flow of blood.
You cannot escape your taxes. If you are fixing for a fight with the IRS, make sure you have a legitimate case for appeal.
If you're trying to avoid getting into it with the Taxman, the best thing you can do is ensure you're filing properly in the first place. Royal Legal Solutions can assist you with creating tax-friendly business structures and ensuring your businesses are tax-compliant. We also have relationships with experienced, qualified CPAs. Don't wait until you're already in a dispute: schedule your tax consultation today.

Self-Directed IRAs: Frequently Asked Questions (FAQ)

Self-Directed IRAs offer investment freedom, but they require some explanation. Here are the answers to the most common questions we receive regarding Self-Directed IRAs.

1. What Is a Self-Directed IRA?

A self-directed IRA account allows the IRA to invest funds anywhere allowed by law.
The main reason most people don’t use Self-Directed IRAs is that the large financial institutions that administer most U.S. retirement accounts don’t think it's a good idea to hold real estate or non-publicly traded assets in retirement plans.

2. Can I "Roll Over" or Transfer My Existing Retirement Account to a Self-Directed IRA?

This depends on your situation:

Your Situation: Transfer/Rollover
I have a 401k or other
company plan with a current
employer.
____________________________________		 No, in most instances your current
employer’s plan will make it impossible
until you reach retirement age.
____________________________________
I inherited an IRA and keep the
account with a brokerage or
bank as an inherited IRA.
____________________________________		 Yes, you can transfer to a self-directed
inherited IRA.
____________________________________
I have a Traditional IRA with a
bank or brokerage.
____________________________________		 Yes, you can transfer to a self-directed
IRA.
____________________________________
I have a Roth IRA with a bank
or brokerage.
____________________________________		 Yes, you can transfer to a self-directed Roth IRA.
____________________________________
I have a 403(b) account with a
former employer.
____________________________________		 Yes, you can rollover to a self-directed
IRA.
____________________________________
I have a 401k account with a
former employer.
____________________________________		 Yes, you can rollover to a self-directed
IRA. If it is a Traditional 401k, it will be a
self-directed IRA. If it is a Roth 401k, it will be a self-directed Roth IRA
____________________________________

3. What Can I Invest in With a Self-Directed IRA?

The most popular self-directed retirement account investments include:
• Rental real estate.
• Secured loans to others for real estate (trust deed lending).
• Private small business stock or LLC interests
• Precious metals, such as gold or silver.
• Cryptocurrency

You May Not Invest In:

• Collectibles such as artwork, stamps, coins, alcoholic beverages, or antiques
• Life insurance
• S-corporation stock
• Any investment owned by someone in your close family.

4. What Restrictions Are There on Using a Self-Directed IRA?

When self-directing your retirement account, you must be aware of the prohibited transaction rules found in IRC 4975. These rules don’t restrict what you can invest in, but whom your IRA may transact with.
The prohibited transaction rules restrict your retirement account from transactions with someone who is disqualified. Disqualified persons include: the account owner, their spouse, children, parents, and certain business partners.

On the other hand, your retirement account could buy a rental property from your distant cousin, college roommate, friend, or a random third party.

5. Can My Self-Directed IRA Invest in My Personal Company, Business, or Deal?

No, it would violate the prohibited transaction rules if your IRA transacted with you personally or with a company you own.

6. What Is Checkbook Control?

Many self-directed retirement account owners, particularly those buying real estate, use an IRA LLC, also known as a “checkbook-control IRA”, to hold their retirement assets so that they have fast access.

7. Can I Get a Loan to Buy Real Estate With My IRA?

Your IRA can buy real estate using its own cash and a loan or mortgage. To do this, you must obtain a non-recourse loan.

A non-recourse loan is made by the lender against the asset. In the event of default, the sole recourse of the lender is to foreclose and take back the asset. The lender cannot pursue the IRA or the IRA owner for any deficiency.

8. Are There Any Tax Traps I Should Know About?

The Unrelated Business Income Tax, or UBIT, applies when your IRA receives unrelated business income. If your IRA receives investment income, that income is exempt from UBIT tax. Investment income exempt from UBIT includes the following:
• Real Estate Rental Income: Rent from real estate is investment income and is exempt from UBIT.
• Interest Income: Interest and points made from money lending is investment income and is exempt from UBIT.
• Capital Gain Income: The sale, exchange, or disposition of assets is investment income and is exempt from UBIT.
• Dividend Income: Dividend income from a C-Corp, where the company pays corporate tax, is investment income and exempt from UBIT.
• Royalty Income: Royalty income derived from intangible property rights, such as intellectual property, oil, gas, or mineral leasing activities is investment income and is exempt from UBIT.
So, make sure your IRA receives investment income as opposed to “business income”.

9. What Is Unrelated Debt-Financed Income (UDFI)?

If an IRA buys an investment with debt, then the income attributable to the debt is subject to UBIT. This income is referred to as “unrelated debt-financed income” (UDFI), and it triggers an UBIT tax. This often occurs when an IRA buys real estate with a non-recourse loan.

For example, let’s say an IRA buys a rental property for $100,000, and that $40,000 came from the IRA and $60,000 came from a non-recourse loan. The property is now 60% leveraged, and as a result, 60% of the income is not a result of the IRA's investment, but the result of the debt invested. This debt is not retirement plan money, so your friends at the IRS will require you to pay tax on 60% of the income. So, if there were $10,000 in net rental income on the property then $6000 would be subject to UBIT taxes.

10. Should I Use an Individual 401k Instead of A Self-Directed IRA?

This is where things get interesting.

An individual 401k is a great self-directed account option, and can be used instead of an IRA for persons who are self-employed. If you are not self-employed, then the individual 401k may not work for you.
If you are self-employed and you want to maximize your contributions the individual 401k has much higher maximum contribution amounts: $54,000 annually versus $5,500 annually for an IRA. That’s a significant difference.

A self-directed IRA is a better option for someone who has already saved for retirement. Some funds can be rolled over and invested in a self-directed IRA.

If you are going to carry debt and you are self-employed, you are much better off choosing an individual 401k over an IRA. Individual 401ks are exempt from UDFI tax on leveraged real estate.

There are a lot of things to consider when rolling funds into an IRA. If you have additional questions, feel free to reach out to us.

Roth IRA: Top Benefits You Should Know For Retirement Planning

The Roth IRA is a beauty. Everyone should be buying these beasts. By the time you're done reading this, you will know the primary benefits.

Roth IRA Benefit #1: Massive Tax Savings

A Roth IRA is bought with income that has already been taxed. You can write this off in the year you pay those taxes. The genius of the Roth IRA is that you don’t pay tax ever again. You don’t pay tax on the growth or the withdrawal. This is a wonderful long-term investment plan.
What you don’t know, because you aren’t paid to know, is that there are a whole host of ancillary benefits that ride the coattails of these beauties.
So, if the first reason to buy an IRA isn’t enough, here are some of the other beautiful features of this beast.

Roth IRA Benefit #2: Exemption from Required Minimum Distributions

 
First, your traditional retirement plan is subject to Required Minimum Distributions (RMDs).
When you get up to seventy and half years old, you have to take distributions and you have to take tax on them from traditional IRA’s. Roth IRA’s can just keep growing. Maybe you remember my friend Randy. He’s making enough money off of his fishing business that he’d just as soon leave his money in the bank. He can keep accruing growth for a dream vacation, or to leave a nest egg for his family.
A surviving spouse can keep feeding a Roth IRA or combine it with an existing Roth IRA. You cannot do this with a traditional IRA account. A non-spouse beneficiary cannot continue to grow the account, but they can delay the Required Minimum Distributions. For five years, they can ride those tax-free returns. As a second option, you can choose a lifetime expectancy distribution. Setting aside the morbid reality that this requires you to consider your own mortality, this will provide the best option for a non-spouse beneficiary who wants to keep as much money as possible in the Roth IRA where it will continue to grow tax-free.

Roth IRA Benefit #3: No Early Withdrawal Penalties

Finally, Roth IRA owners are not subject to the 10% early withdrawal that is comprised of contributions or conversions. Randy, because he’s a genius, took care of his money early. When he hit fifty-six it was time to go fishing. He never took the ten percent hit because he planned for his early retirement with a Roth IRA.
Randy couldn’t touch his growth or earnings if he wanted to avoid the taxman. He had to wait five years for the conversions, but he took a lot of investment capital out, tax free, then reinvested it in a new business to further insulate him against the government’s sticky fingers.
There are definitely some requirements to qualify for an Roth IRA, but you can convert existing funds and get started right away.
Let your money grow in a Roth IRA. Be a beast, and your retirement will be a beauty.
If you're considering going the Roth route, get a professional opinion. Schedule your personal retirement consultation today.

RMD Penalties

If you don’t take Required Minimum Distributions, you might get hit with an incredible 50% penalty. That’s almost half!
The 50% penalty is applied to any distribution you were supposed to take from your IRA. We’re going to need a philosopher to justify this one. “But you see, your income exists…in potentiality.” Well, your tax penalty exists
in actuality and it is a big one.
If you’ve been hit with a 50% penalty don’t panic. You may be able to get a waiver for the penalty if you admit the mistake to the IRS by filing a 5329. Come clean. Throw yourself at the mercy of the court.
The bad news is, there is a lot more paperwork.
FIRST, you complete section IX of form 5329. You need to state what your distribution should have been and calculate the penalty tax. You have to right the letters “RC” next to the dollar amount you want waived on line 52.
You still with me? If you can’t listen to money matters you’re going to have a hard time handling your money matters? You need to wake up soldier.
You’re going to have to write a Statement of Explanation that outlines two things:
You need to explain what makes your error “reasonable”. Mental health issues or bad advice from a bad advisor usually qualify. Maybe you’re just new to RMD’s. The IRS is, at times, capable of compassion.
The next thing you need to provide is the step-by-step process you are planning to take, or have taken, to correct the error. If you’re on top of things, you’ve already taken the missed RMD. This makes everything clean, from your explanation for the error, to the enemy’s acceptance of your reasonable explanation.
Keep in mind that RMD failures don’t disappear. The IRS is a relentless, greedy machine. They will get their money. Get your error corrected. Also keep in mind that with an inherited Roth IRA, these withdrawals could be tax-free.
Beating the IRS at their own game is one of our favorite pastimes here at Money Matters. Thanks for tuning in.
 

You Can Use Your Self-Directed IRA To Buy A Retirement Home. Here's How.

In my experience, a retirement that you are in charge of makes for a better retirement than one that is financially uncertain.

If you are starting to think about where you’ll be spending your retirement, you’ve probably been growing your IRA for some time. If real estate investing is what has gotten you to where you are now, you might want to think about buying a retirement home from your self-directed IRA, also known as a SDIRA or solo IRA.

You can use a self-directed IRA to purchase your retirement home  before your loving children dump you on the side of the road and run off with their inheritance. Here's how.

What To Know About Buying Your Retirement Home With Your SDIRA

This is one of the great reasons to go with self-directed IRA. Traditional IRAs can hold investments, but you can’t buy a home with them. With a self-directed IRA you can buy an investment property and distribute later for personal use. This is black-belt level stuff. You can rent the property as an investment, so you are still making money off of it until you are ready to retire and move in.

To do this you need to purchase the property through your IRA, which will own it as an investment until you retire. When that time comes, you will distribute the property via title transfer from your self-directed to your traditional IRA.
This makes your retirement home a retirement benefit.

Beware of Prohibited Transactions

You need to avoid prohibited transactions. You cannot use the property. Your family cannot use the property. You do not own the property. It is the IRA’s property. It rents the property; you don't.

The rental income accrues in your account because, I repeat, your IRA owns the property. You can lease the property, of course—that’s how investments work. They make income. You will have to lease it to someone outside the family until it’s been distributed, but after that, your dream home is all yours.

Be Smart About Distributions and Taxes

When you take control of your retirement home, it is an “in kind” distribution and it means taxes are due for traditional IRA’s. If your future retirement home was appraised at $250,000, you will receive a 1099-R for $250,000 from your custodian upon distribution.

Distribution taxes can be high. You might prefer to take partial distributions over time, to spread out the pain, but it’s going to sting no matter what you do and this can be a trap. You need appraisals every year for fair market valuation. These valuations cost money. Whatever you decide, you and your family cannot use the property until it has been 100% distributed.

As with most things retirement related, if you take a distribution before you are 59½, you’re going to pay a penalty. Ten percent is stiff. Be patient.

Do Your Homework Before Buying

This process of home ownership isn’t going to work for everyone. It takes a lot of work, but most things worth doing are a lot of work, including putting yourself in a position to purchase a retirement home in the first place. It is possible, but if you self-direct your IRA investments, make sure you understand relevant investment laws and tax structures.

You need to be like a Boy Scout when it comes to retirement planning. Be prepared.

Why You Need a Real Estate Corporation

Real estate is usually a sound investment. I would remiss if I didn’t use the word “usually” considering the little hiccup we experienced in 2008. Investing in real estate is sound, but you need to know pay attention to what way the wind is blowing.
Still, real estate is a good investment 99.9% of the time. Just make sure you consider the following:
You’re liable for your property. You need protection. You will most likely use an umbrella insurance policy or an LLC to protect yourself.

Insurance vs. LLC: Which is Better?

An umbrella policy adds additional coverage to the insurance you already have.
Now, if Demi Moore has 100k worth of liability coverage and business general liability is 500k, than a $1M umbrella policy is going to give you 1.1 M in pool liability coverage and 1.5M of general business liability coverage.
So, an umbrella policy doesn’t insure anything that isn’t insured. It’s more like a top up on a half full tank.
Let’s say you provide home appliance repair services and somebody sues you for a failed repair. If your general liability doesn’t cover those repairs, you’re umbrella policy is about as useful as that appliance you failed to repair. So, in short, don’t get an umbrella unless you’ve already got your rubber boots: You’re umbrella won’t keep your feet dry when the flood of litigation comes.
LLCs are 100% necessary if you want to keep your feet dry. Your business assets are at risk in a lawsuit, but if you don’t have an LLC, you could lose your home. Don’t get caught barefoot in a flood. Make sure you have your coverage.
The cost of an LLC is a few hundred dollars. You’ll pay yearly fees as well. $50.00 to $200.00 a year is the average, but it’s different in every state. You are going to pay monthly for an umbrella policy. About $1200.00 a year will get you a million in coverage. Umbrella policies have benefits such as attorneys that will be appointed to defend you, but they also have exclusions. You have to know what they are. An umbrella won’t save you from the storm if it’s full of holes.
Now for the million dollar question:

What Type of Company Structure is Best For You?

Well, it depends on what you own. If you have multiple units or commercial property, you want a lot of coverage because you have a lot of tenants. Tenants are people, and people can be very stupid. On the other hand, if you only have a single family, one policy might be enough.
You’re going to have to do some homework here and consider the risks. Bottom line, if you own property, you are going to face catastrophes. Be prepared. When the storm passes, you’ll be dry as a bone.
If you need specific advice on the best method for forming your real estate corporation, schedule your personal consultation today.

4 Pet Law Facts Animal Owners Should Know

I once owned a pit bull named Jackson. He went down a bad path. He was a product of public obedience school. I was too busy with my legal career to notice that Jackson was out on the corner hustling with local thugs.
Every night I went to bed thinking: "Please, don’t make me financially responsible for my pet’s poor life choices. Please."
There are a lot of situations where pet law can get rough. Pet custody is fiercely contested in divorces. Your pet might go down a bad road like mine did. And heaven help you if yours commits the greatest crime in the canine criminal code: biting somebody. You will also have to make provisions for your animals after you’re gone.
Pets are beloved family members, but there are some legal realities that you need to be aware of if you are a pet owner. To that end, here are a few Pet Law fundamentals.

1. Pets are property, and "duds" happen. 

If life sells you a lemon, trade it in for an orange. Or at least something that isn't dying. It may not be the kindest idea, but if you purchase a pet with an illness or a disease, you can return it for a full refund in 21 states. Then you just have to live with the knowledge that Snowball is going to be left on a rock to be consumed by an eagle. Circle of life.

2. Laws regulating the treatment of pets vary from state to state.

All laws regulating pet care can be reduced to one Elvis Presley maxim: don’t be cruel. Don’t leave you dog outside in a hurricane. Don’t leave them in a hot car. And of course, no dog fighting. I thought this one was common sense, but it seems necessary to say it out loud because Michael Vick did 18 months for it. If dog fighting gets you off, you might also want to consider a psychiatrist. You’re a sadist.

3. Pet custody issues are real: understand them.

Look, you love your dog and so does your wife. You might love it more than your car but less than your boat. You might love it more than your children but less than your dinner. To be frank, the law doesn’t care. Pets are considered property no matter how meaningful deep attachment to them may be.
So, in the event of a divorce where pet ownership is in dispute, the court has to consider a number of factors similar those that would be considered during a child custody hearing. Of course there are differences, since you legally own your dog. You don't own your kids. That’s why you can’t put them to work in your salt mine.
Still, the rubric for pet custody and children is similar. The court considers who took care of the pet and who can pay for it. If it is a family pet, it will likely end up wherever the children go. Either way, this is going to be in the judge’s hands. If pet custody is important to you, prepare your case.

4.  Include your pet in your estate plan.

So, you’ve been dead for a week. Your dog has finished mourning at your grave and now he needs to eat. Who is going to feed him?  If you want your pet taken care of after your passing, you can state in your trust or will what provisions you are leaving behind for its care. You can create a "pet trust" to outline the care of your pet after you are gone.

There is good chance there is someone in your life who will take the pet for free because generally speaking we all no at least one person who isn’t completely heartless. If you don’t, I’m sorry that you are dying alone, but cheer up! You can see to your pet’s care either way. Leona Helmsley left millions of dollars to her dog. I mean, none of it was spent on her dog, but if the dog one day developed the powers of speech through the integration of silicon-based microprocessors and the carbon-based canine brain, he might say something like, “You know what I want to do? I want to take LADY to TONY’s for a nice plate of spaghetti.” If that were to happen, TRAMP could afford to take his girl for a nice dinner and a bottle of Chianti.
If you want your pet to fill the void left by your absence with a jettsetting, playboy lifestyle and a solid gold grill, you can leave them your entire estate. Tony will appreciate the business.
Do you have questions about pet ownership or pet law? Fire away in the comments below. Better yet, let Royal Legal Solutions help you. Whether you want to protect a show dog or racehorse as an asset or incorporate your emotional support peacock into your estate plan, we've got you covered. Our nonjudgmental, empathetic attorneys are pet parents themselves. Schedule your consultation today.
 

Pet Ownership Laws & How They Can Bite You In The Assets

I once owned a pit bull named Jackson. He dropped out of obedience school and went down a bad path. I was too busy with my legal career to notice that Jackson was out on the corner hustling with local thugs.

Every night I went to bed thinking: "Please, Lord. Don’t make me financially responsible for my pet’s poor life choices. Please."

There are a lot of situations where our furry and feathered friends run afoul of pet ownership laws. Pet custody is fiercely contested in divorces. You will also have to make provisions for your animals after you’re gone.

Your pet might go down a bad road like mine did. And heaven help you if yours commits the greatest crime in the canine criminal code: biting somebody. 

Pets are beloved family members, but there are some legal realities that you need to be aware of if you are a pet owner. These legal risks also may apply if you are a landlord or property owner and your tenant's dog bites someone. To that end, here are a few pet law fundamentals.

pet ownership laws: bird law

Laws regulating the treatment of pets vary from state to state

All laws regulating pet care can be reduced to one Elvis Presley maxim: don’t be cruel. Don’t leave your dog outside in a hurricane. Don’t leave them in a hot car. And of course, no dog fighting.

I thought this one was common sense, but it seems necessary to say it out loud because Michael Vick did 18 months for it. If dog fighting gets you off, you might also want to consider a psychiatrist. You’re a sadist.

Whether you're a dog owner or a property owner with "animal-friendly" policies, know the laws regarding animal treatment where you live and do business.

Pet custody issues are real: understand them

Look, you love your dog and so does your wife. You might love it more than your car but less than your boat. You might love it more than your children but less than your dinner.

To be frank, the law doesn’t care. Pets are considered property, just like any other asset, no matter how meaningful or deep your attachment to them may be.

So, in the event of a divorce where pet ownership is in dispute, the court has to consider a number of factors similar those that would be considered during a child custody hearing. Of course there are differences, since you legally own your dog. You don't own your kids.

Still, the rubric for pet custody and children is similar. The court considers who took care of the pet and who can pay for it. If it is a family pet, it will likely end up wherever the children go.

Either way, this is going to be in the judge’s hands. If pet custody is important to you, prepare your case.

pet ownership laws: pit bull with kissesInclude your pet in your estate plan

So, you’ve been dead for a week. Your dog has finished mourning at your grave and now he needs to eat. Who is going to feed him?  

If you want your pet taken care of after your passing, you can state in your trust or will what provisions you are leaving behind for its care. You can create a "pet trust" to outline the care of your pet after you are gone.

There is good chance there is someone in your life who will take the pet for free because, generally speaking, we all know at least one person who isn’t completely heartless.

If you don’t, I’m sorry that you are dying alone, but cheer up! You can see to your pet’s care either way. Leona Helmsley left millions of dollars to her dog.

If you want your pet to fill the void left by your absence with a jettsetting, playboy lifestyle and a solid gold grill, you can leave them your entire estate. Tony will appreciate the business.

Don't Get Left Holding The Bag If Your Tenant's Dog Bites Someone

What happens when your tenant’s dog bites a neighbor? Generally, the dog owner is the one liable for injuries.

However, there are instances in which the landlord or property owner can be legally responsible. For example, if the landlord has been made aware of a dog having an aggressive streak and failed to take appropriate measures, he or she could be facing a lawsuit.

Remember: One lawsuit can wipe your real estate investments if your investing business is established as a sole proprietorship. It may be a legal and easy way to structure your business, but it does little to protect you and your assets. The neighbor’s lawyers can see all of your investments, and you can be sued for everything you have.

It doesn’t matter if you’re just starting out in property investing or if you have been doing this for decades, you can keep more of what you earn through legal tax strategies and entity structures that shield your assets from unexpected lawsuits.

Interested in learning more? Read Renting To Tenants With Dogs: What Landlords Need To Know About Liability and Dog Bites and Landlord Liability: Know Where You Stand.

Wrapping It All Up

Most lawyers will give you cookie-cutter advice. You should learn from lawyers who are also property investors and who know how to protect you from any opportunistic lawsuits while making sure you pay no more tax than you really need to. Find someone who can legally structure a range of real estate investments to make sure your real estate investments or business are protected from unfair taxes or lawsuits.

Do you have questions about pet ownership or pet law? Fire away in the comments below. Better yet, let Royal Legal Solutions help you. Whether you want to protect a show dog or racehorse as an asset or incorporate your emotional support peacock into your estate plan, we've got you covered.