Business trusts can allow you to safely and inexpensively manage your Self-Directed IRA (SDIRA).
With typical IRAs, you’re at the mercy of the "custodian" (the financial institution that manages your investment). With a Self-Directed IRA business trust or LLC, you get access to different types of alternative investments (including real estate), that you otherwise wouldn’t be able to purchase with those funds.
So the SDIRA grants you the "checkbook control" you need, which means more direct authority and oversight over the investment and management decisions regarding the funds held in your retirement account.
With a business trust, there are even more benefits, as we'll see ...
If a legal entity allows you to manage your Self-Directed IRA more effectively, should you open a business trust or LLC? You could theoretically become the trustee of either entity, so why would you choose a business trust?
One key reason: the trust saves you money.
LLC filing fees vary by state, but most states charge anywhere between $50-800 for annual filing fees and reports, creating an additional and unnecessary expense.
The states with the highest annual LLC filing fees are:
That’s not to mention the initial filing fee cost, which averages anywhere from $100-200. If you ignore or forget to pay your fees, your LLC gets shut down. If you’re managing a lot of money in that LLC, this could cause even bigger issues.
For Self-Directed IRA investors, business trusts offer the same checkbook control with fewer annual fees. That means a lower cost and generally less upkeep. A California business trust, for example, would save you $800 a year right off the bat (and an additional $70 if you count the initial filing fee). Instead, you could pay nothing annually.
But that isn’t the only benefit trusts afford you...
Additionally, business trusts go beyond the protections afforded to you by an LLC. They don’t require that you file publicly. When you form an LLC, the Articles of Organization, along with your name and address as the trustee of that LLC, must be filed with your Secretary of State.
Business trusts don’t have that same requirement, giving you an additional layer of anonymity and asset protection in the event of a lawsuit. If the litigators can’t find who owns the trust, they can’t sue that person.
Finally, business trusts can be more tax-efficient than LLCs. A business trust is considered a “disregarded entity” separate from its owner. That’s also true for LLCs—but there’s a key distinction: even if you file taxes as a partnership, most states require LLCs to file income taxes. If you choose to use an LLC, that’s an additional headache.
This also ties in with the anonymity. Business trusts don’t have to be filed publicly, they don’t have to be updated annually with any reports, and they don’t have to report income taxes. If you use them to shield your Self-Directed IRA, you’re protecting against legal trouble to the greatest possible extent while minimizing costs.
To give you an idea of the types of assets that you could invest in with your retirement funds using a business trust, here’s a short list:
However, just because you have access to more investments doesn’t mean there aren’t rules to what you’re allowed to do and what you aren’t allowed to do. We actually have a specific list of prohibited transactions.
For one, you aren’t allowed to self-deal in any way. If you want to buy a vacation home using your Self-Directed IRA, that’s prohibited. The investment can’t serve you, and you aren’t allowed to work on it yourself. If you choose to purchase a fixer-upper, you also need to hire contractors for that fixer-upper. DIY is expressly prohibited.
Here are some of the biggest takeaways from this article:
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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