Finding a Trustee For Your Estate Plan

Finding a trustee for your estate plan is tricky. If you choose someone who isn’t up to the task, you won’t be around to correct them.

On the surface, the job is simple. You name which assets go to whom and under what conditions. The trustee just has to execute. So, as with any trust designed to protect your investments, you need a trustee you can, well, trust. You may also want to see our Trustee Vs. Executor article.

In order to pick the right person, consider the following:

What Will My Estate's Trustee Do?

The trustee will make the funeral arrangements with the help of the family. The hardest part about this is managing a grieving family. If your son or daughter doesn’t do well with grief, you may want to consider someone else.
Your trustee will inform your family members and your heir of your estate plans. This is just like in the movies where the deceased leaves behind a video. The trustee puts in the video and the eccentric old billionaire announces that to get his money you have to do something hilarious like defeat his greatest enemy in mortal combat, or solve a terrific riddle that leads you to a treasure buried on an island off of Nova Scotia. No? Maybe that’s just my grandmother, who wasn’t a billionaire, but she was crazy.
Your trustee pays people. Dying is expensive. Make these arrangements ahead of time. By the time your trustee steps in, all he should be doing is signing checks in accordance with your carefully laid plans.
After the dust settles, the trustee determines what assets you still have and how to distribute them. Might be a good idea to include “well- organized” on your list of desirable trustee qualities. With that in mind, you should have selected a beast of a bean counter to execute your will. Someone meticulous, organized, and financially sound. It won’t hurt if they’re funny either. Your family might need a laugh while they divide up what remains of your life in the days and weeks after your death.

Now that you have found a trustee who can educate and entertain, you need to make a plan for your estate. Once again, you need to choose the right trustee for the job.

Here are a few things to consider.

How Big is Your Estate?

If it’s not extremely large, you can probably entrust its distribution to a family member. Unless of course merciless thieves populate your family, in which case you may need outside help. Sometimes family member receive a small honorarium for their services, but this job is largely pro bono. That’s right, you can keep taking advantage of your family even after death.

Now that’s a haunting.

When an estate is worth over 10M, you may want to name a company or a bank as the trustee. Absolute power corrupts absolutely and every family has a Mr. Burns buried somewhere, just waiting to get their hands on the cash so they can “release the hounds."

If you appoint a company or bank, this will cost…a lot. This means it’s only practical for larger estates. It’s also a lot to hoist off on your daughter, even if she is majoring in finance.

You may also want to appoint a non-family member or friend as a trustee simply so that your estate doesn’t tear the family apart. It can get ugly when one family member is dividing up wealth amongst the others. See: KING LEAR.

Does Your Trustee Have Solid Financial Skills?

This one should seem obvious, but a lot of people make posthumous financial decisions with their heart instead of their head. Whether it’s your wife, your child, or a friend, you need to make sure that your trustee is organized, responsible, and financially sound.

What Are Your Family Dynamics?

Families are made up of people and people get into disagreements. They are flawed units made up of flawed people. Every gold digger and delinquent in the world belongs to somebody’s family. If you have any in yours, keep them away from your finances when you’re gone.

Are You Compensating Your Trustee?

Generally, family members act as trustees without compensation, but you can leave them a little something for their trouble. A little bonus out of the estate might motivate them to do a better job. You’re son also tends to do a better job on the lawn when he’s receiving an allowance.

Conflict of Interest

If you are naming a child as a trustee, you are probably naming them as an heir as well. Don’t sweat this one too much. The trustee is bound to the terms of the trust, so if you are thorough, there is very little that can be done to abuse the trustee position for personal benefit.

Co-Trustees

Sometimes it’s important that several people are trustees. Once again, family members are people, and people are petty. You don’t want to bruise egos that are in the middle of grieving.

Multiple trustees are fine, but make sure that you are specific about authority and responsibility. Your death might leave a financial rat’s nest. One monkey will take long time to untangle it. If you involve multiple monkeys you might turn your funeral into a mud-slinging contest. When you're estate planning, you can be the circus ringleader who prevents these issues.

Most people will name a child as trustee. Siblings and close friend of the family are common choices where the children are too young. Keep in mind; this is more than just the distribution of your wealth. This is the evolution of your legacy. Make sure you have chosen the right captain to steer the ship.

Take care of your family’s future. Choose a capable trustee. For much more information and a look at things from the trustee's point of view, read up on trust executor duties.

DIY Estate Plans: Three Of The Mistakes To Avoid

Normally when you think "Do It Yourself" you might imagine painting your house or a trip to the store. But now you can also plan your own estate from the comfort of your own home. Thank the internet. Not only is this cheaper, but it's also more convenient.

However, this increase in affordability and convenience has caused disasters for many families. "Do It Yourself" estate plans often fail to provide the kinds of benefits and protections that you would get in a well drafted and planned estate.

And I'm not just saying that because I'm an attorney. The same mistakes come up over and over when people create wills and other documents without legal counseling.

3 Most Common Mistakes Found in DIY Estate Plans

1. Improper Signatures in Wills

Most states require the signature of the person creating the will as well as two witnesses to the will. The only exception to the two witness requirement in most states is hand written wills.

Failure to adhere to the signature and witness requirements invalidates the entire will. It doesn’t matter how good it looks or how many terms you included. If the signature and witness requirements are not followed, then the will is invalid.

2. Failure to Fund The Trust.

Many people who create a revocable living trust (AKA a "trust") on their own don't fund the trust with the assets from their trust. Funding a trust means that you actually put the assets you want to be controlled by the trust in the name of the trust.

Let's say you want your home to be subject to the terms in your trust. To do this you would need to deed the home out of your personal name and into the name of the trust.

If the property is not deeded into the trust it falls outside the trust terms and your heirs will need to go to probate court to get a judge to approve any transfers of title to the property following your death.

As for stock or LLC ownership, those need to be transferred into the trust. And for insurance, investment, and savings accounts, those should be put in the trusts name or the trust should be listed as a beneficiary.

Note: Failure to properly fund your trust will lead to your heirs going to probate court.

3. The General Forms May Not Address Your Unique Situation.

Most families have at least one unique situation to their estate that is not covered by standardized documents found on the web. One situation that would be hard to deal with in a will is when you have a child who is financially irresponsible while the rest of your children are not.

Or, maybe you have an estate that has more debt than assets, in which case you would need to structure your estate plan to leave as little money as possible to the creditors.

More "unique situations" include you having assets in multiple states or being married to a spouse with children from a prior marriage.
The list could go on and on but these unique situations are rarely handled properly when you’re doing your estate plan on your own.

Solution: Get Help With Your Estate Plan From an Attorney

My suggestion is that, if you've completed an estate plan the DIY way, consider at least having a lawyer look at it to make sure what you have down is correct in the eyes of the law. Doing so will probably save your heirs and family a few court dates.

Disinheriting Your Heirs: Your Legal Options

Disinheriting an heir is something most of us hope we never have to do. It’s sad, but it happens. Sometimes you grow estranged from an heir. Other times, the heir may be on a path to self-destruction that you don't want to aid and abet.
Not all circumstances are this dire. Occasionally, an heir surpasses you financially so they won’t benefit as much from an inheritance as the family artist who is still paying off his American Studies degree.
Whatever your hilarious or tragic reason might be, removing an heir from your estate is fairly straightforward. Emotionally, this move can be devastating to your personal life and tear your family apart. But legally it’s a piece of cake. The following will outline the disinheriting process, but also present legal alternatives to disinheriting.

Why You Will Need to Legally Disinherit An Heir

Unless you specifically state otherwise in a legally binding document, the state is going to assume that you intended your spouse, and then your children to be your heirs. You know, because they assume you love your family. If you think about it, that is the appropriate default setting.
So, if you want to cut an heir out of an inheritance you’ve got to really mean it. You can't undo this move from beyond the grave.
It is important to complete an entire list of your children in the estate plan and to specify any child who will not be an heir. This will make for a wonderful and dramatic moment suitable for a movie:
The estranged youngest son shows up on the day of his father’s death. After comforting his mother and arguing with his brother, his father’s will is read aloud in father’s study. As the grieving family gathers around, the executor reads in a loud, authoritative voice: “…and to my youngest son Samuel, I leave nothing.”
The son lowers his head. His sister tries to comfort him. He dashes from the room. It’s the sweetest revenge of all: revenge from beyond the grave!
In all seriousness, I know what a tragic situation disinheriting can be. That's why I'm going to share another, less final option below.

What To Do If You Don't Want to Disinherit Your Heir: Use Stipulations in Your Will

If you want to leave something for a lost or wayward child, you can always attach a few strings to an inheritance. In this way, you take a family tragedy and turn it into a hilarious, heart-warming comedy.
Now, you cannot just attach any stipulation you can think of to an inheritance. Everything has its limits. For instance, you cannot ask an heir to commit a crime. You cannot subject them to anything torturous, no matter how personally entertaining you might find those posibilities. If you want to make your heir miserable, you’ll have to double up on the emotional torture while you’re still alive. Disinheriting isn't the best option for haunting beyond the grave. Not that we recommend a life spent in resentment for anyone.
You also cannot ask an heir to divorce their partner. This topic is kind of a "fan-favorite," and comes up all the time. Most of us tolerate our children, but you may not relish the prospect of sharing your money with your money-grubbing in-laws. Nonetheless, most courts view such a request as a violation of public policy because it promotes divorce.
We'e previously covered how to use wills and trusts instead of disinheriting your heirs. I recommend you read that as well if you're considering this process.

Why You Need a Lawyer's Help With Estate Planning for Your Heirs

You should talk to a lawyer about what kinds of stipulations you can place on an inheritance. You might demand that your heirs do something with their lives, from maintaining stable employment to educating themselves, before they can access what you leave behind. This will teach them to fish for themselves before you give them all of your catch.
If you need help disinheriting, adding stipulations to your will, or otherwise planning your estate, contact us today. At Royal Legal Solutions, our experts can help with all phases of the estate planning process.

How to Get Out of Annuities

Annuities promise some pretty amazing things including a lifetime of income for you and your partner. They also carry some very sizable fees. There are some benefits, such as no maximums on annual contributions and tax deferral, but they aren’t right for a lot of investors.

What is an Annuity and How Do I Get Out of One?

An annuity is a contractual agreement with an insurance company. You invest money with the company and they agree to pay you a specific amount of money over your life. Like most investments, you give up some money now and the insurance company will pay you later.
Most people who own an annuity with an IRA are seeking a new investment plan for those retirement dollars. Dumping annuities is harder to do than selling mutual funds or stocks. Which is a problem for those people who are realizing that their annuity isn’t working for them they want had hoped.

Cancelling Annuities: Beware the Surrender Penalty

You can cancel your annuity, but will be subject to a surrender penalty. There is no way around it. You get penalized if you take out your investment early, so short of taking a hefty financial hit, you have to wait for the time to elapse. During this surrender period they penalty usually will go down. It can as high as 10% at ten years, but the penalty will decrease by 1% a year until it reaches 0. Like so many things retirement related, you may have to practice some patience again unless you think an alternative investment is really worth taking the loss.
If you do bite the bullet and cancel, your funds need to stay within your IRA to avoid taxes and penalties with the IRS. You could get smacked with a double whammy here so keep that money where it’s going to grow.
A lot of people have found themselves stuck with annuities that aren’t working for them. It’s not an easy choice to make, but if you think it’s worth it, you can get out. Follow these tips to mitigate the loss if you want to increase the return on your investment.

Bottom Line: Know What You're Investing In

In the future, make sure you understand an investment before you make it.
If you're unsure of an investment, there are a number of questions to ask about potential investments. Doing your homework can save you a lot of money and grief. When in doubt, get an opinion from a qualified expert now so you won't regret your investment later.

IRA Rollovers, Explained

An IRA rollover is a transfer of funds from one retirement account a traditional IRA or Roth IRA.

IRA Rollovers are defined as tax-free transfers of retirement from one type of investment account to another. Rollovers were originally introduced to increase the mobility of qualified plan funds for employees moving from one job to another.

You can find the basic provisions governing rollover transfers here. These provisions cover transfers from one IRA to another, transfers from qualified pension, profit-sharing, stock bonus, and annuity plans to IRAs, and transfers from IRAs to qualified plans.

There are a few rare exceptions to the rollover rules. For example, in certain situations, an IRA can make a rollover distribution to a health savings account (HSA).

In other words, if you receive a distribution from a qualified plan (such as a 401(k)), you might decide to put some or all of the distribution amount into an IRA. The IRA that receives the qualified plan distribution is called a rollover IRA.

You can do this either through a direct transfer or via check. If you do a rollover via check, your custodian will write you a check, which you will then deposit into the other account.

How Often Can I Do a Rollover?

The privilege of rolling over from IRA to IRA may be exercised only once in a 12-month period.

Can You Rollover Funds From a Traditional IRA to Another Traditional IRA?

Yes, as long as the money being moved is withdrawn from your old account and deposited in another account within 60 days. Failing to follow this rule can cause your rollover to lose tax-deferred status and cost you big time.

This rule operates on an all or nothing basis. The entire amount received from your old IRA must be transferred to the designated IRA. If you pocket anything, the rollover rule does not apply, and everything received from the old IRA, including any amount transferred to another IRA, is treated as a taxable distribution.

What If I'm Transferring Property That Isn't Money?

If property other than money is received from your old IRA, that property, (not substitute property of equal value or the cash proceeds of the property's sale), must be included in the transfer to the new IRA.

Note: According to our friends at the Tax Court, the rollover contribution must be of cash if the distribution is in cash.

Can I Rollover Funds From a Qualified Plan to a Traditional IRA?

Yes. A qualified plan (or annuity participant) can roll over any distribution other than a distribution that:

Is part of a series of payments over a period of at least 10 years
Is a distribution required by the minimum distribution rules.
Is a hardship distribution.

Note: An employee's surviving spouse may also roll over a similar distribution received on account of the employee's death.

Can a Traditional IRA be Rolled Into a Qualified Plan?

Yes. Within 60 days after the distribution, an IRA can be rolled into an eligible retirement plan for the distributee's benefit.

The term “eligible retirement plan” includes:

Qualified pension.
Profit sharing.
Stock bonus.
Annuity plans.
Tax deferred annuities.
Eligible deferred compensation plans maintained by state and local governments and their agencies.

A rollover contribution must include the entire amount received in the distribution, but it may not exceed the portion of the distribution that, in the absence of the rollover, would be included in the distributee's gross income.

Can I Rollover a Traditional IRA I inherited?

No, usually. A taxpayer whose interest in an IRA is as a beneficiary of the person who created the IRA is usually denied the privilege of rolling over tax free from the IRA to another type IRA or a qualified plan or tax deferred annuity.

Rare exception: a surviving spouse may roll over to another IRA but not a qualified plan.

So why isn't this usually allowed? Because the tax allowances for IRAs (including an IRA’s tax exemption) are intended to encourage saving for the retirement of the contributor and surviving spouse.

Blame Congress. They're the ones who decided it was inappropriate to allow the tax exemption to be prolonged by rollovers after the contributor has died and the account has passed into the hands of a person other than a surviving spouse.

Are There Reporting Requirements For Traditional IRA Holders?

Yes. But don't worry, it's not that bad! (Hopefully you have someone else doing the paperwork for you.) Individuals maintaining IRAs and surviving beneficiaries under IRAs must usually file an annual information return on Form 5329.

Also, an individual maintaining an IRA must make an information filing for each year in which a nondeductible IRA contribution is made or a distribution is received from an IRA.

The filing, which must be included with the individual's return for the year, must disclose the following:

The amounts of the non-deductible contributions for the year.
The distributions received from IRA's during the year.
The total balance in all of the taxpayer's IRAs at the end of the year.
Other information the Treasury might require by regulation (this varies).

What Will The IRS do if You Fail To File Properly?

A $50 penalty is assessed for not filing, unless you can justify why you didn't. Also, because non-deductible contributions are recoverable tax free upon distribution, the IRS will want $100 if these contributions are overstated in the return and you, the taxpayer, cannot justify the overstatement.

I hope this article answered any questions you may have had. If you have any questions about IRA rollovers feel free to ask me, I'd love to help you.

Rollover IRAs Explained

An IRA rollover is a transfer of funds from one retirement account into another, such as a traditional IRA or Roth. You can do this either through a direct transfer or via check. If you do a rollover via check, your custodian will write you a check account which you will then deposit into the other account.

Rollovers are defined as tax free transfers of retirement from one type of investment account to another. Rollovers were originally introduced to increase the mobility of qualified plan funds for employees moving from one job to another.
You can find the basic provisions governing roll over transfers here. These provisions cover transfers from one IRA to another, transfers from qualified pension, profit-sharing, stock bonus, and annuity plans to IRAs, and transfers from IRAs to qualified plans.

There are a few rare exceptions to the rollover rules. For example, in certain situations, an IRA can make a rollover distribution to a health savings account (HSA).

In other words, if you receive a distribution from a qualified plan (such as a 401k), you might decide to put some or all of the distribution amount into an IRA. The IRA that receives the qualified plan distribution is called a rollover IRA.

How Often Can I do a Rollover?

The privilege of rolling over from IRA to IRA may be exercised only once in a 12-month period.

Can You Rollover Funds From a Traditional IRA to Another Traditional IRA?

What If I'm Transferring Property That Isn't Money?

Note: According to our friends at the Tax Court, the rollover contribution must be of cash if the distribution is in cash.
Can I Rollover Funds From a Qualified Plan to a Traditional IRA?

Yes. A qualified plan (or annuity participant) can roll over any distribution other than a distribution that:

Is part of a series of payments over a period of at least 10 years
Is a distribution required by the minimum distribution rules.
Is a hardship distribution.

Note: An employee's surviving spouse may also roll over a similar distribution received on account of the employee's death.

Can a Traditional IRA be Rolled Into a Qualified Plan?

Yes. Within 60 days after the distribution, an IRA can be rolled into an eligible retirement plan for the distributee's benefit.

The term “eligible retirement plan” includes:

Qualified pension.
Profit sharing.
Stock bonus.
Annuity plans.
Tax deferred annuities.
Eligible deferred compensation plans maintained by state and local governments and their agencies.

Can I Rollover a Traditional IRA I inherited?

Rare exception: a surviving spouse may roll over to another IRA but not a qualified plan.

Why Not?

Because the tax allowances for IRAs (including an IRA’s tax exemption) are intended to encourage saving for the retirement of the contributor and surviving spouse.

Are There Reporting Requirements For Traditional IRA Holders?

Also, an individual maintaining an IRA must make an information filing for each year in which a nondeductible IRA contribution is made or a distribution is received from an IRA.

The filing, which must be included with the individual's return for the year, must disclose the following:

The amounts of the non-deductible contributions for the year.
The distributions received from IRA's during the year.
The total balance in all of the taxpayer's IRAs at the end of the year.
Other information the Treasury might require by regulation (this varies).

What Will The IRS do if You Fail To File Properly?

I hope this article answered any questions you may have had. If you have any questions about IRA rollovers feel free to ask me, I'd love to help you.

Should You Convert Your IRA or 401k to Roth?

Are you thinking about converting your IRA or 401k to a Roth? Doing so may or may not be a good idea. If you have a traditional IRA or 401k, your money is currently growing tax deferred and you'll pay tax on the money as it is drawn out at retirement. So why might you want to convert? Read on to learn the benefits, and who is a good candidate for this kind of switch.

Reasons to Convert Your Traditional IRA/401 to a Roth

A Roth is the opposite of a traditional IRA or 401k. Roth IRAs and 401ks grow and the money invested in them is distributed tax free when you decide to retire. So if you had a Roth, you'd pay taxes now and pay no taxes on distributions when you decide to retire.

The benefit of paying now is it's less money in the long run. If you can afford to pay taxes today, they'll be cheaper than their equivalent in 20 or even 5 years. $20 today can inflate dramatically in the time until you retire.

There are several differences between traditional and Roth accounts. To put it simply, a Roth is best for you if you plan on being in a higher tax bracket then the one you're in now when you retire. If you plan on being in a lower tax bracket, a traditional account is better for you.

Note: You may also want to check out our related articles:

Roth IRA Conversion Doesn't Have to Be Forever

Yes that's right! If you have second thoughts, you can convert at any time. The good news is you can convert your traditional IRA to a Roth IRA, or your traditional 401k to a Roth 401k. The price to make that conversion is including the amount you convert to Roth as taxable income for the year in which you make the conversion.
For example, if you convert $100,000 from your traditional IRA to a Roth IRA in 2017, you will list $100,00 as income on your 2017 tax return. You will then pay any federal and state taxes on that income depending on your 2017 tax bracket.

You probably don’t like the idea of paying additional taxes to convert. Honestly, who would? Nobody likes paying their friends at the IRS more taxes now. However, you can easily end up saving more money as your account grows and the entire growth comes out tax free.

Three Situations Where Converting Your IRA or 401k Funds to Roth Is Your Most Profitable Option:

Expecting Higher Than Average Returns From An Investment Opportunity.

If you're about to make an investment you expect will produce huge returns, then it'll be in your best interest to convert to a Roth.
Wouldn't you rather pay tax on the smaller investment amounts now? Those larger returns will go back into your Roth IRA or 401k, where they will grow to an unlimited amount and come out tax free.
I realize this is hard to predict. After all, if it was easy we'd all be rich. However, a situation like this is bound to happen when you're investing in real estate, startups, pre-IPOs, and other investments.

Low Income Year.

The biggest pain of a conversion is that you have to pay tax on the money you convert. The best time to convert is when you're in a lower tax bracket because you'll end up paying less in taxes.
For example, if you are married and have $50K of taxable income for the year and you decide to convert $100K to Roth, you will pay federal tax on that converted amount at a rate of 15% which would result in $15,000 in federal taxes.
And don't forget about state income tax (if you live in a state that actually has one) because they tax conversions the same way the fed does!

If you choose to convert when you're in a high tax bracket at around $250,000 of income, then you’d pay federal tax on a $50K conversion at a rate of 33%. This would result in federal taxes of $16,500. In other words, that's one third of your money down the drain. Ouch!

Unfortunately, many of us have careers where we can't just expect to be in a lower tax bracket. This option is probably more likely for those who are self employed as small business owners, consultants and freelancers.

You'd Rather Have The Money Sooner Instead Of Later

Roth accounts are kind of like the gift that never stops giving. With a Roth you can take out the funds you've contributed or converted (NOT the earnings) after five years without paying tax or the early withdrawal penalty. Even if you aren’t 59 1/2.

For Roth conversions, the amount you convert can be distributed from the Roth account five years after the tax year in which you converted. The five-year clock starts to tick on January 1st of the tax year in which you convert, regardless of when you convert within the year.

Let's say you converted your traditional IRA to a Roth IRA in May 2017. You'd be able to take a distribution of the amounts converted without paying tax or penalty on January 2nd, 2022.

Whereas if you try to access funds in your traditional IRA or 401k before you are 59 1/2, you will pay tax AND a 10% early withdrawal penalty even if the amounts you distribute are only the contributions you put in, not the investment gains.

Roth accounts offer you flexibility, plain and simple. So if you're looking to always have access to your retirement money, a Roth is what you need!

Final Thoughts on Who Should Convert to a Roth

Whether or not you should convert to a Roth largely depends on your future. Will you be richer or poorer when you retire? Also, many employers are willing to match your contributions to a traditional 401k to a certain degree, whereas for a Roth they aren't.

For most people, a Roth conversion simply isn't worth the money. But for some circumstances, it's a no-brainer. If you need help determining if a Roth conversion is in your best interest call Royal Legal Solutions now at (512) 757–3994 to schedule your retirement consultation.

How To Flip Houses & Avoid UBTI/UBIT

First of all, I'd like to commend all you house flippers out there. Flipping houses isn't easy--not unlike some less honorable professions. But you know what makes it a little easier? Avoiding unnecessary contributions to Uncle Sam. Let's talk about the best way to flip houses and limit or avoid UBTI/UBIT.

Use a Self-Directed IRA for Flipping Houses

With a Self-Directed IRA, you can flip homes or engage in real estate transactions funded with your retirement savings by simply writing a check. As owner of your Self-Directed IRA LLC, you will have the authority to make real estate investment decisions on your own without having to wait for the consent of an IRA custodian.
Another advantage of using a Self-Directed IRA to flip homes is when you want to purchase a home with your self-directed IRA, you can make the purchase, pay for the improvements, and sell or flip the property on your own without involving an IRA custodian.

Did I forget to tell you all the money you make from flipping houses using a Self Directed IRA will be tax free? This is true, believe it or not. However, there are a few things you need to watch out for.

Understand and Avoid UBTI & UBIT

When engaging in a real estate transaction, like flipping a house, you should always be mindful of the Unrelated Business Taxable Income rules (also known as UBTI or UBIT).
The purpose of the UBTI and UBIT rules is to make sure those who are traditionally tax exempt, (IRA's, charities and 401k's) are taxed as a for-profit business when they engage in active business activities or use leverage.
The UBTI or UBIT rules generally applies to the taxable income of “any unrelated trade or business…regularly carried on” by an organization subject to the tax. The regulations separately treat three aspects of the quoted words—“trade or business,” “regularly carried on,” and “unrelated.”
Overview of The Three UBTI/UBIT Aspects
Trade or Business
The rules start with the concept of “trade or business” listed by Internal Revenue Code Section 162, which allows deductions for expenses paid or incurred “in carrying on any trade or business.”
The tax code is vague on this issue, but by using Section 162 as a reference you can limit the term “trade or business” to profit oriented activities involving the tax exempt entity. Let's break down the language.

"Regularly Carried On"

The UBIT or UBIT rules only applies to income of an unrelated trade or business that is “regularly carried on” by an organization.
Whether a trade or business is "regularly carried on" is determined by comparing what the tax exempt entity does to non-tax exempt entities. Basically, tax exempt entities can't do things that are deemed "commercial".
Unless they want to start paying taxes.

"Unrelated"

In the case of an IRA or 401k plan, any business activity will be treated as “unrelated” to its exempt purpose. This can be confusing, I know.
For IRA's and 401k's, a transaction would not trigger the UBTI or UBIT rules if the transaction is deemed not to be considered a trade or business that is "regularly carried on".
Activities which wouldn't trigger UBIT OR UBTI include capital gains, interest, rental income, royalties, and dividends generated by the IRA/401k. The passive income exemptions to the UBTI or UBIT rules are listed in Internal Revenue Code Section 512.

But if you, as a tax exempt entity, engage in an active trade or business, such as a restaurant, store, or manufacturing business, the IRS will tax the income from the business since the activity is an active trade or business that is regularly carried on.

How Do The UBTI/UBIT Rules Apply to Flipping Homes?

So now you're probably wondering what kind of real estate transaction will trigger the UBTI or UBIT taxes. As I mentioned earlier, the IRS is unfortunately vague on issues like this. What a coincidence, right?
There's no telling how many houses you have to flip in order to trigger the UBTI or UBIT tax. But the IRS does have a number of factors it will use to determine whether you've engaged in a high enough volume of real estate transactions, such as home flipping, to trigger the UBTI or UBIT tax.
3 Factors The IRS Uses:

Frequency. The IRS will examine the frequency of the transactions. As in, how many flipping transactions did you do in a given year?
Intention. The IRS will also examine your intent . Were you intending to engage in an active trade or business?
Alternate Activity Patterns. They'll also look at the other activities you've been doing using your 401k or IRA to determine whether the activity is part of a business activity (what you don't want them to think) or an investment.

What Happens If You Trigger UBTI or UBIT?

If it's determined that an activity/transaction you engaged in is an active trade or business transaction, you will trigger the UBTI or UBIT tax, which is taxed at a rate of approximately 40% for 2017.
The 40% rate can be lower or higher, depending on the facts and circumstances of your situation. What you should know is that one or two flipping transactions per year wouldn't be considered an active trade or business and wouldn't trigger the UBTI or UBIT tax.

Final Thoughts on Flipping and UBTI/UBIT: One Size Doesn't Fit All

Now, knowing the real estate tycoon that you are, you're probably asking yourself, what happens if you do 4 or 5, or even 10 flipping transactions in a year? Would that be considered an active trade or business causing the UBTI/UBIT taxes to get triggered?

The answer to your question largely depends on the circumstances of your unique situation. It's all about how and why you flip the houses, not how many you flip. At least, that's how your friends at IRS see it anyway.

401(k) For The Self Employed: What Kick-Ass Entrepreneurs Should Know

A self-directed 401(k) for self-employed business owners isn't the same as an employer-funded retirement plan.

And if you're a kick-ass entrepreneur, a solo 401(k) is a kick-ass way to save for retirement. Why? Because this unique plan offers the ability to use retirement funds to make any type of investment on your own without requiring the consent of a custodian.

The following are some examples of the types of investments you can make with your solo 401(k) :

Loans (personal, private, hard & soft, etc.)
Foreclosure property.
Stocks, Bonds, Mutual Funds
Tax liens
Gold
Mortgages
Raw land
Deeds
Private loans
Private businesses
Limited Liability Companies & Partnerships
Residential or commercial real estate
Mortgage pools
Private placements
Most currencies

Indeed, you can make just about any type of investment except art and collectibles.

Who Benefits The Most From a Solo 401(k) Plan?

The solo 401(k) plan is designed specifically for small, owner-only businesses. It’s a tax-efficient and cost-effective plan that offers all the benefits of a self-directed IRA, and includes a couple of unbeatable benefits, such as high contribution limits (up to $60,000 or $54,000 depending on your age) and a $50,000 loan feature.

There are many benefits and features of the solo 401(k) plan that make it useful to self-employed individuals. These features and benefits are what make the solo 401(k) plan so popular:

Roth Type Contributions

Roth IRAs have historically been unavailable to people with high incomes. But if you have a solo 401(k), you can use the built-in Roth sub-account which can be contributed to regardless of how much money you make.

Flexible Investment Options

As I mentioned above, you can make almost any type of investment, including real estate and private stock, and then channel them back into your solo 401(k) tax-free.

Loan Features

I also mentioned earlier how the solo 401(k) allows participants to borrow up to $50,000 or 50% of their account value (whichever is less) for any purpose. The interest rate on this loan will be the prime interest rate, which is around 4% give or take.

But be careful, failing to pay back this loan will "displease" your friends at the IRS to say the least!

UDFI Exemption

Most IRAs generate Unrelated Debt-Financed Income (a type of Unrelated Business Taxable Income) when they buy real estate. Which means they'll end up paying more taxes. Thankfully, a solo 401(k) plan is exempt from UDFI.

Sky High Contribution Limits

Under the 2017 solo 401k contribution rules, if you're under the age of 50 you can make a max contribution of $18,000. This amount can be made in pre-tax or after-tax dollars.

On the profit-sharing side, a business can make a 25% (20% in the case of a sole proprietorship or single-member LLC) profit-sharing contribution up to a combined max of $54,000, if you include the employee deferral.

If you're over the age of 50 everything is the same, except your contribution limit, which is $60,000 instead of $54,000.

Consolidation

A solo 401(k) can accept rollovers of funds from any other retirement account, such as an IRA, a SEP, or a previous 401(k).

Employee Elective Deferrals & Employer Profit Sharing

For 2017, you can contribute up to $18,000 per year through employee elective deferrals. An additional $6,000 ($24,000) can be contributed for persons over age 50. These contributions can be up to 100% of your self-employment compensation.

As an employer, you can make an additional contribution of up to 25% of your self-employment compensation.

Total Limit

As I mentioned earlier, the contributions to a solo 401(k) are capped at a max of $54,000 per year or $60,000 for persons over age 50.

But if your spouse also participates in the Solo 401(k) with you and earns compensation from the business, the spouse is allowed to make separate and equal contributions.
This would increase your combined annual contribution limit to $108,000 (or $120,000 if both spouses are over the age of 50).

Cost-Effective Administration

The solo 401(k) is not only easier to administrate, but it's also cheaper! There is no annual filing requirement unless your solo 401(k) plan exceeds $250,000, in which case you will need to file Form 5500.

Do Self-Employed Solo 401(k) Owners Need a Custodian?

Nope! The most cost-effective benefit of the solo 401(k) is that it does not require you to hire a bank or trust company to serve as trustee. This allows you to serve in the trustee role.

This means that all assets of the 401(k) trust are under your sole authority. You won't have to pay fees, or wait for a custodian's consent, unlike most other people with retirement accounts! And then you'll also be able to invest in almost anything by simply writing a check.

Click here to watch videos on Solo 401(k) and other retirement planning tools

Are There Any Administration Costs or Maintenance Fees With a Solo 401(k)?

Yes and no. You won't have to pay a custodian, so that kills 90% of the fees right there.

As for maintenance cost, there is generally no annual filing requirement unless your solo 401(k) plan exceeds $250,000 in assets. If you have more than $250,000, you'll need to fill out Form 5500.

Besides the $250,000 filing rule, you're not required to do anything else. However, I would advise you to keep all records, receipts, and contracts related to your solo 401(k) and its investments on file. So, if you hire someone to do those things for you, that will probably be your biggest administrative cost.

Do you want to learn more about solo 401(k) to see if it's the right option for you? Check out our previous article to find out if you're eligible for the solo 401(k).

A Series Of Landmark Prohibited Transaction Cases, Part Three: The Kellermans

This article is part 3 of a series with the goal of educating you, the Self-Directed IRA LLC investor, on how to successfully invest and avoid triggering prohibited transactions.

If you've read parts 1 and 2, get ready for something completely different. The case we're going to go over today is about bankruptcy, something I hope you never go through!

Oddly enough, with Self-Directed IRA LLCs, you have a bit of an advantage as far as protection from creditors is concerned. But as you will find out by the end of this article, once you go in too deep, there's no way out.

The Beginning: The Kellermans File For Bankruptcy

The Kellermans, for whatever reason, decided to file for voluntary Chapter 11 bankruptcy. Prior to filing for bankruptcy, Barry Kellerman created an IRA, which as of October 27, 2008, had a reported value of $252,112.67.

The named administrator of the IRA is Entrust Mid South LLC. The IRA is Self-Directed by Barry Kellerman, who made all of the decisions related to the issues raised in the objections.
At the start of their case, the Kellermans valued their IRA at $180,000.00 and claimed the entire fund as exempt under the Bankruptcy Act.

The trustee in the bankruptcy case against the Kellermans objected to the Kellermans’ claimed exemption in the IRA on the basis that it was no longer exempt from taxation as of the commencement of the case and is not eligible for exemption.

The trustee alleged that the IRA lost its exempt status in 2007 because Barry Kellerman directed the IRA to engage in prohibited transactions involving disqualified persons.

The Kellermans' LLC and Its Alleged Prohibited Transactions

The alleged prohibited transactions involved the 2007 purchase of four acres of real property located near Maumelle, Arkansas. Panther Mountain Land Development LLC helped setup the purchase.

Barry Kellerman and his wife each own a 50 percent interest in Panther Mountain. To effect the acquisition and development of the four-acre property, the IRA and Panther Mountain formed a partnership whereby the IRA contributed property and Panther Mountain contributed property and cash.

The purchase took place to assist in the development of two nearby tracts of approximately 80 and 120 acres owned by Panther Mountain. Controlling the 4 acre tract assisted in the development of the other Panther Mountain properties.

The Plot Thickens

Interestingly enough, Panther Mountain filed its own Chapter 11 bankruptcy on September 20, 2009 after the Kellermans filed for bankruptcy on June 3, 2009.

Even more interesting is that the Kellermans admitted that they are “disqualified persons". Specifically, Barry Kellerman is the beneficiary of the IRA and a fiduciary because he exercises “discretionary authority” and “discretionary control” over the IRA as the owner.

Dana Kellerman qualifies as a “member of the family” as the wife of Barry Kellerman. Panther Mountain is a “disqualified person” according to 4975(e)(2)(G) because Barry Kellerman asserts a 50 percent membership interest. Likewise, the Entrust Partnership is also a disqualified person according to subsection 4975(e)(2)(G).

Remember: in this case it is already clear that a prohibited transaction occurred. The debtors are only seeking bankruptcy protection.

The Court Rules Against The Kellermans

Based on the Kellermans' admittance and the court's findings on disqualified persons, all that remained was a determination of whether a prohibited transaction occurred that terminated the tax exempt status of the IRA.

The court concluded that in 2007, Barry Kellerman engaged his IRA in transactions including the purchase of the real property with IRA funds and the cash contribution of $40,523.93 made by the IRA to the Entrust Partnership.

Both collectively and individually, both the non-cash contribution and the cash contribution are prohibited transactions with disqualified persons according to IRC Sections 4975(c)(1)(B), (D), and (E), which rendered their IRA non-exempt.

Hidden Details

What was not stated above is that, during Panther Mountain's own bankruptcy filings, (which were happening around the same time) they made it seem as if they were using the Kellerman IRA as a lending source for the purchase and development of property.

So then, the real purpose of these transactions was to directly benefit Panther Mountain and the Kellermans in developing both the four acres and the properties owned by Panther Mountain.
Here's a shocker. The Kellermans each owned a 50 percent interest in Panther Mountain and stood to benefit substantially if the four acre tract and the adjoining land were developed into a residential subdivision.

Case Outcome & Summary

The Kellerman case involved a construction company's owners, the Kellermans, who were also LLC co-owners. They were denied a claim for bankruptcy estate exemption for Mr. Kellerman’s Self-Directed IRA.
The court found that Mr. Kellerman who, along with his wife, were disqualified persons who had engaged in prohibited transactions by:

By directing their IRA to deliver property as a non-cash contribution to an IRA and LLC.
By making cash contribution to partnerships to develop property.

You can view the full case here.

What Real Estate Investors Can Learn From The Kellermans

This case is a clear example that using retirement and personal funds together in the same transaction can trigger a prohibited transaction.

The Kellermans entered into a transaction with their IRA funds, which involved a disqualified person, in this case Panther Mountain. Because they did that, they then had the burden of proving the transaction didn't violate any of the self dealing or conflict of interest prohibited transaction rules under IRC Section 4975.

A burden that, as this case shows, can be difficult to prove.

So here's the lesson we've all learned from the Kellermans: Using retirement funds and personal assets in the same transaction can potentially trigger the prohibited transaction rules.

Don't end up like the Kellermans! If you're interested in learning more about Self-Directed IRA LLCs, we have many free resources for you to read about investing with these entities. If you're going to set up your own, get the job done right: contact Royal Legal Solutions now.

Are You Eligible For a Solo 401k? What About Your Employees?

Chances are if you're reading this you've probably heard of a solo 401k, which our friends at the IRS call a "one participant 401k." But what about solo 401k eligibility? Before you waste 5 minutes of your life reading my masterpiece, I'd like to let you know: if you're not self employed you aren't eligible for a solo 401k.

I know, some people just got their hearts broken. It'll be okay, trust me. You've got options. And you can read about the Roth IRA and conventional IRAs/401ks from our previous posts on the subjects. Anyway, for those of you who are self employed and interested in learning more about solo 401ks, read on.

Solo 401k Basics

The solo 401k was born out of the Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA. The idea is to give kick-ass entrepreneurs who'd rather work for themselves than "the man" an opportunity for tax-deferred retirement savings.

With that introduction out of the way, you should know there are some limitations to solo 401k eligibility.

What Are The Limitations Of a Solo 401k?

A solo 401k is limited to companies with one employee (you as the owner) although if you have a spouse then he or she can also contribute to the plan. Partners or shareholders can be included in the plan as well.

Your company can have part-time employees who are excluded from the plan, as long as they work less than 1,000 hours a year, or belong to a union or are non resident aliens.

But if your company takes on full time employees who aren't married to you (the boss), then your solo 401k will unfortunately have to be converted to an old-school 401k plan.

The solo 401k plan is available to anyone who is already a business owner or who will be establishing a sole proprietorship and does not have, or plan to have, full time employees.

The solo 401k is great for consultants, freelancers, home businesses, and independent contractors. So now I bet you want to know about the contribution rules huh. As a good host, I must oblige my audience.

Solo 401k Contribution Rules

If you're under the age of 50, you can make a max contribution in the amount of $18,000. This amount can be made before or after tax.

On the profit sharing side, your business can also make a 25% (20% in the case of a sole proprietorship or single member LLC) profit sharing contribution up to $36,000. That comes out to a combined max of $54,000.

Note: If you're over the age of 50, the contributions are the same, except you can contribute $6,000 extra.

The 2 Kinds Of Solo 401k Contributions

The solo 401k plan accepts two types of contributions: salary deferrals and a profit sharing contribution. Both are tax deductible and grow tax-deferred until withdrawals.

You can withdraw money from your solo 401k penalty free after you turn 59 1/2. Withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals must begin at the age of 70 1/2--but this rule doesn't apply if you go Roth style.

To fund a solo 401k, you can rollover funds from your previous retirement plans, IRAs etc, by setting up a Trust account for the solo 401k and directly transferring your funds from the old custodian to the trust bank account.

A Trustee needs to be designated to hold the assets of your solo 401k, preferably you. However, if you do serve as Trustee, you cannot legally benefit directly from the trust, enter into a transaction with the trust, or use the trust as your personal fund.

Since a solo 401k is an IRS qualified retirement plan, it has to have a written 401k plan document that establishes the provisions of the plan. It's a lengthy document which will explain how the plan works and operates.

For example, the plan document will explain how you are able to borrow up to 50% or $50,000 (whichever is greater) from your solo 401k tax free, and literally for free. You pay interest, but the interest is paid into your account, so you're really paying yourself.

What Are The Technical Requirements For a Solo 401k Plan?

Great question! To be eligible for a solo 401k plan you must meet two eligibility requirements:

The "presence" of self employment activity. (You must be self employed.)
The "absence" of full time employees. (It's gotta be all you, baby!)

Allow me to explain these two lines in detail.

The Presence of Self Employment Activity

This basically means you should be the owner/operator of one of the following: sole proprietorship, LLC, C Corporation, S Corporation, or Limited Partnership where the business intends to generate revenue for profit and make contributions to the solo 401k plan.

There's no set amount of revenue for profit you should be generating. In most cases the IRS will consider you eligible if your business is legitimate and run with the intention of generating profits. You can be self employed either part time or full time, and even have another job somewhere else.

You can also participate in an employer’s 401k plan alongside your solo 401k. But if you choose to do this, your contribution limits will not be raised. (So a few thousand dollars contributed to your employer 401k will mean a few thousand dollars less you can contribute to your solo 401k.)

The Absence of Full-Time Employees

As you already know, a solo 401k is available to self employed individuals or small business owners who have no other full time employees.

The following types of employees are excluded from solo 401k coverage:

Employees under 21 years of age.
Employees who work less than 1000 hours a year.
Union employees.
Non-resident alien employees.

If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will have to include them in any plan you set up. You can get around this by employing independent contractors.

Once you have a solo 401k, you'll be able to invest in anything from real estate to cryptocurrency and more!

Top Six Duties For Trustees and Executors of Estates

Unlike the movies, you won't just get a call one day telling you that you've been named as the executor or trustee to a billion-dollar estate. Not usually, anyway.

But let's say you do.

So you’ve been named as an executor in a will or as a trustee in a trust? Now you have some serious duties to carry out. Before I explain the trustee duties and the trust executor duties, you need to know the difference between the two.

What Is an Executor?

An executor, also known as a personal representative, has the authority to administer and distribute an estate. If you were appointed as an executor (or personal representative) in a will, you will need to understand the terms of the will and who the heirs are.

In most situations where only a will is used, you will need to go to court to be appointed as the legal executor of an estate and will need court approval to transfer certain assets (such as a home.)

What is a Trustee?

If you were appointed as a trustee in a trust, you will need to understand what assets are owned by the Trust and what assets are owned outside the Trust. In general, a trust is used by individuals to avoid probate and to provide better direction and control of their estate.

If the Trust was established correctly and if it was properly funded (the trust owns the assets of the deceased person), then you will not need to go to court to get approval to administer the estate.

The Difference Between an Executor And a Trustee

The position of executor tends to be temporary, while someone could serve as a Trustee for a few months or a few decades.

Think of an executor as a "liquidator" and a trustee as more of a "manager." An executor's duties are complete once everything has been liquidated, whereas a Trustee's duties are complete when there is nothing left to be managed.

Fun fact: Usually neither an executor nor a trustee is compensated for their position.

Now that we've got that covered, let's go over the six most essential duties of executors and trustees.

Responsibilities as an Executor or Trustee

#1 Understand the Estate Documents.

Before you do anything, you need to read the estate documents. These documents will determine the distribution and management of the estate. These documents may include funeral and burial instructions. (Where and how the person wants to be buried, or where they want to be cremated, etc.)

There may also be a memorandum of personal property that outlines how specific items of personal property are to be distributed to heirs. Common items identified and handled on the memorandum of personal property are jewelry, guns, and other valuables.

#2 Determine the Assets.

You will need to determine what assets are included in the estate. Sometimes this can be difficult to determine, as the deceased person may not have provided complete information as to their bank accounts, investment accounts, real estate, retirement accounts, and life insurance policies.

Many children who become executors and trustees have a difficult time locating the assets of their deceased family member despite having an otherwise close relationship.

#3 Identify the Heirs.

Most estate documents such as a will or a trust will list the heirs to the estate and these heirs (AKA, beneficiaries). Usually, the heirs are clearly identified. However, what happens if the will or trust listed one of your siblings as an heir, and what if that sibling in longer living?

Does that portion of the estate go to your sibling’s surviving spouse or children or to the other siblings? Hopefully, the will or trust will state what shall occur in this instance. But in many instances, this item can be overlooked and not considered in the estate plan.

As executor or trustee, you are left to determine who shall take the place of your deceased sibling and this decision is subject to the terms of the document and state laws.

#4 Identify the Creditors.

Almost every estate has creditors who need to be paid. From credit card companies and other consumer debt to mortgage lenders with liens on real estate owned by the deceased.

As executor or trustee of the estate, you have an obligation to guarantee that all creditors' claims are paid from the estate. Failure to do so may result in liability to you as the executor or trustee or to the heirs who receive distributions from the estate.

Whether you are working with a secured or unsecured creditor, you will need to provide evidence of your position as executor or trustee, which in the case of a Will would include a copy of the Will, or in the case of, a Trust would include a copy of the certificate of trust.

In general, secured creditors such as mortgage lenders or car lenders will be paid upon the sale of the property or asset unless the estate otherwise has cash available and intends to hold these assets.

Regardless of whether the asset will be held or sold, you should immediately notify secured creditors of the death of the deceased person. Where possible, you should make sure that payments are made to these creditors to avoid late fees and other penalties.

If properties or assets subject to the secured creditor are paid, then the proceeds from the sale will resolve these debts.
As for unsecured creditors, you should notify them of the passing of your loved one. However, these creditors are not always paid in full. Don't be hesitant to negotiate with unsecured creditors, such as credit card companies. They can be negotiated with fairly easily.

Maybe start with an offer of 1/3 of the amount owed and see if the unsecured creditor will accept that amount as a payoff. While they do have legal recourse against the estate, they do face significant legal fees in probate court to collect on the debt.
If the estate must go through probate in the court, as will typically occur if there is only a will, then as executor you are required to notify creditors of the probate court action and of the assets of the estate.

Unsecured creditors then have a certain amount of time to assert their claim against the estate. Most unsecured creditors won't follow up and make a claim against the estate despite being given notice of the assets of the estate.

Look to negotiate with these creditors and if you are in probate court already, wait until they actually make a claim in the probate court (following notice of the case and deceased person's death you will be required to provide) before paying those creditors.

You have a good chance that the creditor won’t even make a claim.

#5 Conduct the Proper Process.

The estate documents and the assets of the deceased will determine the process to administer the estate. Also, if the deceased person had assets in multiple states if they only left a will, you may need to conduct probate in multiple states.

There are a number of common situations where you will need to go to court to obtain court approval in administering the estate.

In the case of a will, you will typically need to go to probate court to be appointed as executor by the court and to get court approval to transfer any real estate assets to heirs or in a sale from the estate.

Also, if the identity of heirs is in question, you may need to get approval from the court as to the proper heirs to receive proceeds from the estate.

Lastly, you may be required to go to court if the estate documents leave contradictory, improper, or confusing provisions that cause disagreement amongst heirs. In this situation, obtaining approval from the court is advisable in order to avoid claims against yourself and the estate.

#6 Final Tax Returns

As executor or trustee, you must also make sure individual income tax returns and estate tax returns are filed. This can be tricky, considering the circumstances.

For example, you must write the word DECEASED across the top of the tax return. In addition to a final income tax return, you may be required to file an estate tax return using IRS form 1041. This is required if the estate receives $600 or more in gross income.

Conclusion

Being a trustee or executor isn't easy. You may want to get some professional help to make sure everything goes smoothly.

Remember, the estate can pay the expenses of professionals and if you incur out-of-pocket expenses then the estate can typically reimburse those expenses.

One last thing you should be aware of as an Executor or Trustee. I didn't mention this in the list above, but as an Executor or Trustee, you will typically be involved closely with the heirs/beneficiaries. Sometimes this can involve drama, emotional support, and other sticky situations. For your convenience, we've created an additional Survival Guide for Trustees and Executors. You can make it. We believe in you and are here to support you through this process if you need help.

How to Fund Your Business or Start-Up With Self Directed IRA

Do you have a private company or start-up that could use some funding? Maybe you're planning on starting your own soon. Whatever the case is, you're in for some great news!

There are tens of trillions of dollars in retirement plans across the United States. But did you know that these funds can be invested in your business? Yes, it’s true! IRA's and 401k's can be used to invest in start-ups, private companies, and even real estate.

Most entrepreneurs and retirement account owners have no idea that retirement accounts can invest in private companies. And there's a good reason for that. (More on this later.)

And it's not just anyone who owns these retirement funds, it's EVERYONE! Literally. Have you ever asked anyone to invest in your business with their retirement account?

Probably not.

But why not? How much do you think they have in their IRA or old employer 401k and how attached do you think they are to those investments? Think hard on that one.

(The answer is they usually have lots of money and they probably don't even know anything about what it's invested in.)

Those two questions have paved the way for over a billion dollars to be invested in private companies and start-ups!

This kind of funding isn't as uncommon as you might think.

Recent industry surveys show that there are over one million retirement accounts that are self-directed into private companies, real estate, venture capital, private equity, hedge funds, and start-ups.

How does it work?

So now you want to know how these funds are properly invested into your business. Well, if you ask your CPA or lawyer, the typical response is, “It’s possible, but we wouldn't recommend it.” Which probably means they don't know-how.

So they don't know, how about you ask a financial adviser? If you ask a financial adviser, especially your own, they'll tell you it's a bad idea. Most likely because you won't be paying him or her fees like how you do with mutual funds, annuities, and stocks.

There are "different" risks in a private company or start-up investments, so self-directed IRA investors need to be cautious and they shouldn’t invest everything into one private company or start-up. And yes, you will probably need some help regarding the tax and legal issues.

What is a Self Directed IRA?

A self-directed IRA is a retirement account that can be invested into any investment allowed by law. In order to invest in a private company, start-up, or small business, the retirement account holder must have a self-directed IRA. If you have an account with a "typical" IRA or 401k company, such as Vanguard or Ameritrade, then you can only invest in investments allowed under their platform. Usually, these companies won’t allow your IRA or 401k to invest in private companies or start-ups. To do so, you would first need to roll over or transfer the funds to a self-directed IRA custodian.

For a detailed list of the companies that provide these types of accounts, check out the (RITA) Retirement Industry Trust Association’s website and membership list. RITA is the leading national association for the self-directed retirement plan industry.

How to sell corporation stock or LLC units to Self Directed IRA's

Are you seeking capital for your business in exchange for stock or other equity? You might consider offering shares or units in your company to retirement account owners. And no, you don't have to go public. Companies that have had individuals with self-directed IRA's invest in them before they were publicly traded include Google, Facebook, PayPal, Domino’s, Sealy, and Yelp.

There are many investment options available. Popular ones include:

An equity investment purchasing shares or units where the IRA becomes a shareholder
Note investment where the IRA becomes a lender.

Note: you must comply with state and federal securities laws when raising money from investors.

What You Need to Know: Prohibited Transactions

One of two important things to be aware of when someone invests their retirement account money into your business relates to what they can and can't invest in (prohibited transactions). The tax code restricts an IRA or 401k from transactions with the account owner personally or with certain family members (parents, spouse, kids).

This is called the prohibited transaction rule. If you own a business personally you can’t have your own IRA or your parent's IRA invest into your company to buy your stock or LLC units. However, family members such as siblings, cousins, aunts, and uncles could move their retirement account funds to a self-directed IRA to invest in your company. Anyone else can invest in your company without worrying about that rule.

Note: If a prohibited transaction occurs, the investors self-directed IRA is entirely distributed. Make sure the rules are followed!

What You Need To Know: UBIT Tax

The second thing you need to be aware of is the tax known as Unrelated Business Income Tax (UBIT).

UBIT is a tax that can apply to an IRA when it receives “business” income. Generally, IRAs and 401k's don’t pay tax on the income or gains that go back to the account because they're considered "investment income". Investment income would include rental income, capital gain income, dividend income from a c-corp, interest income, and royalty income. (e.g. income from a mutual fund).

However, when you go outside of these forms of investment, you may find yourself outside of “investment” income. This means you might be receiving “business” income that is subject to the extremely costly “unrelated business income tax.”

This tax rate is at 39.6% at $12,000 of taxable income annually last time I checked. That’s steep. You want to make sure you avoid it.

When should an investor anticipate paying UBIT?

The most common situation where a self-directed IRA will have to pay UBIT is when the IRA invests in an operational business selling goods or services that do not pay corporate income tax.

Let's say you own a new business that sells goods online, and is organized as an LLC and taxed as a partnership. This is a very common form of private business and taxation, but one that will cause UBIT tax for net profits received by self-directed IRA. On the other hand, if your new business was a c-corporation and paid corporate tax (that’s what c-corps do), then the profits to the self-directed IRA would be dividend income, a form of investment income, and UBIT would not apply.

Self-directed IRAs should expect that UBIT will apply when they invest into an operational business that is an LLC but should expect that UBIT will not apply when they invest into an operational business that is a c-corporation.

Note: IRAs can own c-corporation stock, LLC units, LP interest, but they cannot own s-corporation stock.

Are you an LLC wanting to raise capital from other peoples IRA's or 401k's?

You should have a section in your offering documents that notifies people of potential UBIT tax on their investment. UBIT tax doesn’t your company any additional money or tax. But it will cost the retirement account investor since UBIT is paid by the retirement account.
If the investment from the self-directed IRA was via a note or other debt instrument, then the profits to the IRA are simply interest income and that income is always investment income, which is not subject to UBIT tax.

Interestingly, many companies raise capital from IRAs for real estate or equipment purchases. These loans are often secured by the real estate or equipment being purchased and the IRA ends up earning interest income like a private lender.

Recap (because that was a lot!)

So, here’s a brief recap of everything you just read.

There are trillions of dollars in retirement plans across the U.S.
These retirement accounts can be used to invest in your private company, start-up, or small business.
You must comply with the prohibited transaction rules.
Anyone can invest in your company, except you & your close family members.
Depending on how a company is structured (LLC or C-Corp) & how the investment is designed (equity or debt/loan), there may be UBIT tax.
UBIT tax usually arises for IRAs in operating businesses structured as LLCs where the company doesn’t pay a corporate tax on their net profits. This income gets passed down to IRA owners & can cause UBIT tax liability.

Retirement account funds can be a huge source of funding and investment for your business, so it’s worth some time and effort to learn how these funds can be used. Just make sure you follow the rules.

How to Fund Your Business With Self-Directed IRA and 401(k) Money

Do you have a small business or start-up that could use some funding? If so, you're in for some great news!

There's tens of trillions of dollars in retirement plans across the United States. But did you know that these funds can be invested into your business?

IRAs and 401(k)s can be used to invest in startups, private companies, and even real estate.

Most entrepreneurs and retirement account owners have no idea that retirement accounts can invest in private companies. And there's a good reason for that. (More on this later.)

And it's not just anyone who owns these retirement funds, it's EVERYONE! Literally. Have you ever asked anyone to invest in your business with their retirement account?

Probably not.

But why not? How much do you think they have in their IRA or old employer 401(k) and how attached do you think they are to those investments? Think hard on that one.

(The answer is they usually have lots of money and they probably don't even know anything about what it's invested in.)

Those two questions have paved the way for over a billion dollars to be invested in private companies and startups!

This kind of funding isn't as uncommon as you might think. Recent industry surveys show that there are over one million retirement accounts that are self directed. Those accounts invest heavily in private companies, real estate, venture capital, private equity, hedge funds, and start-ups.

How does it work?

So now you want to know how these funds be properly invested into your business. Well, if you ask your CPA or lawyer, the typical response is, “It’s possible, but we wouldn't recommend it.” Which probably means they don't know how.

What about you ask a financial adviser? If you ask a financial adviser, especially your own, they'll tell you it's a bad idea. Most likely because you won't be paying him or her fees like how you do with mutual funds, annuities and stocks.

There are "different" risk in private company or start-up investments, so self directed IRA investors need to be cautious and they shouldn’t invest everything into one private company or start-up. And yes, you will probably need some help regarding the tax and legal issues.

What is a Self Directed IRA?

A self directed IRA is a retirement account that can be invested into any investment allowed by law. In order to invest into a private company, start-up, or small business, the retirement account holder must have a self directed IRA.

If you have an account with a "typical" IRA or 401(k) company, such as Vanguard or Ameritrade, then you can only invest in investments allowed under their platform.

Usually these companies won’t allow your IRA or 401(k) to invest in private companies or start-ups. To do so, you would first need to rollover or transfer the funds to a self directed IRA.

For a detailed list of the companies that provide these types of accounts, check out the (RITA) Retirement Industry Trust Association’s website and membership list. RITA is the leading nationwide association for the self directed retirement plan industry.

How to sell corporation stock or LLC units to Self Directed IRAs

Companies who have had individuals with self directed IRAs invest in them before they were publicly traded include: Google, Facebook, PayPal, Domino’s, Sealy and Yelp.

There are many investment options available. Popular ones include:

An equity investment purchasing shares or units where the IRA becomes a shareholder
Note investment where the IRA becomes a lender.

Note: you must comply with state and federal securities laws when raising money from investors.

What You Need to Know: Prohibited Transactions

One of two important things to be aware of when someone invest their retirement account money into your business relates to what they can and can't invest in (prohibited transactions).

The tax code restricts an IRA or 401(k) from transactions with the account owner personally or with certain family members (parents, spouse, kids).

This is called the prohibited transaction rule. If you own a business personally you can’t have your own IRA or your parents IRA invest into your company to buy your stock or LLC units.

However, family members such as siblings, cousins, aunts and uncles could move their retirement account funds to a self directed IRA to invest in your company. Anyone else can invest into your company without worrying about that rule.Note: If a prohibited transaction occurs, the investors self directed IRA is entirely distributed. Make sure the rules are followed!

What You Need To Know: UBIT Tax

The second thing you need to be aware of is the tax known as Unrelated Business Income tax (UBIT). UBIT is a tax that can apply to an IRA when it receives “business” income. Generally, IRAs and 401(K)s don’t pay tax on the income or gains that go back to the account because they're considered "investment income".

Investment income would include rental income, capital gain income, dividend income from a c-corp, interest income, and royalty income. (e.g. income from a mutual fund).

However, when you go outside of these forms of investment, you may find yourself outside of “investment” income. Which means you might be receiving “business” income that is subject to the extremely costly “unrelated business income tax.”

This tax rate is at 39.6% at $12,000 of taxable income annually last time I checked. That’s steep. You want to make sure you avoid it.

When should an investor anticipate paying UBIT?

The most common situation where a self directed IRA will have to pay UBIT is when the IRA invests into an operational business selling goods or services who does not pay corporate income tax.

On the other hand, if your new business was a c-corporation and paid corporate tax (that’s what c-corps do), then the profits to the self directed IRA would be dividend income, a form of investment income, and UBIT would not apply.

Self directed IRAs should expect that UBIT will apply when they invest into an operational business that is an LLC, but should expect that UBIT will not apply when they invest into an operational business that is a c-corporation.
Note: IRAs can own c-corporation stock, LLC units, LP interest, but they cannot own s-corporation stock.

Are you an LLC wanting to raise capital?

If the investment from the self directed IRA was via a note or other debt instrument, then the profits to the IRA are simply interest income and that income is always investment income, which is not subject to UBIT tax.

Recap (because that was a lot!)

So, here’s a brief recap of everything you just read.

There’s trillions of dollars in retirement plans across the U.S.
These retirement accounts can be used to invest into your private company, start-up or small business.
You must comply with the prohibited transaction rules.
Anyone can invest into your company, except you & your close family members.
Depending on how a company is structured (LLC or C-Corp) & how the investment is designed (equity or debt/loan), there may be UBIT tax.
UBIT tax usually arises for IRAs in operating businesses structured as LLCs where the company doesn’t pay a corporate tax on their net profits. This income gets passed down to IRA owners & can cause UBIT tax liability.

The bottom line

The Not-So-Well-Known Benefits of Roth IRAs

Many investors and financial professionals are familiar with the primary benefits of a Roth IRA: that after you pay taxes on the money going into the Roth IRA that the plans investments grow tax free and come out tax free. That being said, there are so many more benefits to the Roth IRA that need to be noted. I’ll note just three.

Benefit #1: Roth IRAs are not subject to RMD.

Traditional retirement plan owners are subject to regulations known as Required Minimum Distribution rules which require the account owner to start taking distributions and paying tax on the distributions (since traditional plan) when the account owner reaches the age of 70 ½. Not being subject to RMD rules allows the Roth IRA to keep accumulating tax free income (free of capital gain or other taxes on its investment returns) and allows the account to continue to accumulate tax free income during the account owner’s life time.

Benefit #1: Your Roth IRA Can Outlive You

A surviving spouse who is the beneficiary of a Roth IRA can continue contributing to that Roth IRA or combine that Roth IRA into their own Roth IRA. Allowing the spouse beneficiary to take over the account allows additional tax free growth on investments in the Roth IRA account. A traditional IRA on the other had cannot be merged into an IRA of the surviving spouse nor can the surviving beneficiary spouse make additional contributions to this account.
Non spouse beneficiaries (e.g. children of Roth IRA owner) cannot make additional contributions to the inherited Roth IRA and cannot combine it with their own Roth IRA account. The non-spouse beneficiary becomes subject to required minimum distribution rules but can delay out required distributions up to 5 years from the year of the Roth IRA account owner’s death and is able to continue to keep the tax free return treatment of the retirement account for 5 years after the death of the owner. The second option for non-spouse beneficiaries is to take withdrawals of the account over the life time expectancy of the beneficiary (the younger the beneficiary the longer they can delay taking money out of the Roth IRA). The lifetime expectancy option is usually the best option for a non-spouse beneficiary to keep as much money in the Roth IRA for tax free returns and growth.

Benefit #3: Roth IRAs Don't Have Early Withdrawal Penalties

Roth IRA owners are not subject to the 10% early withdrawal penalty for distributions they take before age 59 ½ on amounts that are comprised of contributions or conversions. Growth and earning are subject to the early withdrawal penalty and to taxes too but you can always take out the amounts you contributed to your Roth IRA or the amounts that you converted without paying taxes or penalties (note that conversions have a 5 year wait period before you can take out funds penalty and tax free).
Roth IRAs are a great tool for many investors. Keep in mind that there are qualification rules to being eligible for a Roth IRA that leave out many high income individuals. However, you can convert your traditional retirement plan dollars to a Roth IRA (sometimes known as a backdoor Roth IRA) as the conversion rules do not have an income qualification level requirement on converted amounts to Roth IRAs. This conversion option has in essence made Roth IRAs available to everyone regardless of income.

Estate Planning 101: Who Will Carry On Your Legacy?

Estate planning 101 starts with understanding that a trust is more than an opportunity to guarantee that your assets are distributed the way you see fit upon your death. A trust is also a great way to pass your legacy on to the next generation, whether they be your family, friends or someone else deserving of the privilege.

Your trustee will have an immense responsibility thrust upon their shoulders following your death. But finding a trustee is easier said than done. How do you know how someone will act once you're not around anymore? If you appoint the wrong person as trustee, they might just end up making you "roll over" in your grave.

The Purpose of a Trust in Estate Planning

When establishing a trust you will be outlining your assets and who will receive those assets upon your death. You will also outline certain conditions that may be placed on your assets.

For example, you may state that your children will receive an equal share of your estate upon your death. But you can also add that your children shall not receive a distribution if they have a drug or alcohol addiction or if they have a creditor who would seize the funds. The trust may also set up distributions to minor children so that they don’t receive a large inheritance when they turn 18.

How Do I Pick My Trustee?

As stated earlier, appointing a trustee to your trust is an important part of estate planning. In most situations, you will be the trustee during your lifetime and if you have a spouse your spouse will be trustee if they survive you.

However, you will need to select a successor Trustee of your Trust who will manage your estate following your death. (Even if you have a spouse, you may not want them to be the trustee). This successor Trustee may be a family member, friend, company, etc.

Factors To Consider When Picking Your Trustee

What Will My Trustee Do?

Your Trustee will make funeral and burial arrangements along with family members.
Inform your family members and heirs of the estate plans of the deceased. (This is the part you see in movies).
Your Trustee will pay off creditors and hire professional as needed to assist with the estate. (Lawyers, real estate agents, etc.).
Your Trustee will determine what exactly your assets are to make sure they are distributed to the heirs/beneficiaries of your Trust.
Your Trustee will organize your assets for distribution. This may include listing and selling property, transferring ownership of businesses, jewelry, art, bank accounts, etc.

How Large is Your Estate?

If your trust is only worth a couple million dollars or less, listing a family member as the trustee is probably your best option. However, if your estate is worth over $4 million you may want to consider listing a lawyer as the successor trustee of your estate.

And if you've been fortunate enough to accumulate an estate worth over $10 million you may want to consider listing a trust company or bank as the trustee of your estate. "Absolute power corrupts." Need I say more?

Note: If you appoint a trust company to manage your trust it will cost tens of thousands of dollars, so this option is only viable for large estates.

When Should You Appoint a Non-Relative Trustee?

If you have heirs who are likely to disagree and cause problems, you may want to list a non-family member or a friend as the Trustee so that a third party can make decisions. This way you can avoid potential contention and litigation over your estate.

Does Your Trustee Have Good Financial Skills?

If you are selecting a family member, choose one who has shown good financial skills over their life. If you’re selecting a child over another, consider their financial skills, work background, and family dynamics.

Note: Choose someone who is well organized and who can get things done. You want a responsible person to be your trustee.

What Are The Dynamics of Your Family?

Every family is different, some have gold diggers or feuds, others have delinquents. Maybe your children are too young to be trustees, or you don't have a spouse. In any case, just think long and hard on this one!

Will You Compensate Your Trustee For Managing Your Estate?

You may compensate them or give them something extra from the estate for taking on the responsibility but generally family members are appointed to serve without compensation. Those with large estates may want to hire a professional instead. At any rate, you can do your trustee a favor and supply them with our article on the duties of a trustee.

Can Your Heir/Beneficiary Be a Trustee?

Yes, you may have your beneficiary/heir serve as Trustee. Most people who have adult children will list a child as the successor Trustee and this person will typically be a beneficiary/heir.
Note: While there is some conflict of interest in this arrangement, the Trustee is bound to the terms of the Trust and can’t abuse that discretion for their own personal benefit.

Should You Appoint Co-Trustees?

Some people will consider listing co-beneficiaries as successor Trustees. This can be a way to involve more than one family member in the distribution of the estate so that one person doesn’t feel left out.
While there can be some benefits to involving another person as Trustee it can cause tension and confusion as to who is doing what. Make sure you're specific about their authority and responsibility if you are listing multiple trustees.

Who is Most Commonly Listed as Trustee?

Most persons with adult children will list one of their children as successor Trustee. Most persons with younger children will list a sibling or close friend as their successor Trustee.

How To Pocket Your Retirement Distributions Tax Free

You've worked hard all your life, and now it's time to retire, or you're getting ready to retire. When that time comes, depending on what state you live in, you may end up having to say good bye to some of your hard earned money.
When you begin taking distributions from your IRA, 401k, or pension plan, those distributions are taxable under federal income tax and any applicable state income tax rules. While federal taxation cannot be avoided, state taxation may be avoided depending on your state of residence.
That's right! The good news is that there are a few states that have no income tax and don’t tax retirement plan distributions. On the other hand, some states that have special exemptions for retirement plan distributions, and other states that do in fact tax retirement plan distributions.
Let's discuss how to avoid paying taxes. (We do that a lot around here folks!)

States with No Income Tax.

Naturally, the easiest way you can avoid state income tax on retirement plan distributions is by living in a state that has no state income tax. Have you ever heard of "the villages" in Florida? It isn’t just the sunny beaches of Florida that helps attract all of those retirees. It’s the tax free state income treatment!
The 8 other states with no tax on retirement plan distributions are New Hampshire, Nevada, South Dakota, Texas, Washington, Tennessee, Wyoming and Alaska.

States Income Tax Exceptions for Retirement Distributions.

There are many states who are willing to make an exception for your retirement distribution. There are 36 states that have some sort of exemption for retirement plan distributions. Since each of these states are different, so too are their exemptions. The type of retirement account you have is what decides the exemptions available to you. Here’s a quick summary of the common exemptions found throughout the states:

Public Pensions and Retirement Plans. Distributions from federal or state employer plans are exempt from taxation in many states. This is the most common exemption amongst states that have an income tax but who exempt some types of retirement plan distributions from income.

Most of the 36 states that have an exemption for retirement plan income provide an exemption for public employee pensions and retirement plans.

Private Pensions and Retirement Plans. 10 states offer a full exclusion for private pensions and retirement plans. Some of them differ between pension and contributory plans, while some of them make no distinction.
IRAs. There are some states that don't tax any retirement pan distributions, including IRA distributions to retirees. Illinois for example does not tax distributions from retirement plans at all.

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 from any retirement plan, including IRAs.
I hope this article has helped you. Oh, and just in case you were thinking about going to the villages, they were raided for drugs recently.
Just kidding, of course. We like to have fun at Royal Legal Solutions. Ideally, while helping you plan your retirement.

How To Disinherit Someone Legally Using a Will Or Trust

Have you become estranged one of your heirs? Sometimes, the apple falls far far away from the tree. I hate to sound satirical, but the good news is that you can easily disinherit the heir from receiving anything in your estate.

Disinheriting an Heir: The Right Way vs. The Wrong Way

You certainly shouldn't just leave their name out of things and think that this will accomplish your goals of disinheriting them. The laws in most states will presume you intended to have them be an heir unless you specifically state otherwise.
Following your spouse, your children are the presumed heirs to your estate by law in the absence of an estate plan. As a result, it is important to complete an entire list of your children in the estate plan and to specifically mention any child who will not be an heir to your estate by stating something like, “I do not want *child's name here* to receive anything from my estate."

Other Ways to Provide for a Disinherited Heir

Perhaps you have a heart, and you still want to provide for that "bad apple". But you also want to attach some "strings" to their inheritance. While you generally have freedom in deciding how to pass on your estate, there are some things you can't do with a trust.

Limits on Trust Clauses

For example, a trust or will cannot be created and enforced to go against public policy, promote illegal activities or tortuous acts. One of the more popular clauses is one which requires a child to divorce their spouse in order for them to receive their inheritance.
For example, you can’t say, “Brad doesn’t get anything from the estate so long as he is married to Angelina.” Many courts view this as a violation of public policy as it promotes divorce.
Avoid clauses such as these and seek the guidance of an attorney when adding clauses which disinherit or significantly restrict a child’s inheritance.
Whatever you do, don't ever state why you've disinherited someone in your will or trust. If you do, chances are that they'll use hired guns to prove that you were "mentally unstable" when you wrote that.
Details like this are why you should form an estate plan with an experienced attorney. If you don't have one, schedule your estate planning consultation today.

How To Buy Your Retirement Home Ahead Of Time Using A Self Directed IRA

Chances are you've been steadily growing your IRA for quite some time. Did you know that you can buy a retirement home with a Self Directed IRA (SDIRA)?

Yep, it's true. But there are a few things you need to know first.

If you have any other IRA besides a SDIRA, you can only hold investments. You can't just go buy a home with your IRA and live there. However, with a SDIRA, you can buy an "investment property", which you can later distribute and use personally.

Let's break this strategy down.

Steps To Using a Self-Directed IRA to Buy a Retirement Home

If you are seriously interested in using your SDIRA to purchase a retirement home, then know that it works in two phases.

First, your IRA purchases the property and owns it as an investment until you decide to retire. (You need an SDIRA for this.) Second, upon your retirement (after age 59 ½), you can distribute the property via a title transfer from your SDIRA a regular IRA. This allows you to personally use the home and benefit from it personally. Before you go out and buy your future retirement home, you should consider a couple of factors.

Avoid Prohibited Transactions

Be careful to avoid those dreadful "prohibited transactions". The rules in place currently do not allow you, the IRA owner, or certain family members to have any use or benefit from the property while it is owned by the IRA.

The IRA must hold the property strictly for investment. The property may be leased to unrelated third parties, but it cannot be leased or used by the IRA owner or prohibited family members (kids, siblings, parents, etc). Only after the property has been distributed from the self-directed IRA to the IRA owner may the IRA owner or family members reside at or benefit from the property.

You Must Distribute The Property Fully Before Personal Use

The property must be distributed from the IRA to the IRA owner before the IRA owner or his/her family may use the property. Distribution of the property from the IRA to the IRA owner is called an “in kind” distribution, and results in taxes due for traditional IRAs.

For traditional IRAs, the custodian of the IRA will require a professional appraisal of the property before allowing the property to be distributed to the IRA owner. The fair market value of the property is then used to set the value of the distribution.

For example, if your IRA owned a future retirement home that was appraised at $250,000, upon distribution of this property from your IRA (after age 59 ½) You would receive a 1099-R for $250,000 issued from your IRA custodian to you.

One of the drawbacks of this strategy is that distribution taxes can be high. You might prefer to take partial distributions of the property over time, holding a portion of the property personally and a portion still in the IRA to spread out the tax consequences of distribution.

However, that would be a tiresome process, as you would have to appraisals each year to set the fair market valuation. While this can lessen the tax burden by keeping you in lower tax brackets, you and your family still cannot personally use or benefit from the property until it is entirely distributed from your IRA.

Bottom Line: Play By The Rules With Your Self-Directed IRA

Remember that you should wait until after you turn 59 ½ before taking the property as a distribution, as there is an early withdrawal penalty of 10% for distributions before age 59 ½.

While this strategy is possible, it is not for everyone and certainly is not easy to accomplish. Few things worth doing in life are. SDIRA investments come with rules, and self-directed IRA investors should make sure they understand those rules. Remember, you can't use your retirement home for personal use until after its been distributed and you may or may not end up paying lots of taxes.

Your Quick Fix: Self-Directed IRA Benefits & 2017 Contribution Limits

For 2017, the IRA contribution limits will remain the same as 2016. This means the following is true for individuals:

If you're under the age of 50, the maximum Self-Directed IRA contribution for 2017 will be $5500.
If you're over the age of 50, the maximum Self-Directed IRA contribution for 2017 will be $6500.

Let's look at some quick tips about the Self-Directed IRA LLC and contributions.

Take Control of Your Retirement Account: The Self-Directed IRA LLC

A Self-Directed IRA LLC will offer you the ability to make tax free investments without custodian consent.
Think of a Self-Directed IRA LLC as a special purpose limited liability company that is created, owned and managed 100% by you. Or someone else, if you choose.
The advantage of using an LLC to make the investment is that an LLC is treated as a pass-through entity for tax purposes, meaning you, the owner of the LLC, would be subject to the tax and not the LLC itself.
In most cases, all income and gains generated by the IRA LLC would flow back to the IRA tax free. Also, the LLC allows you to keep IRA funds in your LLC bank account, instead of with a far away custodian. For you that means greater flexibility and less delays when it comes to investing.

You Can Invest in Anything

With a Self-Directed IRA LLC, you will be able to invest in almost any type of investment opportunity that you discover, including: domestic or foreign real estate (rentals, foreclosures, raw land, tax liens etc.), private businesses, precious metals (i.e. gold or silver), hard money & peer to peer lending, as well as stock and mutual funds.
Your only limit is your imagination. The income and gains from these investments will flow back into your IRA tax free.

Quick List of Self-Directed IRA LLC Benefits

When you get a Self-Directed IRA LLC:

You will have the power to act quickly on a potential investment opportunity.
You can say good bye forever to custodian fees. (You can just say good bye to custodians all together!)
You can invest in almost anything.
You will actually know what you're investing in.

If you have any questions about Self-Directed IRA LLCs, you can always ask in the comments below, or contact us directly. We're here to help you.

Can Your IRA Invest In & Own Bitcoin and Other Cryptocurrencies?

Yes, your IRA can invest in and own bitcoin and other cryptocurrencies. Bitcoin is a form of virtual currency using blockchain technology. Bitcoin can be exchanged between people for goods, services and of course, dollars.
From 2011 to September 2017, the value of Bitcoin has risen from $0.30 per Bitcoin to a shocking $3,772 per Bitcoin. As a result, investors are beginning to seriously consider whether their retirement account can invest in and own actual Bitcoin or other forms of cryptocurrency. Maybe you are too, now that you just read that. I can't blame you.

Can Your IRA Own Bitcoin?

Yes! Your IRA can own Bitcoin and other forms of cryptocurrencies, such as Ethereum and Litecoin. The only items your IRA cannot invest in is life insurance, S-Corp stock and collectibles.

How Are Bitcoin Gains Taxed?

The IRS has stated that Bitcoin and other forms of virtual currency are property. The sale of property by an IRA is generally treated as capital gain, so the buying and selling of cryptocurrency for investment purposes wouldn’t trigger unrelated business income tax (UBIT) or other adverse tax consequences that can occasionally arise in an IRA.

3 Steps To Owning Cryptocurrency With Your IRA.

First, you will need a self directed IRA with a custodian who allows for alternative assets, such as LLC's.
Second, you will invest funds from the IRA into the LLC. Your IRA will own an LLC 100%, and that LLC will have a business checking account.
And third, the IRA/LLC will use its LLC business checking account to establish a "wallet" to invest and own Bitcoin through the wallet. The most widely used Bitcoin wallet is through a company called Coinbase. You can use a wallet on Coinbase to buy, sell and digitally store your cryptocurrency.

There are already publicly traded funds and other avenues (Bitcoin Trusts) where you can own shares of a fund that in turn owns Bitcoin. But, if you want to own Bitcoin directly with your IRA, you’d need to follow the steps above.
Don't underestimate Bitcoin and other forms of cryptocurrency. You're living in the digital age now. Cryptocurrencies have great potential, as of this writing one Bitcoin is worth $3,772 , almost triple that of an ounce of gold. Times change.
However, as with any new investment, make sure you proceed with caution. Who knows, by the time you read this article, Bitcoin could be worth nothing, or it could be well on its way to being the "currency of the future". Just to give you an idea, the value of Bitcoin is about as volatile as a Dutch Tulip...(pictured below, click the link if you don't know about "tulip mania")

Solo 401k Plan Roth Contributions: Frequently Asked Questions

The short answer is yes. Your Solo 401k does allow for Roth contributions.

You can choose to treat contributions under your plan which would otherwise be "elective deferrals" as designated Roth contributions. In this context, an “elective deferral” is an employer contribution to your 401k plan which is excluded from your gross income.

An elective deferral is instead a designated Roth contribution if you “designate” it as not being excludable. Your designated Roth contributions for any year may not exceed the maximum amount of elective deferrals that could be excluded from gross income.

All About the Roth IRA: A Hybrid Account

The Roth "sub-account" of the Solo 401K Plan is a hybrid of sorts. Although it is technically a type of 401k plan, it has some of the features of a Roth IRA. Only after-tax salary deferral contributions may be deposited in the Roth 401k sub-account.

No employer contributions and no pretax employee contributions are permitted. The entire account will contain only after-tax contributions from your salary plus pretax earnings on those contributions.

Note: Because the Roth 401k is actually just part of a regular 401k plan, most of the rules that apply to a regular 401k plan also apply to a Roth 401k plan, including the contribution limits.

Can a Roth 401k Plan Exist On Its Own?

We wish! Unfortunately, the answer is no. A Roth 401k plan is only available as an option that can be added to a traditional 401k.

When Are Roth 401k Distributions Taxable?

Distributions from a designated Roth account are excluded from gross income if they are:

Made after the employee attains age 59 1/2.
“Attributable to” the employee is “disabled".
Made to the employee's beneficiary or estate after the employee's death.

However, the exclusion is denied if the distribution takes place within five years after your first designated Roth contribution to the account from which the distribution is received. Or if the account contains a rollover from another designated Roth account, to the other account.

Other distributions from a designated Roth account are excluded from gross income under Internal Revenue Code 72 only to the extent they consist of designated Roth contributions and are taxable to the extent they consist of trust earnings credited to the account.

Can I Convert a Traditional 401k Plan to a Roth 401k Plan?

Yes, you can. The Small Business Jobs Act of 2010, signed by then-President Obama contains a provision, which went to effect on Sept. 27, 2010. This provision allows for the conversion of a traditional 401k or 403b account to a Roth in the same plan if their employer offers one.

However, you must pay income tax on the amount converted. Let's take a look at 3 important criteria below that need to be satisfied in order for you to reap all the benefits of a Roth 401k:

Once your funds have been converted to the Roth 401k plan sub-account.
Once you're above the age of 59/1/2 .
After your Roth 401k account has been opened at least 5 years.

All income and gains from your Roth 401k plan investment would be tax free!

Can I Rollover the Roth 401k Plan to a Roth IRA?

Yes. You are permitted to roll over your Roth 401k plan assets into a Roth IRA. Your assets can be transferred via a direct rollover, which will avoid mandatory income tax withholdings.

Can I Rollover a Roth IRA to a Roth 401k Plan?

No. But you can rollover assets from a Roth 401k to a Roth IRA. (Basically, you can't do the reverse.)

How Are Distributions From Roth 401ks Taxed?

All distributions from Roth 401k's are either qualified distributions or non-qualified distributions.

If the distribution is a qualified distribution, the early distribution tax does not apply.
The early distribution tax applies only to those distributions that are subject to income tax.

Also, because all qualified distributions from Roth 401ks are tax-free, they are also exempt from the early distribution tax as well.

What is a "Qualified Distribution?"

A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

A distribution must not occur within 5 years after the first Roth IRA contribution was made by the taxpayer or the taxpayer's spouse.
The distribution must be made after the account owner reaches age 59 1/2 or becomes disabled.

Are You Required to Take Distributions From Your Roth 401k?

Yes, the required distribution rules that force you to begin taking money out of your retirement plans and Traditional IRAs during your lifetime also apply to Roth 401k.
If you have leftover money in your Roth 401k after your death, the distributions will be directed to your beneficiaries.
Note: The rules for a Roth 401k plan are different from those for a Roth IRA. If you have a Roth 401k, you must begin taking distributions from the account when you reach age 70 and 1/2, or after you retire, whichever comes first.

How Should a Solo 401k Plan Trustee Administer a Plan With Roth Contributions?

A trustee of a Solo 401k plan with a qualified Roth contribution program must establish separate accounts including only designated Roth contributions and “earnings properly [allocated] to the contributions”.

Also, the plan administrator must maintain separate records for these accounts.

Since distributions from accounts containing elective deferrals are included in the distributees' gross income, while distributions from accounts containing designated Roth contributions are generally excluded from gross income, an employee's designated Roth contributions cannot be grouped with elective deferrals.

Note: Forfeitures may not be allocated to Roth accounts.

That's all for our FAQ on the Roth option. If you have any questions about your Solo 401k plan, take our financial freedom quiz now. We're happy to help with any concerns you may have.

Penalties For Prohibited Transaction With A Self-Directed IRA LLC or Roth IRA

You may already be aware of the many rules and penalties your friends at the IRS have when it comes to prohibited transactions. The penalty tax for prohibited transactions begins at 15% for most type of retirement plans.
But wait, there's more!
For those of us trying to pay less taxes by going the self directed route it comes as no surprise that the IRS has harsher penalties for self-directed IRAs who engage in prohibited transactions.
Here we go.

What happens when an IRA owner or beneficiary engages in a prohibited transaction?

When a self-directed IRA or Roth IRA owner or beneficiary is involved in a transaction that is deemed prohibited pursuant to Internal Revenue Code Section 4975, pursuant to Internal Revenue Code Section 408(e), the IRA loses its tax-exempt status.

Also, the IRA holder (or beneficiary) is treated for tax purposes to have received a distribution on the first day of the tax year in which the prohibited transaction occurred.

The distribution amount that the IRA holder is deemed to have received is equal to the fair market value of the IRA as of the first day of such tax year, and is required to be included in the IRA holder’s income for the year.

Additionally, unless the IRA holder qualified for an exception to the early distribution penalty (i.e. over the age of 591/2, disabled, etc.), the 10% early distribution penalty would also apply. (Ouch!)

Summary of the above.

If you own an IRA or are a beneficiary of one, and you engage in a transaction that violates the prohibited transaction rules, your IRA will lose its tax exempt status. The entire fair market value of the IRA will also be treated as taxable distribution, subject to ordinary income tax.
Note: You would also be subject to a 15% penalty as well as a 10% early distribution penalty if you're under the age of 59 and a half.

What happens if a non-IRA owner or non-IRA beneficiary engages in a prohibited transaction Under IRC 4975?

In the case where someone other than the IRA holder or IRA beneficiary (for example, another disqualified person) engages in a prohibited transaction, that disqualified person may be liable for certain penalties.
In general, a 15% penalty is imposed on the amount of the prohibited transaction and a 100% additional penalty could be imposed if the transaction is not corrected.
Note: fiduciaries to an IRA or plan are not subject to the 15% or 100% additional penalty.

What are the penalties for engaging in a prohibited transaction under internal revenue code section 408? (Yes, more sections!)

The penalty for engaging in an Internal Revenue Code Section 408 prohibited transaction differs from the Internal Revenue Code Section 4975 penalty. (Your friends at the IRS have many, many penalties dear reader.)
If an IRA assets are invested in collectibles or life insurance, only the assets used to purchase the investment are considered distributed, not the entire IRA.

In addition, pledging an IRA as a security for a loan is a prohibited transaction under Internal Revenue Code Section 408(e)(4). If an IRA holder pledges a portion of his or her as security for a loan, only the amount pledged is deemed distributed – not the entire IRA.

IRS penalties can be costly.

The prohibited transaction rules are extremely broad and the penalties extremely harsh. (Instant disbandment of your entire IRA plus a penalty fee.)

So yes, anyone using a self-directed IRA should be cautious in engaging in transactions that would anger their friends at the IRS, because angering them could cost you big time.

What Will My Estate's Trustee Do?

How Big is Your Estate?

Does Your Trustee Have Solid Financial Skills?

What Are Your Family Dynamics?

Are You Compensating Your Trustee?

Conflict of Interest

Co-Trustees

3 Most Common Mistakes Found in DIY Estate Plans

1. Improper Signatures in Wills

2. Failure to Fund The Trust.

3. The General Forms May Not Address Your Unique Situation.

Solution: Get Help With Your Estate Plan From an Attorney

Why You Will Need to Legally Disinherit An Heir

What To Do If You Don't Want to Disinherit Your Heir: Use Stipulations in Your Will

Why You Need a Lawyer's Help With Estate Planning for Your Heirs

What is an Annuity and How Do I Get Out of One?

Cancelling Annuities: Beware the Surrender Penalty

Bottom Line: Know What You're Investing In

How Often Can I Do a Rollover?

Can You Rollover Funds From a Traditional IRA to Another Traditional IRA?

What If I'm Transferring Property That Isn't Money?

Can I Rollover Funds From a Qualified Plan to a Traditional IRA?

Can a Traditional IRA be Rolled Into a Qualified Plan?

Can I Rollover a Traditional IRA I inherited?

Are There Reporting Requirements For Traditional IRA Holders?

What Will The IRS do if You Fail To File Properly?

Reasons to Convert Your Traditional IRA/401 to a Roth

Roth IRA Conversion Doesn't Have to Be Forever

Three Situations Where Converting Your IRA or 401k Funds to Roth Is Your Most Profitable Option:

Expecting Higher Than Average Returns From An Investment Opportunity.

Low Income Year.

You'd Rather Have The Money Sooner Instead Of Later

Final Thoughts on Who Should Convert to a Roth

Use a Self-Directed IRA for Flipping Houses

Understand and Avoid UBTI & UBIT

"Regularly Carried On"

"Unrelated"

How Do The UBTI/UBIT Rules Apply to Flipping Homes?

What Happens If You Trigger UBTI or UBIT?

Final Thoughts on Flipping and UBTI/UBIT: One Size Doesn't Fit All

Who Benefits The Most From a Solo 401(k) Plan?

Roth Type Contributions

Flexible Investment Options

Loan Features

UDFI Exemption

Sky High Contribution Limits

Consolidation

Employee Elective Deferrals & Employer Profit Sharing

Total Limit

Cost-Effective Administration

Do Self-Employed Solo 401(k) Owners Need a Custodian?

Are There Any Administration Costs or Maintenance Fees With a Solo 401(k)?

The Beginning: The Kellermans File For Bankruptcy

The Kellermans' LLC and Its Alleged Prohibited Transactions

The Plot Thickens

The Court Rules Against The Kellermans

Case Outcome & Summary

What Real Estate Investors Can Learn From The Kellermans

Solo 401k Basics

What Are The Limitations Of a Solo 401k?

Solo 401k Contribution Rules

The 2 Kinds Of Solo 401k Contributions

What Are The Technical Requirements For a Solo 401k Plan?

The Presence of Self Employment Activity

The Absence of Full-Time Employees

What Is an Executor?

What is a Trustee?

The Difference Between an Executor And a Trustee

Responsibilities as an Executor or Trustee

#1 Understand the Estate Documents.

#2 Determine the Assets.

#3 Identify the Heirs.

#4 Identify the Creditors.

#5 Conduct the Proper Process.

#6 Final Tax Returns

Conclusion

This kind of funding isn't as uncommon as you might think.

How does it work?

What is a Self Directed IRA?

How to sell corporation stock or LLC units to Self Directed IRA's