Self-Directed IRA Bitcoin Investing

Bitcoin is constantly making headlines. We're getting a little sick of hearing about it, to be totally honest.

As Bitcoin becomes mainstream, we hear stories of the crypto-savvy investor buying Bitcoin in its early years and becoming a millionaire. Which leaves more investors asking, “Why not me?”

In 2021, IRA investors are increasingly diversifying with Bitcoin and other cryptocurrencies. Self-Directed Bitcoin IRA investing can deliver high yields along with the tax benefits of non-digital investment.

Here’s a brief primer on Bitcoin and three steps investors can take to start making their own Bitcoin investments using a Self-Directed IRA-owned Business Trust.

Here are the 3 most popular types of investments for our Self-Directed IRA clients. Reach out and we can help you decide whether or not they have a place in your portfolio.Bitcoin Basics

With cryptocurrencies, encryption is used to make new currency units and perform transactions. All this is done in a decentralized system and records are kept in a blockchain, which is a type of digital ledger.

Bitcoin, released in 2009 by Satoshi Nakamoto, is one of thousands of cryptocurrencies but is easily the most popular. Bitcoin must be stored using an online digital wallet or in a personal computer. Due to hacking concerns, some owners use a hardware wallet (a USB-like device protected with a PIN code).

Bitcoin Gets Attention From Investors

Bitcoin turned heads in the investment world by going from a price of under $1 in 2011 to $40,111 on January 14, 2021. The highs and lows have attracted headlines, as in December of 2017, when prices doubled in a matter of weeks. As I write this, its current U.S. value is $33,626.60.

Bitcoin’s wider adoption and impressive gains led to the “Bitcoin IRA," bringing the flashy new investment into the stodgy world of traditional retirement accounts.

Bitcoin Meets the IRA

A traditional IRA (individual retirement account) doesn't permit alternative investments such as Bitcoin and other cryptocurrencies. They're not really known for trying new things.

But what about the Self-Directed IRA (SDIRA), with its more flexible structure? The IRS doesn’t list Bitcoin as a forbidden investment (only list life insurance and collectibles are specified as non-permissible IRA investments). Check out our article, Our 3 Most Popular Self-Directed IRA Investments, to see what else is (and is not) permitted.

Using Your IRA to Invest In Crypto (4 Steps)How to Invest in Bitcoin Using a Self-Directed IRA

#1 Do Your Research

The information I’ve provided about Bitcoin is a good primer, but is by no means a substitute for doing your own due diligence. Be prepared for the uncertainty that surrounds Bitcoin as a new investment.

Also, since Bitcoin isn’t under a regulated system don’t expect the same type of publicly available financials you’d find with traditional stocks or mutual funds.

You can educate yourself on how the IRS deals with Bitcoin investments; a good cryptocurrency resource is Investopedia.

#2 Choose the Right IRA Custodian

The "custodian" is the financial services company that manages your retirement account for you. To learn more, check out our article, Why Your Self-Directed IRA Needs A Special Custodian.

Traditional IRA custodians won't even think about it, but if you're in the market for the self-directed version, you'll need to make sure your IRA custodian is IRS-approved and allows Bitcoin investments. Still, you probably won’t enjoy true checkbook control over your account.

Your SDIRA is self-directed (as the name says), but it isn’t “self-managed.” This means you can’t write a check out yourself for a Bitcoin transaction without a custodian approving the transaction. The processing time can hurt you when you're trying to buy or sell quickly. Also, the fees can add up when choosing this route.

This doesn’t mean you should give up on Bitcoin investing with a Self-Directed IRA. Royal Legal Solutions may be able to help you eliminate the custodial overhead. Many of our clients are Bitcoin investors who enjoy direct control over their IRA investments. Start with our investor quiz to see if you can take advantage of our custodial services.

#3 Choose a Good Cryptocurrency Exchange

Once your Self-Directed IRA is setup and you have direct access to your funds, you’re ready to purchase Bitcoin. Choose a reputable exchange and understand its fee structures. More importantly, be aware of any security flaws and hacking issues. Currently, Coinbase and Kraken are some of the most reputable exchanges.

#4 Choose a Good Cryptocurrency Wallet

For those new to cryptocurrency, this step may seem like the hardest to understand. A cryptocurrency wallet isn’t a physical wallet, although it can take physical form as a hardware digital wallet. Wallets are accessed via a private key, which is a hexadecimal code that you should guard just as you would a security box key. Like a bank account, the wallet holds your balance and a reference to all transactions. It’s also where you can send and receive currency. Think about security when choosing a wallet. Online wallets are convenient and usually offer a mobile version. However, they are susceptible to hackers. Hardware wallets are more secure because they hold the private key in an offline, unhackable device.

#5 Keep Your BTC Investments in Compliance

The “self-dealing” rules that apply to other alternative assets also apply to Bitcoin. For instance, an investor can’t sell Bitcoin to his own IRA nor can any of his family members. This can disburse the IRA or lead to a taxable event. Also, be mindful of annual reporting requirements which require market valuations similar to real estate properties.

#6 Enjoy Tax-Deferred Earnings

With a Self-Directed IRA you can apply the tax-deferral benefits enjoyed by other alternative investments towards Bitcoin. Bitcoin investments can grow unhindered as taxes aren’t applied till funds are disbursed, which can mean decades of growth.

#7 Explore Other Cryptocurrency Investments

Bitcoin is the most widely-known cryptocurrency. However, once you’ve gotten your feet wet in Bitcoin investing, you can expand towards others currencies such as Ethereum and Litecoin. Like Bitcoin, Litecoin has enjoyed tremendous growth. It’s second to Bitcoin in market capitalization, followed by Ethereum and Ripple.

When expanding your Self-Directed IRA, consider what advantages rival currencies have as an alternative to Bitcoin. For instance, Litecoin enjoys faster transaction times and a larger coin supply limit of 84 million compared to Bitcoin’s 21 million.

gold mining bitcoin - miner with pickaxeStart Investing Today

Like any other investment, investors should complete their due diligence, choose the right custodian and be aware of custodial fees. Check out our Using Your IRA to Invest In Crypto (4 Steps) article while you're at it.

Lastly, keep Bitcoin investments in compliance with IRS regulations. The unique steps Bitcoin investors need to make may be overwhelming at first. They include choosing a cryptocurrency exchange and digital wallet. However, once investors get their feet wet, they’ll be a step ahead in expanding their Self-Directed IRA towards other cryptocurrencies. For now, investors could start off with Bitcoin and other private investments using a Self-Directed IRA.

Articles of Incorporation Vs. Operating Agreement: What's The Difference?

When you're starting a business, you have to think about the boring stuff.

There are legal decisions to make. There are forms to complete. Although the paperwork can seem overwhelming, these documents are essential to keeping your operation running smoothly.

One of the common questions new small business owners have concerns articles of information vs. operating agreements. What’s the difference?

Articles of incorporation and operating agreements both outline the structure of a business and define its ownership. But each of these documents serves a unique purpose, and small business owners and real estate investors often mix them up or think they are the same thing.

To help you understand which document you need for your business—or if you need both—we'll examine the characteristics of each one, including their similarities and their differences. Don't be bored ... Getting this right on the first try will increase your chance of success down the road.

articles of incorporation vs operating agreement cat

Bored? Don't be. A profitable business is exciting!

What are articles of incorporation?

Articles of incorporation (also called a corporate charter or a certificate of incorporation) is a set of legal documents that establishes a corporation in the eyes of the state. These documents, which are typically filed with the secretary of state, give the business owner asset protection by separating personal assets from the business assets.

The information included in your articles of incorporation can vary according to the nature of your business and your state's requirements. However, these documents generally include the following elements:

If you are filing for incorporation as an LLC, you are not legally required to have articles of incorporation. However, if your business is an S or C corporation, you must file these documents with your state.

articles of incorporation vs operating agreement bored womanWhat is an operating agreement?

An operating agreement is a legal document that establishes internal operating procedures and defines the business relationship between the members (owners) of a limited liability company (LLC). All LLCs with two or more members should have an operating agreement to protect the business' LLC status, clarify verbal agreements in writing, and legally protect the agreement in the eyes of your state.

An LLC operating agreement should include the following elements:

Although not all states require Series LLC operating agreements, legal experts recommend having a written agreement (or bylaws) that outlines your business operations. In addition to helping your business run more smoothly, some financial institutions will require corporate bylaws before you can open an account or get a loan.

articles of incorporation vs operating agreement bored gifHow do articles of incorporation and operating agreements differ?

One way to look at the difference between these two legal documents is that articles of incorporation define a business as a corporation with the state, while an operating agreement defines how the business owners relate to each other. Therefore, the first one is a public document, while the second is more for internal use.

Another difference is operating agreements are often less formal than articles of incorporation and therefore are usually easier to update and adjust as the organization changes and grows.

How are articles of incorporation and operating agreements similar?

Articles of incorporation and operating agreements both outline your business structure and share some similar features. Both documents contain basic business information, such as its name, purpose, management structure, and how it will operate.

Another thing the documents have in common is that they both can contribute to the successful operation of a small business. 

articles of incorporation vs operating agreement bored man smallHow do you write articles of incorporation or an operating agreement?

Both articles of incorporation and operating agreements require wording that is specific to your business, your state's requirements, and your type of operation. Vague or general verbiage can create problems down the road.

For example, here are some problems to guard against in your legal documents:

An experienced legal professional can answer questions and provide help with operating agreements or articles of incorporation. The bottom line is that while these documents can be a headache to prepare when you are launching your new business, you will be glad later that you took the time to do them right.

 

 

Photo by PxHere
Image by Sandy Müller from Pixabay

The Revocable Living Trust: Your Estate Planning Secret Weapon

Having a sound financial plan makes sense for your future and your family's future.

You may be young. You may be new to real estate investing. But estate plans aren’t just for the wealthy; nor are they for those who are close to retirement.

Estate planning is for anyone who wants to lead a secure life in their retirement years and pass on their hard-earned assets to loved ones.

This article will examine a valuable estate planning tool: the revocable living trust. We'll see what this tool offers, how to create one, and delve into its advantages and potential disadvantages as part of your estate.

What is a revocable living trust?

A revocable living trust (also called a revocable trust) is a written legal document that specifies how you want your assets to be handled when you die.

Since it is a living trust, you create this document during your lifetime. And since it is a revocable trust, you can make changes to it at any time. The main advantage of a revocable living trust over a will is that your heirs will be able to avoid probate, and the details of your estate will remain private.

How do you set up a revocable living trust?

As the creator of the trust, you (the grantor) must name a trusted individual to manage and administer your trust after your death. If you prefer, you also could name a financial institution or legal office as your trustee.

Once you have established the trust, you can transfer assets, including bank accounts, investments, and real estate into the trust. Going forward, you can amend or change the trust whenever you choose to do so (keep that beautiful word "revocable” in mind). Any income generated by the trust's assets goes to you and is subject to taxation.

For some assets, you will need to have to notify insurance companies, banks, and transfer agents about the trust. You may need to update beneficiaries, get new investment certificates, retitle vehicles, and sign new deeds accordingly.

You should also consider establishing a pour-over will, a financial tool that allows unallocated or unfunded assets to "pour over" into your trust.

Irrevocable vs. Revocable Living Trusts

With a revocable living trust, you can change or even void a trust at any time during your lifetime. If you want to remove a specific beneficiary, you do that as well. No one needs to sign off on the changes; it is up to you as the grantor.

On the other hand, with an irrevocable living trust, the grantor gives away all ownership rights to the assets. Why would someone want to set up an irrevocable trust? The answer has to do with taxes.

Does a trust need to file a tax return? The IRS views a revocable trust as a grantor's trust and not a separate entity. The income from a revocable trust must be reported on the grantor's personal tax return. However, since the assets in an irrevocable trust are no longer yours, the trust itself pays all the taxes.

After the granter of a revocable trust dies, a revocable trust becomes irrevocable. No further changes can be made to the trust, and it works the same as an irrevocable trust.

What are the benefits of a revocable trust?

We've already stressed the main advantage of a revocable living trust: its flexibility. You’ll appreciate this benefit if you are doing your estate planning early in your career.

Here are some of the other benefits of this financial tool:

What are the disadvantages of a revocable living trust?

The initial process of creating a revocable living trust can be expensive and time-consuming if you aren’t getting help from an asset protection attorney near you. For example, you may need to get new titles for some of your real estate assets.

After you have created the trust, you need to update it every time you purchase a new asset or open a financial account. Any assets you do not place into the trust will become part of the probate process after your death.

Also, if your marital status or parental status changes, you will need to update the trust. These changes in life circumstances will not automatically be part of the trust.

What are the main differences between a revocable living trust and a living will?

Understanding living trusts is a bit of a learning process. You may be wondering if you need a living trust, a will, or both. The answer is both in many cases.

Both a living trust and a living will allow you to plan the distribution of your assets and name your beneficiaries. You also can revise each document as you wish during your lifetime.

However, a living will go into effect only after your death. A living trust covers your assets in three areas – while you're alive and well, if you're incapacitated, and after you pass away.

Another key difference is that a will must go through probate and become part of the public record. On the other hand, living trusts remain private and avoid probate.

If you have minor children, a will allows you to name their guardians. A revocable trust does not include this information. It only allows you to determine when your children can receive their inheritance and to name will administer the trust for your children until they reach age 18.

Whether a revocable living trust is right for your estate plan depends on your individual circumstances. You'll also want to consider the rules regarding trusts in your location since they can vary state by state. You may want to consider a land trust vs. a living trust. Unlike a living trust, which can hold any type of asset, a land trust holds only real estate or property-related assets such as notes, mortgages, and air rights.

As we've seen, revocable trusts do take some time and planning to create, but they have many long-term advantages for you and your beneficiaries. You can find some revocable living trust templates online, but we recommend that you consult your attorney to find out what best meets your needs and financial goals.

Is My Roth IRA Protected in a Bankruptcy?

Although relief available through the Paycheck Protection Program (PPP) and the CARES Act may have kept them afloat for a while, many businesses and individual investors continue to experience the economic fallout caused by the pandemic.

Chapter 11 filings were up about 20 percent in February 2021 over the same month in 2020, and because bankruptcy filings lag behind other signs of economic distress, experts predict the worst may be yet to come.

If you’re considering filing for bankruptcy, it’s natural to be concerned about your retirement accounts. In particular, you may be wondering about your Roth IRA bankruptcy protection.

Before 2005, certain retirement assets—including traditional and Roth IRAs—had some protections at the state level, but these protections varied from state to state. However, after President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, the federal government now protects the IRA assets of all U.S. citizens.

Under BAPCPA, the following retirement savings accounts are generally excluded from bankruptcy:

As you can see, only IRA assets have a dollar limit for their bankruptcy protection. This amount, which applies to traditional and Roth IRAs, was set in April 2019 and will be adjusted for inflation in 2022 and beyond.

roth ira bankruptcy protection: protekt yo'self before ya wreck yo' selfDo Roth IRAs Have Additional Bankruptcy Protections?

Both types of IRAs (traditional and Roth) offer tax advantages. The key difference between a Roth IRA and a traditional IRA is the timing of when you claim those advantages. With a traditional IRA, you take out contributions now and then pay taxes later. With a Roth IRA, you pay taxes on contributions now and then take out tax-free withdrawals later.

If you have rollover assets combined with your IRA contributory assets, and your IRA account balances are approaching the $1,362,800 limit, you may need to provide documentation showing how much of your IRA balances come from employer retirement plan savings.

Each state can still create additional laws regarding the types of property that may be protected from creditors, such as a home or a vehicle. And, in some states, people filing for bankruptcy have the option to choose between following the federal laws or the state laws regarding exclusions of personal property, depending on which one is more favorable.

To read more, check out our other resources:

What if your account is over the limit?

While BAPCPA does not offer creditor protection for Roth and traditional IRAs accounts above the current $1,362,800 limit, a bankruptcy judge has the authority to extend the protection if they believe your situation warrants it.

How to protect rollover IRAs

Under the terms of BAPCPA, a rollover IRA is either a Roth IRA or a traditional IRA that was funded initially by a qualified retirement plan. These “qualified” plans, including traditional pension plans, standard 401(k) plans, and some employee profit-sharing plans, are shielded from creditors in a bankruptcy.

To make sure that a rollover IRA from an employer-sponsored retirement plan has full protection, it’s a wise idea to create a separate account just for those assets. With separate accounts, the origin of the assets is easy to document in a bankruptcy proceeding.

What About Inherited Roth IRA Assets?

In a 2014 decision -- Clark v. Rameker -- the Supreme Court unanimously ruled that inherited IRAs should not have the same level of creditor protection as retirement plans under federal bankruptcy law.

The Supreme Court’s decision seems to be limited to IRAs inherited by someone other than a spouse. There are special tax code rules for spousal beneficiaries, including the ability for a surviving spouse to roll over the inherited IRA into their own IRA.

However, Clark v Rameker applies to Self-Directed IRAs (both the Roth and traditional varieties). A Self-Directed IRA is an account that does not have a “custodian,” meaning account holders are able to invest in “non-traditional” assets, such as real estate, precious metals, and renewable energy.

The court gave the following as reasons for the ruling:

It’s important to note that after an IRA is inherited by a beneficiary other than a spouse, the law sees the account in the same way as all other assets when it comes to creditor protection. That means that a creditor may be able to may obtain a judgment and a court order to seize a Self-Directed Inherited IRA.

However, as we noted earlier, some states give debtors a choice between handling their bankruptcies under federal or state guidelines. It’s worth finding out how your state stands on the issue since some states offer exemptions that are more favorable for Self-Directed Inherited IRAs and account holders with IRA balances over the dollar limit.

Parents of adult children who are spendthrifts or who are facing legal issues may want to set up a trust rather than passing their IRAs directly on to their children where, depending on their state, they may be seized by creditors.

To Wrap It Up ...

No one wants to think about bankruptcy, but this past year has thrown us some challenging circumstances. While many employer-sponsored retirement accounts are protected from creditors, it will put your mind at each to know for sure.

If you still have questions, speak with your plan administrator or your financial advisor.

 

 

 

Photo by Jason Dent on Unsplash

 

 

 

How To Create A California LLC (And Why You May Want To Reconsider)

It doesn't matter if you're just starting out or have been investing in real estate for a while; protecting your assets is vital. If you live in California, you might be considering creating an LLC in California to protect your investments. However, not only can the process of forming a California LLC be cumbersome and confusing, but other business structures may actually provide you with better asset protection in California than an LLC.

Creating A California LLC: A Play-By-Play

Before we have a chat about your other options, let’s walk through the steps for forming an LLC in California, in case you decide it’s the right choice for you.

Step One: Register With The Secretary Of State

To create your LLC, you’ll need to register with the California Secretary of State. First, you’ll need to choose a unique name for your business and submit a Name Reservation Request Form to the Secretary of State. This submission will reserve your name of choice for 60 days.

Under California law, the LLC name must include one of the following LLC identifiers: 

Before the 60 days is up, you’ll need to file Articles of Organization (Form LLC-1) with the Secretary of State to formally register your business. 

Your Articles of Organization must include the following information:

Step Two: File A Statement of Information

Within 90 days of filing your Articles of Incorporation, you’ll also need to file a Statement of Information (Form LLC-12) with the California Secretary of State. You’ll also need to file an updated Statement of Information every two years to keep your business active.

Your Statement of Information must include the following information:

creating an llc in california: golden gate bridge

Step Three: Register With The Franchise Tax Board

On top of the taxes you’ll have to pay to Uncle Sam, you’ll also need to pay state taxes to California. To pay your California taxes, you’ll have to register with the Franchise Tax Board. To register to pay your taxes online, call the Franchise Tax Board at 1-800-353-9032 (or 1-916-845-2829 if you’re outside the U.S.) to begin the online registration process. If you prefer, you can also file your taxes by mail with Form 568.

Step Four: Register With The EDD and Request An EIN

If your LLC will have employees, you’ll need to register with the California Employment Development Department (EDD) and request an Employer Identification Number (EIN), also known as a federal tax ID, from the IRS. 

To hire legally in California, you need to register for a payroll tax account number on EDD’s website. You’ll also need to request an EIN from the IRS using Form SS-4, which you can submit online, to set up payroll and pay federal payroll taxes. Even if you don’t intend to hire employees, you may want to apply for an EIN anyway, as it can make it easier for your business to open a bank account and apply for business permits.

Step Five: Apply For A Seller’s Permit

Finally, if you intend to sell or lease any goods, products, or tangible property subject to sales tax through your LLC, you’ll need to register online for a free seller’s permit from the California Department of Tax and Fee Administration. Under California law, you need to obtain a seller’s permit and pay sales tax on items that you sell.

Other Important Steps

California law requires your LLC to have an Operating Agreement that outlines:

While California allows you to have either a verbal or written Operating Agreement, it’s strongly advised that you create a formal written Operating Agreement for your LLC to help preserve its limited liability status. Operating Agreements are internal business documents, so while you do need to have one, you don’t have to file it anywhere.

Similarly, opening a separate bank account for your business is not required, but it is an essential step for separating your business assets from your personal assets. If you commingle your assets, you may risk losing your limited liability status if your business is ever sued. 

Disadvantages Of A California LLC

The LLC has been around for a long time and is one of the most popular forms of business entity in the United States. And it's easy to see why. But there are some disadvantages to this form of ownership, too, particularly in the state of California.

A significant disadvantage of a California LLC is the high costs of starting and operating an LLC in the state. In fact, LLCs in California must pay an annual $800 tax to the Franchise Tax Board, plus additional fees if the LLC’s total income is more than $250K. 

California has also been particularly reluctant to accommodate LLCs from other states and Series LLC. If you want to start a California Series LLC, be prepared to pay $800 each year for each series. 

Alternatives To A California LLC

Other business structures can provide Golden State real estate investors with better protection than a California LLC and save your hard-earned cash at the same time.

Delaware Statutory Trusts

If you’re wondering how to avoid California’s franchise tax, the Delaware Statutory Trust (DST) may be your best option. As a trust structure created in Delaware, assets held in a DST are not subject to the $800 annual franchise tax in California. You can even use a series structure with a DST to enjoy the benefits of a series LLC without the exorbitant taxes. 

Land Trusts

Up until recently, the answer to “does California recognize land trusts?” was no. Recently, however, California began to recognize land trusts, allowing real estate investors to protect their investment properties without having to pay oppressive franchise taxes. A California land trust can also be used to hide property ownership, avoid probate, and create additional protections against California’s community property laws for married investors. You may also want to consider a title-holding land trust, commonly referred to as an Illinois Land Trust. 

California Business Trusts

IRA business trusts are an excellent alternative to a California self-directed IRA LLC, as business trusts aren’t subject to franchise taxes. As with an LLC, you maintain complete control over your assets and investments without having to pay costly custodian fees. However, it’s important to note that a California business trust doesn’t offer the asset protection you would get from an LLC. 

What Is the Roth IRA 5-Year Rule?

The Roth IRA 5-year rule sounds like it is far from the sexiest topic in the world.

However, if you invest in a Roth IRA, it’s crucial that you understand it unless you’re cool with paying extra taxes. You’re not? We didn’t think so.

Following the 5-year rule when taking funds out of your Roth IRA can help you avoid taxes and substantial penalties.

This article seems a little sexier now, doesn’t it?

Keep on reading if you want to learn more about how understanding the 5-year rule can save you serious cash.

What Is the Roth IRA 5-Year Rule? sexy man and woman

Self-Directed IRAs: The Sexiest of All Retirement Accounts?

What Is An IRA?

An IRA (short for Individual Retirement Account) is a retirement savings account you can open and manage without going through an employer. Traditional IRAs are “tax-deferred,” which means that you can invest pre-tax funds in the account. With a traditional IRA, you can contribute up to $6K of pre-tax income each year. Once you hit 50, that annual limit jumps to $7K. 

While you can invest in a traditional IRA with pre-tax money, you know Uncle Sam isn’t going to let you avoid taxes forever. Once you turn 72, or 70½ if you hit 70½ before January 1, 2020, the IRS is done waiting for its tax money. You’ll have to start taking required minimum distributions (RMDs) each year, and, unsurprisingly, you have to pay income taxes on them. 

What Is A Roth IRA?

While you use pre-tax income to invest in a traditional IRA, Roth IRAs are the exact opposite. With a Roth IRA, you are only allowed to invest post-tax income. However, for many people, Roth IRAs actually offer more significant tax benefits and more flexibility.

First, since you already paid taxes on the money you invest, the IRS won’t make you take RMDs from a Roth IRA. You can keep your money invested and keep earning more and more income. And the kicker is, you don’t have to pay taxes on your earnings. Unlike traditional IRAs, you pay income tax on the amount you invest, not the amount you take out, so any money you make with your Roth IRA investments is almost always tax-free! 

Income and Contribution Limits 

Of course, the feds have to put SOME restrictions on the awesomeness of Roth IRAs. As with Traditional IRAs, you can only contribute $6K each year ($7K for our 50+ friends). There are also income requirements for who is allowed to use a Roth account. As of 2021, phase-out amounts for married couples who file jointly are $198,000 to $208,000 and $125,000 to $140,000 for single people and heads of households.

What Is The Roth IRA 5-Year Rule?

Now that we’ve given you way more information about Roth IRAs than you probably needed let’s move on to what we’re actually supposed to be talking about: The 5-year rule. While you can always withdraw contributions you have made to your Roth IRA without taxes or penalties, the Roth IRA 5-year rule refers to the five-year waiting period imposed on some withdrawals from a Roth IRA account. There are three circumstances where the 5-year rule applies: earnings withdrawals, conversions from a traditional IRA to a Roth IRA, and inherited Roth IRAs.

Withdrawing Earnings

The most commonly encountered situation involving the Roth IRA five-year rule is when attempting to withdraw money that you earned from account interest rather than money that you contributed to the account. 

For earnings withdrawals to be tax-free, you must withdraw the earnings at least five tax years after the date you made your first contribution to any Roth IRA you own. You must also be at least 59½ years old. This means that even if you are over the age limit, you have to wait until it has been five years since your first contribution to take out your earnings without taxes or penalties.

Converting A Traditional IRA To A Roth IRA 

The second way the five-year rule applies to Roth IRA withdrawals is when you convert a traditional IRA or a traditional 401(k) to a Roth IRA. Since traditional IRAs and 401(k)s are funded with pre-tax money, you have to pay taxes on any funds you convert from a traditional account to a Roth IRA. 

Once you convert to a Roth IRA, you’ll have to wait five years to withdrawal any converted funds. This can get confusing because each conversion has its own five-year waiting period before you can withdraw the funds tax- and penalty-free.

However, IRS rules state that when you take money out of a Roth IRA, the oldest conversions are considered to be withdrawn first. When the IRS decides whether your distribution should be subject to early-withdraw penalties, the order of withdrawals are contributions first, followed by conversions, and then earnings. 

Say, for example, that you have $100K in a Roth IRA - $75K in contributions; $20K in conversions; and $5K in earnings. If you were to withdraw $80K from the account, the IRS would consider you to have depleted your contributions before moving to converted funds, so only $5K of your balance of conversions would need to comply with the 5-year rule. 

Inheriting A Roth IRA

The rules surrounding inherited IRAs can be incredibly confusing, but fortunately, applying the 5-year rule to inherited Roth IRAs is relatively straightforward. When the owner of a Roth IRA passes away, a beneficiary who inherits the account can withdraw contributions or earnings without penalty as long as the Roth IRA has been open for five years. If not, you’ll need to wait until you hit the five-year mark before withdrawing any earnings if you want to avoid a penalty. However, you can still take out all of the contributed funds regardless of the age of the account.

Never Hurts To Double-Check

We’ve covered the basic principles about the 5-year rule in this article, but many other factors must be considered before withdrawing funds from a Roth IRA. We recommend consulting with your lawyer or CPA before taking an unscheduled distribution from your Roth IRA to ensure you won’t suffer penalties or have to pay taxes.

Especially when it comes to your money, a second opinion is very sexy indeed!

Taxes For An LLC: How the IRS Sees Your Limited Liability Company

If you're a real estate investor, you should be aware of how the tax code and the way you structure your business will affect how much money Uncle Sam takes from your bank account.

For example, the IRS has a lot to say about your Limited Liability Company (LLC) and how taxes for an LLC are handled.

If you don't already have one, it's time to create an LLC. Not only does owning your properties and other investments through an LLC protect you from liability, but it can also save you some serious tax dollars if you make the right elections for your business.

Buckle up! It’s time to learn the basics of how the IRS sees your LLC and what the tax benefits of an LLC are.

What Is An LLC?

An LLC is a business structure that offers its owners limited liability from the business’s debts. That means if you are the owner of an LLC, your personal assets are protected from any debts or obligations incurred by the company. You and your LLC are considered to be separate legal entities.

This type of legal structure is helpful for real estate investors because it's cheaper and easier to create than other entities like a corporation but still offers the all-so-crucial protection from personal liability.

The people or entities that own an LLC are called its “members.” There is no maximum number of members an LLC can have, and most states will allow single-member LLCs, which have only one member, to be formed.

LLC Tax Classifications

For the purposes of taxes, LLCs are considered “pass-through” entities. This means that LLCs do not pay taxes. Instead, the LLC’s profits are reported on its members’ income taxes. However, depending on the number of members in the LLC and the tax elections chosen for the business, the IRS will treat an LLC as a corporation, partnership, or a disregarded entity.

Disregarded Entities

If you own a single-member LLC, the default tax status for your business is called a “disregarded entity,” which means that the IRS ignores your LLC entirely and just considers its profits to be your personal income. This is the same way that the IRS taxes sole proprietorships. When you file your federal income tax return, you will also need to submit a Schedule C form, which details the profit or loss from a sole proprietorship.

Many states also allow LLCs to be treated as a disregarded entity when the LLC is solely owned by a married couple. However, if you form a married-couple LLC in a community property state, it will be taxed like a multi-member LLC, so it’s crucial that you do your homework before making any decisions.

Partnerships

The IRS will automatically tax multi-member LLCs like a partnership, which means that each member will receive a Schedule K-1 and include their portion of the LLC’s profits as taxable income on their personal income taxes. When LLCs are taxed as partnerships, each member must also include a completed Form 1065 for partnership taxation with their tax returns.

Corporations

Although the default tax classification for an LLC is either a disregarded entity or a partnership, members of an LLC may choose to be taxed as a corporation by submitting Form 8832 (Entity Classification Election) to the IRS. For tax purposes, there are two varieties of corporations- S-Corporations and C-Corporations.

Like LLCs, S-Corps are pass-through entities, where corporate income, losses, deductions, and credits are passed through to the business’s shareholders for federal tax purposes. With C-Corps, on the other hand, the business itself is taxed, and then each shareholder is taxed again on their earnings when they pay personal income taxes.

C-Corps are generally not the best choice for an individual real estate investor, but, in some situations, an S-Corp can save you a significant amount of moolah on single-member LLC self-employment tax.

While you must pay yourself a reasonable salary from the LLC’s profits, you can receive any income your business makes on top of your salary as a shareholder distribution instead of in a paycheck. Because the IRS considers distributions to be “passive” income, you don’t have to pay self-employment/ payroll taxes on the money you receive as a shareholder distribution.

However, this move only pays off if your LLC makes enough income to support a reasonable salary for yourself on top of shareholder distributions. Generally, this threshold is around $75K annually for a single-member LLC, but this can vary depending on your particular circumstances.

What Is The Best Tax Classification For My Business?

Unfortunately, this is not a question that any blog or article can answer for you. Not even the all-mighty Google can give you advice on this issue. Because everyone’s circumstances are different, we strongly recommend that you meet with a business attorney or tax professional to discuss the tax classification that will save you the most money.

How Does A Reverse Mortgage Work?

Actor Tom Selleck (Magnum, P.I.) is the latest celebrity shilling for them on television.

Maybe you have an older family member or neighbor who has gotten a phone call from a financial institution offering them.

But what are reverse mortgages and how do they work?

If you are a senior homeowner with most of your net worth tied up in your home, these loans can sound pretty appealing. If you're a real estate investor, you may be wondering if you can use a reverse mortgage to your advantage.

In this article, we'll explain what a reverse mortgage is, the pros and cons this cashflow option can offer to some older Americans, and how you can decide if it's right for your financial strategy now or in the future.

what is a reverse mortgage hand holding coffeeWHAT IS A REVERSE MORTGAGE?

 A reverse mortgage is a type of federally insured loan available to Americans age 62 and over. It gets its name because it works in the opposite way as a standard home loan.

With a regular mortgage, the bank gives you a lump sum that you pay back with interest over a set period of time.

With a reverse mortgage, the lender makes payments to YOU based on the equity you have built in your home. You have the option of receiving monthly payments, a lump sum, a line of credit, or a combination of the different options.

 Over time, the amount you owe in interest and fees on the loan grows while your home equity declines. You retain the title to your home, and the balance isn't due until you or your heirs sell your home. 

WHO QUALIFIES FOR A REVERSE MORTGAGE?

Reverse mortgages are only available to a specific set of homeowners. In order to qualify for a reverse mortgage, you must: 

Reverse mortgage loan values may be influenced by the home's value, how much equity is in the house, and other factors. And older borrowers are eligible for greater total loan amounts because age directly correlates with limits. 

what is a reverse mortgage dog wearing glassesWHAT ARE THE ADVANTAGES OF A REVERSE MORTGAGE?

With life expectancy in the U.S. growing closer to 80 years, many Americans are outliving their personal retirement savings. As a result, they may be unprepared for the rising cost of living and the mounting medical expenses that often accompany aging.

Reverse mortgages are ideal for older homeowners who may not have much in the way of savings or investments but who have built up wealth in their homes. In other words, this type of loan allows you to turn an otherwise illiquid asset into a liquid asset without having to move out of your home.

Whether they're living with the results of an investment gone awry or the difficulties of a fixed income, any senior with cash flow issues may want to consider a reverse mortgage.

Here are some of the other attractive features of these home loans.

 FLEXIBLE LENDING OPTIONS

 This type of loan offers flexible disbursement options, meaning you can borrow only the amount you need. Investors may choose to accept the loan as a single lump sum, in monthly installments, or even as a line of credit. This amount of control the borrower has in this regard is greater than most loans.

 If your need is more about your long-term budget, try to put a number on what you need for, say, one year. This amount will help you and anyone helping with your financial planning determine what a conservative loan amount for you might be.

 MORE CASH ON HAND

 For some cash-strapped retirees, a reverse mortgage allows them to remain in their long-time homes without having to downsize. Some borrowers even use the proceeds of a reverse mortgage to pay off their existing home loan.

You can use the money from your reverse mortgage for any purpose, including:

 We'll discuss below why you'll need to account for reverse mortgages in your estate plan. However, if you just want to live out your golden years comfortably, you can do so and even plan to pay off your mortgage at the same time.

Lock In the Value Of Your Home

If we've learned anything about the economy in recent years, it's that anything can happen. If for whatever reason, the value of your home ends up being less than the amount owed on the reverse mortgage, you are protected. In practical terms, that means, if home prices fall in your area, you or your heirs won't have to worry about paying the balance. 

INTEREST LIMITS

 The reverse mortgage has an interesting set of rules regarding interest. On the plus side, you're not charged interest while you continue to live in the reverse-mortgaged home as your primary residence. Interest is also capped on the first $100,000 worth of debt.

NO TAX LIABILITY

 The IRS considers the funds you receive from a reverse mortgage as a loan advance rather than income. That distinction means the money is not taxed, unlike other retirement income from distributions from a 401(k) or an IRA.

what is a reverse mortgage chess setWHAT ARE THE DISADVANTAGES OF REVERSE MORTGAGES?

A reverse mortgage isn't for everyone. There are some risks to this type of loan that you should carefully consider.

Here are some of the potential downsides of taking out a reverse mortgage.

DECEPTIVE OR INFLEXIBLE TERMS

 Although we have come a long way since the unscrupulous practices by some lenders in the 1990s and early 2000s, not all reverse mortgage providers are ethical. Some will assume you won't do your due diligence and will take advantage of you.

 Carefully vet a financial company before considering a loan, and have someone you trust to read the fine print. This person could be a CPA, financial planner, family member working in the industry, or even another investor you know who's successfully used a reverse mortgage and knows what to look for in a loan agreement.

 You're examining the documents for any terms that the sales reps haven't disclosed. Any added terms should serve as red flags that you need to shop around with other lenders.

 Also, be on the lookout for inflexibilities. For instance, reverse mortgages are often challenging to refinance. Ask your salesperson about your refinancing options, and then be sure to see how these claims compare with the written agreement. Any time a salesperson's word vastly differs from a written offer, it may be time to walk away.

Here are some tips for avoiding reverse mortgage scams from the FBI and the U.S. Department of Housing and Urban Development (HUD):

 REVERSE MORTGAGES ARE NOT FREE

 Some of the unscrupulous ads of the past have promoted reverse mortgages as a means to get free access to your own money. These loans do have the following costs associated with them: 

You may have the option of rolling some or all of these fees into your loan balance, but, of course, if you choose to do that, you'll receive less money.

YOUR LOAN MAY BECOME YOUR FAMILY'S DEBT

If you fail to make an estate plan or somehow account for a way to pay your debt after your death, your reverse mortgage may be subject to probate. Probate can take time and cost money, and in the meantime, your heirs do not have access to your estate.

If you die with debt, the debt gets passed on, just like your assets and earnings do. You can offset this downside of a reverse mortgage in two ways:

Our suggestion is to take care of this critical detail immediately after seeking the loan. You may pay it off during your lifetime or pre-arrange for your estate to make payments. However, interest is likely to increase if you delay, and your beneficiaries must pay off the debt.

ASSETS ENCUMBERED BY DEBT CAN'T PASS TO HEIRS

Let's say you take out a substantial loan against your home's equity. If you pass away before making payment or fail to update your estate plan, your heirs may be unable to inherit the home until the loan is paid off in full. If you lack the funds in your estate, that could mean one less asset for your heirs. 

Also, it's important to remember that a reverse mortgage diminishes the equity you have in your home. By the time the loan needs to be paid off, there may much equity left for your heirs to inherit. 

Difficulty SECURING OTHER LOANS

A reverse mortgage is relatively easy to obtain if you meet the qualifications, but it doesn't necessarily "look good" to traditional hard lenders. Some seniors who take out reverse mortgages may find it difficult to secure additional lending elsewhere. This factor can be problematic for investors who rely on good terms to make their deals profitable. 

This type of loan also could limit your ability to qualify for other need-based government programs such as Medicaid or Supplemental Security Income (SSI).  

SHOULD YOU GET A REVERSE MORTGAGE?

If, after weighing the pros and cons of a reverse mortgage, you're still unsure if it is right for you, here are some factors to consider. A reverse mortgage could be a good option for you if:

As with taking on any form of debt, you should take your time deciding on a reverse mortgage. Although it is a relatively easy way to boost your cash flow in the short term, it could put your finances at risk down the road.

Make sure you fully understand the pros and cons of reverse mortgages and enlist the help of professionals to help you make the judgment call. Even a close network of fellow homeowners and savvy borrowers with experience in reverse mortgages can be a valuable source of information.

Learn everything you can about these financial tools, shop smart for a lender, read the written loan terms carefully, and be sure to ask plenty of questions. If a reverse mortgage doesn't feel like it's for you, you can always explore other financial options.

 

 

Why Do Independent Contractors Love the S Corps? Short Answer: Lower Taxes!

Independent contractors and real estate investors love S corporations (S corps). That's because an S corp provides significant advantages over sole proprietorships or traditional corporations—both in terms of limited liability and reduced taxation.

Introduction to S Corporations

An S corp is not a separate type of business entity. Rather, it is a designated tax status for businesses that meet these criteria:

An S corp otherwise follows all the other requirements of a traditional corporation. It has a board of directors, drafts corporate bylaws, has shareholder meetings, and keeps meeting minutes of company meetings.

Why Do Independent Contractors Love the S Corps? Short Answer: Lower Taxes!

Advantages of S Corporations For Independent Contractors

Compared to sole proprietorships and traditional corporations, S corps have several benefits, including lower taxes and reduced legal liability.

To receive these benefits, the corporation must register as an S corp. You'll do this by filing IRS Form 2553. This form essentially states that the corporation meets the requirements listed above and that all shareholders consent to the registration.

Reduced Legal Liability

If you operate as a sole proprietorship and get sued, all of your personal assets are at risk. For example, assume you do business as a sole proprietorship and own $200,000 worth of real estate at 100 North Street. You also have $6.2 million in other personal assets.

If you get sued as a sole proprietor, all of your assets ($200,000 + $6.2 million = $6.4 million) could be subjected to liability. However, assuming your S corp is in good standing and complies with all legal requirements, if someone sues you for an issue related to the property at 100 North Street, your liability could be limited to $200,000.

Taxation Benefits

S corps have huge taxation advantages because business income passes directly to the shareholders. There’s no separate corporate tax—only the shareholders are taxed. This is known as the “pass-through” concept and is a distinct advantage over sole proprietorships and traditional corporations.

For the independent contractor or self-employed real estate investor, this means that you are the owner and employee of the company. As an employee, you pay yourself a reasonable salary and are taxed on that - while the S corp itself pays no taxes.

Before discussing the advantages of an S corp over a sole proprietorship or traditional corporation, you need to understand what constitutes a reasonable salary.

How The Self-Employed Determine 'Reasonable Salary'

An S corps’ shareholder-employee must be paid a reasonable salary as compensation. It is treated as employee wages for tax purposes. The IRS requires the salary to be reasonable because it pays the self-employment tax (i.e., it funds Social Security and Medicare). Check out our article, Using Your S Corp: Payroll Taxes for the skinny.

It is critical to get the reasonable salary right because the IRS will be taking a close look—trust us on this. Fortunately, the IRS has published factors to consider when determining the appropriateness of a salary. IRS Form FS-2008-25 provides these factors, listed verbatim here:

There are other factors as well, but they only become relevant when the S corp has multiple employees. For the individually-owned S corp, which is typical of many independent contractors and real estate investors, these do not apply.

There are many rules of thumb for estimating reasonable compensation. Presented in terms of salary per total business profits, they range from 33:67 to 50:50 to 60:40. However, instead of relying on generic guesses, we recommend hiring a certified public accountant or lawyer to estimate the percentage of business profits devoted to salary.Understanding the principles of accounting is crucial for this, as it helps ensure accurate financial management and compliance with tax regulations. If you want to gain deeper insight into the profession and its responsibilities, you can start by reading the article How To Become a Public Accountant.

Here’s are examples of how S corp taxation works compared to sole proprietorships and traditional corporations.

S Corporations Vs. Sole Proprietorships

Let’s assume you are an independent contractor or a real estate investor with a sole proprietorship. Last year, you made $100,000 in profits. As a sole proprietor, you pay a 15.3 percent self-employment tax, or $15,300, in taxes.

Now let’s assume that you have an S corp, and you’ve worked with your accountant or lawyer to arrive at a reasonable salary of $60,000. In this case, because the S corp profits themselves are not taxable, you would only pay the self-employment tax on your salary. That would be $60,000 x 15.3 percent = $9,180. So, being structured as a corporation with S corp registration, instead of a sole proprietorship, would save you $15,300 - $9,180 = $6,120 in federal taxes.

S Corporations Vs. Traditional Corporations

A traditional C corporation not registered as an S corp would pay federal taxes on both the corporation’s profits and the employees’ salaries. This likely would be significantly more than the amount paid solely by an S corp employee.

To learn more, check out our article Series LLCs and S Corporations: Which Is Best For Your Business?

Conclusion

If you are an independent contractor or real estate investor, consider structuring your business as a corporation registered with the IRS as an S corp. Our legal experts at Royal Legal Solutions can discuss your options, including the calculation of a reasonable salary under an S corp ... So don't hesitate to reach out if you have any questions about this strategy!

Solo 401(k) Compliance for Real Estate Investors

Don’t worry about Solo 401(k) compliance. Let our experts do it for you.

A Solo 401(k) can be a clever and efficient way to save for retirement. But what many plan owners don’t consider is the importance of their plan’s compliance with law and regulation.

Fortunately, Royal Legal Solutions can handle this for you. You don’t have to spend time learning the ins and outs of prohibited transactions or ever-changing legal requirements when our experts are on your team.

Solo 401(k) Compliance For Real Estate Investors can include a broad variety of services to ensure your plan isn’t running afoul of the law or regulations. Most of all, investors must avoid making prohibited transactions, which can incur costly penalties. Royal Legal Solutions offers a comprehensive subscription service to allow you to stay compliant.

Yes, you can, but we don’t recommend it. Unfortunately, non-compliance can be very expensive in fees and penalties and lost time. Since mistakes can be expensive and this subject is complex, many of our clients are relieved when professionals assume the responsibilities. And rightly so.

Hiring Royal Legal Solutions to handle your Solo 401(k) Compliance takes the hard work off your own plate. Our team is well versed in current regulations and performs regular research to stay ahead of the curve. To learn more you can check out our Solo 401(k) articles and videos. You may want to start with our Solo 401(k) For Real Estate Investors.

NOT AS SIMPLE AS IT SEEMS FOR REAL ESTATE INVESTORS

The factors to consider when checking for compliance are beyond most people’s common knowledge. You may actually be surprised about what you don’t know regarding the conditions for keeping your Solo 401(k) compliant.

Did you know that you need to update your plan at least every six years? Are you currently tracking all sources of income into the account? Do you know which form you need to file with the Department of Labor, and when? Do you know that your income can influence which form you need?

Is your head starting to spin from the very prospect of all this paperwork?

It’s okay if you answered “no” to any of these questions. These are things that all account holders should be doing, or having done for them by a firm like ours. Our attorneys and other seasoned legal pros have devoted years to studying the subject so you don’t have to.

MAKES SOLO 401(K) COMPLIANCE EASY

With our legal experts handling your solo 401(k)’s compliance, you don’t have to. We have the knowledge and skills to ensure your plan’s compliance, while you continue to focus on your other priorities.

For the absolute highest level of service, consider pairing the Solo 401(k) with the Royal Protection Plan, our option for investors who want all of the paperwork taken care of. Sit back, relax, and enjoy the convenience of our subscription format. You can put all of that paperwork out of mind and direct your time and attention back to running and growing your business.

WHAT’S INCLUDED IN SOLO 401(K) COMPLIANCE SERVICES?

FILING SERVICES
If you never want to stress your 5500 or 5500-EZ deadline again, our filing services are exactly what you need. Let our experts stay on top of your paperwork.

MONITORING FOR PROHIBITED TRANSACTIONS
The ins and outs of prohibited transactions can be deceptively complex. If you’d rather not worry about incurring the fees they cause, let our experts help out. We keep our eyes peeled to ensure your plan’s transactions are on the up-and-up. Of course, we are always here if you have a question about a given transaction.

ENTITY COMPLIANCE FOR SELF-DIRECTED IRAS AVAILABLE SEPARATELY
If all of this sounds wonderful but you’re using an IRA instead of a solo 401(k), we can also assist you with compliance for that retirement plan.

Investors love the Solo 401(k) for its asset protection and tax sheltering applications. Let Royal Legal Solutions show you why.

IRA For Real Estate Investors

Get more control of your retirement plan, your investments and your real estate assets.

WHY USE ROYAL LEGAL SOLUTIONS?

We have experience in setting up the best asset protection structures and making them easy for an investor to use. Our system keeps things simple while making sure your needs are met.

With the Self-Directed IRA For Real Estate Investors, retirement plan isn’t limited to stocks, bonds, mutual funds and bank CDs.

The Self-Directed IRA lets you grow your retirement savings with smart real estate investments.

At tax time, you’ll report everything on Schedule E of your personal return (if you’re an individual/married partners) or a partnership return (if unmarried partners). You don’t need multiple bank accounts as long as you have accurate accounting records.

Before you go, check out the rest of our articles and videos about the Self-Directed IRA. You may also be interested in our Self Directed IRA Business Trust.

How The Qualified Personal Residence Trust (QPRT) Shields Your Home From Estate Taxes

A Qualified Personal Residence Trust (QPRT) is a specific type of irrevocable trust that allows you to remove your primary residence or another personal home from your taxable estate. While creating can be a QPRT complicated process, doing so lets you avoid estate taxes and reduce the amount of gift taxes you have to pay.

And guess what? When the feds take less, your heirs get to keep more of the wealth you’ve worked your whole life to accumulate. 

Keep reading to learn more about QPRTs, and when you're done, check out our article Three Ways To Properly Legally Protect A Personal Residence to discover more asset protection tips for your personal home.

qualified personal residence trust: young child catching football

How Does a QPRT Work?

For estates of several million dollars or more, a QPRT can allow you to keep the value of the home out of part of your estate that is subject to estate taxes. Although the QPRT is not used as often as other estate planning tools, it can save you a significant amount in taxes.

In order to create a QPRT, you have to transfer the title to your home to a trust. However, as part of the terms of the trust, you’ll include a provision that allows you to continue to live in the home for a specific period of time before passing to your heirs. The time in which you can continue to live in the home is known as a qualified term interest or a retained income period. So, while you won’t own your home anymore, you can still live there until this period expires.

How Does a QPRT Avoid Estate Taxes?

While there is technically no limit on how long you can keep your interest in the home, if you pass away before the end of your qualified term interest, the value of the home will be included in your taxable estate. So, you should always make sure the term chosen makes sense given your age and future life expectancy. 

If you survive until the interest expires, the title to the home will pass to your heirs and will not be included as part of your estate upon your death. After your heirs inherit the property, you can pay rent, relocate, or figure out other living arrangements. Any rent payments you make to continue living in the home will further reduce the value of your taxable estate. 

QPRTs and Gift Taxes

Although a QPRT can help you avoid estate taxes, Uncle Sam isn’t going to let you get off scot-free: the transfer of your home is subject to gift taxes. However, since you’re retaining a qualified term interest, the property’s gift value will be lower than its fair market value, which means you’ll owe less in gift taxes.

This deduction can translate to significant savings, particularly when younger homeowners set up QPRTs with extensive qualified term interests. The longer the retained income period, the lower the gift value of the home, the lower your tax bill from the IRS. Just remember that you have to outlive the qualified term interest for your heirs to reap the rewards of your estate planning. An experienced estate planning professional can help you decide on the most strategic term for your situation. 

Another way a QPRT saves you money is by avoiding gift taxes on appreciation. When you transfer your home to the trust, you pay the gift tax on its current value, even though the title won’t pass to your heirs for years to come. That means that any increase in your home’s value during your qualified term interest won’t be subject to the gift tax, which can also save you a substantial chunk of change.  

Why You Should Talk To A Pro

While the QPRT can be a great estate planning tool for shielding your home from estate taxes, it’s not the right solution for everyone. It’s important to keep in mind that specific requirements must be met to qualify for the tax savings. There is also a complicated set of special QPRT/grantor trust valuation rules for estate and gift tax purposes, which are outlined in Internal Revenue Code §2702 and related regulations. 

As with most estate planning strategies, you should consult with an attorney who specializes in this type of law to determine if a QPRT is right for your situation. An estate planning lawyer who knows their stuff can help you decide on the best methods for saving your money from the IRS, determine if you can qualify for a QPRT and make sure it’s set up correctly if you choose to take that path. 

 

Property Transfers for Real Estate Investors

For Complete Protection You Must Have A Properly Drafted Deed Transferred Into An Series LLC Structure

Our property transfer service helps real estate investors move their investment properties into new corporate structures.

Whether you have a property you need to get out of your personal name, are acquiring a new property, or wish to transfer a real estate asset to a business partner or friend, the Royal Legal Solutions property transfer service can help you.

What's included with the Property Transfer?

Our property transfer package includes three related services: drafting the Deed, forming the Anonymous Land Trust, drafting the Series Document, and the Series Operating Agreement.

Do I have to use all three services?

Of course, you could order any of these services individually. However, Royal Legal Solutions offers them as a package deal to save your hard-earned money as we construct the most powerful asset protection plan possible.

Why would I need all three services?

Many of our clients also appreciate the convenience of transferring property with us. When you use the three services we offer in the package together, you can rest easy knowing that the asset is secured from unnecessary liability.

Who Should Use Our Property Transfer Service And Why?

This service is designed for those who already own a Series LLC or plan to buy one. For your Series LLC to give you the most protection possible, you must have a properly drafted deed that is properly transferred into the Series LLC structure. For a property to be incorporated into that structure, you will need an accurately drafted and legally binding Series Document and series OPAG.

These structures separate your assets and preserve your anonymity. When used together, you become a serious pain to sue. Not only will it be nearly impossible to prove you own your investments, but you will also appear to be personally much poorer than you actually are. Attorneys don’t like to waste time investigating whether you’re rich enough to make a civil case worth their while. They also don’t have many legal options for defeating a sound asset protection strategy. Essentially, using this plan makes you way more trouble than you are literally worth. A small investment now could save everything you own later.

Why Should You Choose Royal Legal Solutions For Your Property Transfer?

Of course, you have your choice about where you choose to create any of the documents you need for an effective property transfer. We strongly recommend against attempting to draft such items yourself. Despite the fact that you can find templates for such documents online, we find that these “free” options are rarely truly “free.” You may end up paying a great deal for cutting corners on your documents. Consequences for doing this can range from fines to losing your asset protection coverage, and in some cases, never even owning your property in the first place. Unless you happen to be both an extraordinarily experienced CPA and a licensed real estate attorney, it is unlikely that you will know all of the legal, financial, and technical requirements for creating effective and legally binding documents and entities. Don’t take that chance. Royal Legal Solutions is here to help investors like you.

Features Of Our Property Transfer Service

Anonymous Land Trust Combined With The Series LLC

Savvy investors can pair the Anonymous Land Trust with the Series LLC to achieve total anonymity and superior asset protection. To learn many more details about how these structures combine to make you nearly impossible to sue, check out our free educational resource on how the Series LLC and Anonymous Land Trust prevent lawsuits.

Prevent Lawsuits Before They Occur

The short version is that these structures separate your assets and preserve your anonymity. When used together, you become a serious pain in the ass to sue. Not only will it be nearly impossible to prove you own your investments, but you will also appear to be personally much poorer than you actually are. Attorneys don’t like to waste time investigating whether you’re rich enough to make a civil case worth their while. They also don’t have many legal options for defeating a sound asset protection strategy. Essentially, using this plan makes you way more trouble than you are literally worth. A small investment now could save everything you own later.

Royal Legal Solutions regularly uses this strategy to help investors protect what is rightfully theirs. In our experience, the Anonymous Land Trust and Series LLC combination stop lawsuits before they even start.

Our Property Transfer Package Is Cost-Effective

At other firms, you may find yourself having to order each of the services we provide in our property transfer package “a la carte.” The land trust alone averages $500 elsewhere. At Royal Legal Solutions, we will set yours up for a much more competitive rate. The costs you will incur plummet even further when you take into account the savings you receive from the Property Transfer bundle.

Our Property Transfer Package Is Convenient

At Royal Legal Solutions, we make it our mission to share the asset protection strategies long known by the wealthy. After all, well-employed asset protection strategies are just one reason that the “rich get richer.” But you don’t have to be exquisitely rich to protect your assets like those who are. We’re here to serve everyone, and believe all investors deserve access to high-quality asset protection strategies. This is why we’ve made this package both affordable and convenient. Whether you’re brand new to real estate investing or a seasoned investor with the portfolio to match, we can handle the paperwork and answer any questions you may have.

What If I Don’t Already Have A Series LLC?

You can still take advantage of the property transfer services we offer. But, you will have to do things a little bit differently. Many clients prefer to purchase their Series LLC first, then execute the transfer. Another option is to explore our Royal Protection Plan Package, which comes with a Series LLC at a reduced cost.

Why Use Royal Legal Solutions For A Real Estate Investment Asset Protection?

We have experience in setting up the proper asset protection and making it easy for an investor to use. Our system simplifies management structure as much as possible, and we also use common sense to ensure your needs are met. For example, just one tip we give our clients is that you don’t need multiple bank accounts as long as you have accurate accounting records. For taxation, they should stay exactly how they are now while being reported on a Schedule E of your personal return (if you’re an individual/married partners) or a partnership return (if unmarried partners).

Joint Venture Agreements For Real Estate Investors

Joint Ventures have been dramatically increasing in popularity since the 2009 recession. A Joint Venture Agreement is a partnership agreement. In the context of an LLC, it is known as an Operating Agreement.

Details about how profits and losses are divided, who controls the operations of the LLC, and which rights and responsibilities are designated to each partner are outlined in the LLC’s Operating Agreement. Properly created LLCs and Operating Agreements leave no room for the ambiguities that risk landing Joint Venture partners in court.

How do Joint Ventures help investors?

Joint Venture agreements offer investors a way to pool funds and split profits easily, allowing them to afford investment properties they may not be able to acquire on their own.

Who uses Joint Ventures?

New investors and veterans alike take advantage of these simple agreements, often in the name of securing profits on a relatively short timetable. That said, a Joint Venture is only as strong as the documentation accompanying it and the entity formed in its name.

How are Joint Ventures structured?

Typically, investors will form a venture-specific LLC. Royal Legal Solutions can assist you with drafting your Joint Venture Agreement and venture-specific LLC. Learn more about why many real estate investors need venture-specific LLCs and the assistance of a qualified attorney below.

Why Do I Need A Venture-Specific LLC For My Joint Venture For Real Estate Investors?

It’s helpful to think of a joint venture kind of like dating. You may really like your business partner. Perhaps they are successful in their own right, or you’ve seen how well some of their previous investments have gone. A joint venture allows you to take a test run at investing together. Maybe things will turn out great and you will go on to get “married” by going into business together formally.

But as with all things investing, success is never guaranteed. This is why we recommend a venture-specific LLC. You form this entity, alongside an ironclad agreement, to protect yourself and minimize the unavoidable risks involved in such investments.

The venture-specific LLC also offers liability protection. At Royal Legal Solutions, we always advise our clients to never keep property in their own name in the long term. Joint Ventures are no exception to this rule of thumb. There is no degree of safety conferred by two individuals having their names on a property. The only thing that will save your assets in court is the LLC structure. In addition to maintaining your anonymity, an LLC by design gives Joint Venture partners some very necessary liability protections. In the real estate industry, where anyone from a disgruntled tenant to an injured contractor or even your fellow investors can easily sue you, liability protection is essential for ensuring you won’t lose everything you have worked so hard for in a court judgment.

Why You Should Choose Royal Legal Solutions For Your Joint Venture For Real Estate Investments

At Royal Legal Solutions, we are real estate investors ourselves as well as attorneys. We have enjoyed Joint Venture successes, and also seen them go horribly wrong from a professional standpoint. Joint Ventures can be a great way to turn a quick profit and forge a good relationship with another investor. However, they are not at all without risk. We are here to help you protect yourself when you engage in any real estate transaction or business relationship.

Whether you choose Royal Legal Solutions or another qualified attorney, it is crucial to have some oversight for your Agreement and LLC. Improperly formed or filed LLCs will not give you the liability protection you need, and even worse, could end up totally useless. Usually, this happens when investors try to act as their own lawyers or seek out the assistance of Google, J.D. Don’t make this mistake. You don’t have to. You’ve worked hard to build up your real estate portfolio, and defending it with professional help is absolutely worth the investment. Contact Royal Legal Solutions today for more information about how we can help you minimize your risk in a Joint Venture.

What Are The Parts Of A Joint Venture Agreement For Real Estate Investors?

Every partnership starts off with the best of intentions. If everything works out beautifully, there is usually no issue.

Most Lawsuits And Legal Disputes Stem From Misunderstandings

We have found these can often be prevented by using the proper structures and having detailed documentation. When we help you with setting up your venture-specific LLC, you will receive a well-crafted agreement that keeps everyone is on the same page in terms of understanding:

While Joint Ventures can be a great way to turn a quick profit and forge a relationship with another investor, they aren’t without risk. We are here to help you protect yourself when you engage in any real estate transaction.

When you choose Royal Legal Solutions, we offer crucial oversight for your Agreement and LLC. Improperly formed or filed LLCs will not give you the liability protection you need, and even worse, could end up totally useless. Usually, this happens when investors try to act as their own lawyers or seek out the assistance of Google, J.D. Don’t make this mistake. You don’t have to. You’ve worked hard to build up a real estate portfolio worth defending.

What Is Passthrough LLC Income for Tax Purposes?

There are two short answers to the title question: yes, and hell yes.

But don't just take our word for it. Passthrough LLC income is a hot topic in the investment community. If you're not sure what that means, you're not alone. Read on to learn about what exactly passthrough income is, how it impacts your LLC, and what benefits you will reap from it.

What is 'Passthrough' Income?

Passthrough LLCs allow you to collect the profits from your business as part of your personal income tax. The LLC itself is not taxed, but its owners are. This allows you to save substantially, simplify filing, and enjoy more of your hard-earned profits.

Businesses love this feature so much that at the time of this writing, roughly 90% of entities take advantage of passthrough income. While this access used to be primarily the domain of giant corporations, even the smallest business can also take advantage.

How Does a Passthrough LLC Benefit Me?

The most obvious benefit of passthrough entities is that it saves you tremendously on taxes. Opting out of passthrough benefits would mean you would essentially have to pay taxes on your income twice--both on your personal and your business tax returns. Few among us have the means or desire to pay the taxman twice. Fortunately, businesses don't have to if they take advantage of passthrough taxation. This is available for any type of LLC, including our personal favorite, the Series LLC.

What About the Taxman?

While passthrough has always had the benefits discussed above, there are even more perks you can take advantage of when Tax Season rolls around. Below are some of our favorite perks, along with a little update about the 2018 Tax Bill.

Can I Get Passthrough Treatment for Other Entities?

You bet! S-Corps, Limited Partnerships, and many other types of entities are eligible for passthrough taxation. Of course, we recommend the Series LLC for real estate investors. All of the information above applies to the Series LLC the same as it would to its Traditional counterpart.

That's all for our discussion of passthrough income for LLCs and Series LLCs. That wasn't too painful now, was it? You learned the basics in under ten minutes, but please feel free to reach out for personalized recommendations by taking our Tax Discovery Quiz below.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

Thinking About Buying Real Estate with Your IRA? Read This First

Thinking about buying real estate with your IRA? Read this before you do.

An individual retirement account (IRA) typically offers massive tax-saving benefits while you’re planning for your retirement, like tax-deferred growth or tax-free withdrawals after a certain age—and they can even allow you to lower your taxable income.

So, naturally, just about every personal finance guru will give you the same advice when it comes to withdrawing money from your IRA before retirement: Never do it.

So why is buying real estate with your IRA any different?

First, you’re not actually withdrawing money from the account. If you’re a responsible real estate investor, you can use your IRA in a way that allows you to utilize the account’s tax-saving benefits, potentially saving you thousands, if not tens of thousands, of dollars.

But there are drawbacks (which we'll cover below).

Second, using your IRA to fund a real estate investment isn’t all that different than using your IRA to purchase any other investment, like bonds or shares, but you need to know how to do it responsibly so you don’t end up disqualifying your IRA.

In this article, we’re going to explain how to go about buying real estate with an IRA.

How to Buy Real Estate with a Self-Directed IRA

Using a self-directed IRA for real estate can be a bit more complicated than opening your Vanguard account and buying VTSAX.

Most financial institutions won’t allow real estate investors to use their IRA to purchase real estate, since it doesn’t generate any income for the bank. So, you’ll have two options:

  1. “Custodian controlled’ self-directed IRA
  2. “Checkbook controlled” self-directed IRA

What is an IRA Custodian?

A custodian is any financial institution that the Internal Revenue Service has approved to take care of an IRA. As we mentioned before, most custodians restrict the use of the IRA for certain investments.

Custodians for self-directed IRAs, though, work differently. The SEC defines self-directed IRAs custodians very succinctly:

“A self-directed IRA is an IRA held by a custodian that allows investment in a broader set of assets than is permitted by most IRA custodians.  Custodians for self-directed IRAs disclaim most duties to investors, and may allow investors to invest retirement funds in “alternative assets.’”

What does this all mean in layman’s terms? If you want to set up a self-directed IRA for real estate, you have to go with a bank that’s going to allow you to do that.

What is a Checkbook-Controlled IRA?

On the other hand, if you go with a checkbook-controlled IRA, you’re setting up a real estate IRA LLC for, of course, the purpose of buying and holding your real estate, and then you’re using the funds from your IRA to invest in that LLC, which is then investing in the property you wish to purchase.

In this case, the IRA needs 100% ownership over the LLC, but it opens up the possibility for making quick cash deals using the money in your IRA.

Can an IRA Be Held in a Brokerage Account?

Since we’re on the topic of alternative investments that you can make with your IRA, you might be wondering, “Can an IRA be held in a traditional brokerage account?”

The simple answer is yes. You can hold an IRA in a brokerage account, but the IRA is its own account. Most of the time, when you open a brokerage account—or any additional account within your current brokerage—they’ll typically ask you whether or not you want to open it as a traditional (taxed) account or a tax-deferred IRA (or a Roth, or SEP, or any of the other types of IRAs).

6 Things to Keep in Mind While Using a Self-Directed IRA to Buy Real Estate

Finally, here are some important things to keep in mind if you’re interested in using an IRA to buy a property:

  1. You can’t mortgage a property using the funds in your IRA. Since you can’t borrow money against your IRA, you’ll need to make the purchase in cash using the funds that you have available.
  2. Your IRA needs to be large enough to cover the investment’s ongoing expenses. Not only do you need enough money to cover the down payment and closing costs, but you also need to make sure you have enough money in the IRA to keep running the business before it starts generating income itself (if ever). Crunch the numbers on the property taxes, special assessments, HOA fees, home insurance, and maintenance. Make sure you have enough stashed away in the IRA to cover those costs.  
  3. You can’t personally use the investment. If you’re looking to use your IRA to purchase a primary residence (or a vacation home or anything for your relatives), you’re out of luck. It needs to be strictly arm’s length, and you can’t receive any direct or indirect benefit from it.
  4. You can’t withdraw any of the gains from your IRA until you’re 59.5 years old without incurring penalties—and that number may go higher in the coming years.
  5. As soon as you reach 70.5 years old, you’re required to start taking required minimum distributions regardless of whether or not you need them (unless your IRA is a Roth). This could cause you to sell your IRA-funded property in a down market.
  6. If you break any of the IRS’s rules on managing your IRA, you subject the entire IRA to taxation.

The Takeaway

In this article, we examined the relationship between the IRA and real estate. This includes opening up a self-directed IRA with a custodian (a financial institution) that will allow you to use the IRA for “alternative investments” and to set up a real estate IRA LLC so that you can then buy that LLC through your IRA, which is known as a “checkbook-controlled IRA.”

Sometimes it might sound like a bunch of alphabet soup, but if you’re an experienced real estate investor who doesn’t need access to the gains until you’re past 60 or so, you can save a bundle on your tax bill by using your IRA to fund your real estate investment. It’s really no different than using your IRA to fund any other investment, it’s just a bit different than what most investors use the account to do.

Remember, though, there are some drawbacks. First off, depending on the real estate you’re looking at, you’ll need quite a bit of money inside the IRA to start, and this can take some time to build up. Second, you can’t use the property yourself, or for your relatives. Finally, if you break any of the IRS’s rules, you could possibly subject your entire IRA to taxation, so make sure you know what you’re doing by working with an experienced professional.

Understanding Your Risk in a Joint Venture (JV) Partnership

Understanding Your Risk in a Joint Venture (JV) Partnership

Joint Ventures in real estate investing are pretty common.

Most of these partnerships are created by placing a property into an LLC and having the partners all own a portion of that LLC. If anyone wants to sue you or your partner they will not be able to go after the other person—the LLC makes that protection possible.

In the video above, Scott talks about how charging order against the LLC can make things messy and painful.

The best strategy to deal with this type of situation is to have both yourself and other partners enter into the Joint Venture LLC through your personal LLCs. This takes minimal effort to establish, but can prevent the messy and costly potential of dealing with a charging order.

How To Structure Your Partnership To Protect Your Assets

Say you and your friend that start a company together to invest in real estate.

Now say your friend gets sued, and next thing you know there's a charging order against the LLC. If you don't know what a charging order is, start with this article and come back.

The Cliff Notes version is this: If there's any money distributed from the LLC, it has to be used to pay off the creditors to the extent that your friend has an interest in the LLC.

This means you can't get any money out of the investments you and your partner made—even though he (or she) is the one being sued!

This is not the case if you guys both enter into a Joint Venture LLC. This means using your personal LLCs to become members of the LLC used for the Joint Venture agreement.

This will allow you to distribute money that you can now control without having to pay off those creditors and hurt your friend or your business partner. It keeps everything nice, smooth and amiable.

Which Type of Business Entity Needs an Employer Identification Number (EIN)?

Businesses pay taxes. It is a truth as old as time. However, how a business entity pays taxes vary. For many, the Internal Revenue Service (IRS) requires them to file for an employer identification number (EIN).

The EIN, also referred to as a taxpayer identification number (TIN), is a unique number assigned by the IRS that allows it to monitor any payments, wages, or other financial transactions that occur through your daily business activities.

Furthermore, if you plan to open a business bank account, an EIN will help you establish one that is independent of your own personal account. 

Does a general partnership need an EIN? What about an LLC taxed as a corporation? To find whether or not your business entity requires an EIN, keep reading.

does a general partnership need an einBusiness Entities that Do Require an EIN

Business Entities that Do Not Require an EIN

Business Taxes

The nuances of the tax world can be confusing and hard to understand. If you run a business and would like to discuss taxes with a professional, call Royal Legal Solutions today to set up a consultation. Our professionals have years of experience helping clients make the most of their business while remaining in compliance with all laws and regulations.

 

Interested in learning more? Read How to Get an Employer Identification Number (EIN) for a Foreign Entity and When Does a Sole Proprietor Need an EIN?

IRA Rollovers: Yes, Rolling Over Your 401(k) Into An IRA Is Smart!

Changing careers? Deciding what to do with retirement funds is going to be a primary concern. While there are a number of options available, many choose to roll these funds over into an Individual Retirement Account.

There are a number of good reasons for this, and we'll be looking at seven of them here in a minute. But first ...

What Exactly is a Rollover IRA?

IRA rollovers can be deposited into an IRA from another retirement fund, such as a 401(k). Those who don’t already have an IRA can open one for the express purpose of rolling over funds from a previous employer’s retirement plan. Those who already have an IRA can simply roll over the money into the existing IRA.

IRA Rollovers

7 Reasons an IRA Rollover Makes Sense

Many folks are content to let their 401(k) plans accrue money over time, and there’s nothing wrong with that option. Why would you fix something that isn’t broke?

Well in this instance, you would not be fixing something that is broken so much as replacing it with something better.

What do we mean?

Those who have just switched jobs have a short list of options concerning their retirement funds. These include:

Cashing the funds out immediately is not advisable. While leaving the money in the original 401(k) or rolling it over into the new one aren’t bad options, there are a number of reasons why an IRA rollover is the best option on the list.

Reason #1: Rollovers Can Preserve Tax-Favored Status

Those who choose to cash out their accounts early are not only subject to a 10% early withdrawal penalty if they are under the age of 59 ½ but will also need to pay income tax on the balance.

By contrast, rollovers can preserve tax-favored status so long as they’re transferred from one trustee to another. In other words, the IRA will continue to grow tax-deferred until a retiree begins collecting on their investment.

Reason #2: IRA Rollovers Can Increase Investment Options

Some folks choose to leave the funds in their old plan alone or roll the funds over into a new employer-offered plan. There’s nothing wrong with this per se, but rolling the money over into an IRA can increase the number of options that are available to you. For instance, IRAs typically offer a broader range of investments. 401(k) plans, on the other hand, may be limited to a handful of mutual funds.

This advantage will contribute to a better investment strategy and can prove more lucrative in the long run.

Reason #3: IRAs Have Lower Fees

Generally speaking, employer-sponsored 401(k) plans typically have higher administrative fees than IRAs.

Reason #4: An IRA Centralizes Control of Your Retirement Monies

There might some good reasons to keep your old 401(k) open, particularly if you’re satisfied with the returns. On the other hand, it’s much more convenient to have one centralized location from which to manage all of your retirement funds. IRAs are easy to figure out and significantly reduce the complexity of managing separate accounts.

From one centralized location you can access:

Reason #5: Brokers Will Compete For Your Business

Brokerage firms are more than willing to offer incentives to bring your business to them. In some instances, this could even mean free cash. In other instances, you may be entitled to free trades. It’s certainly something to look into as you figure out how you want to invest your retirement money.

Reason #6: 401(k) Plans are Subject to Rules an Individual Company Establishes

Every company has a great deal of wiggle room when it comes to setting up a 401(k) plan for their employees. IRAs, on the other hand, are subject to a centralized set of rules established by the IRS.

This is better for two reasons:

Reason #7: The Rollover Itself is Free

While there are other costs to consider, rolling over a 401(k) into an IRA is free. There will be transaction costs for individual investments and other costs to bear in mind, but setting up and rolling over the money is a relatively pain-free process.

The Bottom Line

The advantages of rolling over your 401(k) into an IRA far exceed the risks. It makes sense not because the other options are bad, but simply because IRAs are better for some. With more investment options to choose from, lower administrative costs associated with the account, a simple centralized location from which to access your retirement investments, and more transparency regarding how the fund operates, IRAs make the most sense  for your retirement plan.

Should Rental Property Be in an LLC or Trust?

Should rental property be in an LLC or trust? Unfortunately, the answer is not as straightforward as you might think.

Whether you’re planning your will or setting up a company to manage your growing real estate portfolio, you need to know exactly what type of entity you should use to shield your properties from legal trouble. If you make the wrong decision, you could potentially expose your holdings to unnecessary risk, costing you hundreds of thousands of dollars down the road (or, at the very least, giving you a big headache).

So, first, let’s start with a basic definition of "LLC" and "Trust" as they apply to real estate investing. 

(If you just want the pros and cons of each option, feel free to scroll down to the bottom of this article).

Why Use an LLC to Hold Your Rental Properties?

An LLC is a limited liability company. 

It’s one of the most popular legal entities that a person can set up to operate their business. You don’t need any employees or a board of directors, and you can use it to separate your business assets from your personal finances. That way, if you ever find yourself on the losing side of a lawsuit, the only assets you’ll be forced to give up are those assets held within the LLC (in this case, your rental properties).

If someone sues you and wins, they can’t take away your personally-owned assets (like your car, primary residence, and your kid’s college fund).

Sounds like a pretty sweet deal, right? You could theoretically make some risky moves with the assets you put under an LLC and then dissolve that LLC in case you get into any trouble. The only risk is the asset, right?

Well, not so fast. There are some instances when your personal assets might be at risk, and you definitely shouldn’t start an LLC for the sole purpose of doing something nefarious. 

When Does an LLC Fail to Protect Your Personal Assets from Lawsuits?

There are a few instances when, if you use an LLC to hold your rental properties, you’d be putting both your rental properties and personal belongings at risk. Those instances include:

Furthermore, an LLC can create a kind of avalanche effect. As soon as one property is attacked under an LLC that holds multiple rental properties, your entire portfolio can take a hit.

Why Use a Trust to Hold Your Rental Properties?

You’ve probably heard about trusts as they relate to estate planning. By putting certain assets in a trust, you can guarantee exactly how and when they’re distributed. This way you can avoid a solid chunk of estate taxes, since the assets in a trust aren’t considered your personal property, or even protect your assets from heirs that are likely to mismanage them.

One solution is putting all of your properties under separate trusts. There are a few different types of trusts: revocable, irrevocable, pay-on-death (POD), and living trusts. For our purposes, we’re just going to focus on revocable and irrevocable trusts.

What are the Benefits to Using a Trust Versus an LLC?

What are the benefits to putting your rental properties in a trust rather than an LLC?

Should You Put Rental Property in an LLC or Trust?

So, to review, what are the pros and cons of each option?

Putting Rental Property in an LLC Pros

Putting Rental Property in an LLC Cons

Putting Rental Property in a Trust Pros

Putting Rental Property in a Trust Cons

 

Do I Need a Medical Power of Attorney?

It is said that change is the only constant thing in life. And while this saying has fallen into the realm of overuse, it remains true today.

So how does this affect your estate planning? When planning, it will do you well to account for all eventualities that may occur. One of the ways to do that is via power of attorney.

Here is a checklist for estate planning you can use to get started. This article covers one aspect of the checklist—the medical power of attorney and how you can use it to protect yourself.

Do I Need a Medical Power of Attorney?What Is a Power of Attorney?

Hold on, what is a power of attorney? To some, it might sound like something a fairy godmother does to magically transform you into a lawyer. Pumpkins and all. But hold your horses. Even though that might be great to see, a power of attorney is a document that confers specific powers on someone, and we’re not talking about superpowers.

A power of attorney (POA) gives one person (called the attorney-in-fact or agent) the authority to make decisions on behalf of another (called the principal). These powers come into play when the principal is incapacitated and can no longer make those decisions themselves. A POA can be of utmost importance to a real estate investor for the following reasons:

There are several types of POAs. For this post, we will concern ourselves with two of them; the medical POA and the durable POA. Each serves a slightly different purpose, as we will see.

Durable Power of Attorney

A durable POA is one that confers the decision-making power on the agent after the principal gets incapacitated. The POA grants decision-making powers for financial, legal, and property matters. It is called a durable power of attorney because it needs to be explicitly revoked once the principal is available to make decisions once again.

The durable POA does not give the attorney-in-fact authority to make decisions regarding health matters of the principal, except for paying health bills. A medical POA is created to give someone authority to make health-related decisions on your behalf.

Medical Powers of Attorney

A medical power of attorney gives the agent authority to make health-related decisions on behalf of the principal. The medical POA springs into action only after the principal’s doctor says they are unable to make critical decisions themselves. The medical POA is sometimes called an advance directive, a health POA, or an advance healthcare directive.

The requirements for POAs vary from state to state, so if you move, you might want to check with an attorney to verify that your medical POA is still valid in your new home.

How Does A Medical POA Work?

You might be skeptical about ever needing a medical POA. After all, what could ever stop you from talking with your doctors to make your decisions known? Well, a medical POA usually kicks in when the principal:

Sadly, these situations happen often enough that you should be prepared. Better to have it and not need it than otherwise. If you eventually need it, then the POA works to make your decisions known through your agent.

How To Select An Agent/Attorney-In-Fact

Your life is literally in your agent’s hands in a medical POA. This means that you should try as much as possible to appoint an agent that is trustworthy, reliable, mentally capable, isn’t your healthcare provider (most states have this requirement), has discussed your wishes with you, and understands what you want to be done is specific scenarios.

Here are some of the decisions your agent has authority over:

The gravity of these decisions suggests you want to select the best possible person to be your agent.

As Scott discusses in the video above, the healthcare power of attorney and durable power of attorney let people help you when you become incapacitated. All the operational pieces can be done in your home to allow others to make health decisions for you when you aren't able to do so on your own behalf.

Should You Get One?

With all the information we’ve put at your disposal, the decision is still yours. However, we think it is better for you to be prepared for any eventualities and to streamline the decision-making process as much as possible when you’re not available to make them yourself.

Interested in learning more? Check out our articles Do I Need a Durable Power of Attorney? and Using a Power of Attorney With a Land Trust.

Do I Need a Durable Power of Attorney?

Life is unpredictable. But it’s not for nothing that the cliché says: if you fail to plan, you plan to fail.

One of the best things you can do to safeguard your assets is to prepare for the worst, including death and debilitating illness. You should also plan for a scenario where you’re not able to be physically present when business decisions have to be made.

Here is a checklist for estate planning you can use to get started. This article covers one aspect of the checklist—the durable power of attorney and how you can use it to protect yourself.

What Is A Power of Attorney?

A power of attorney (POA) is a legal document that gives someone (called an attorney-in-fact or an agent) the authority to act on behalf of another person (called a principal). A power of attorney is usually used when the principal becomes ill, is disabled, or cannot be physically present to sign legal or financial documents. A POA is especially important to real estate investors because it means your investments are not neglected when you’re indisposed.

Now, there are several types of powers of attorney. What we will concern ourselves with here are two types that are vital in your estate planning journey.

Types of Powers of Attorney

Building on our earlier statement, we will broadly cover two types of power of attorney; durable and medical power of attorney.

Durable Power of Attorney

A durable POA is a type of power of attorney that comes into effect in the event of the incapacitation of the principal. It is called a durable power of attorney because it can last for the entire principal’s lifetime unless it is revoked. The power isn’t activated until the principal is incapacitated, though.

The durable POA only covers legal, property, or financial issues. The agent or attorney-in-fact doesn’t have the power to make decisions concerning the principal’s health except when paying the principal’s health bills. To be able to do that, a medical or healthcare POA is needed.

Medical Power of Attorney

A medical power of attorney gives the attorney-in-fact the power to make decisions regarding the principal’s health. You might also hear it called a health power of attorney, an advance directive, or an advance healthcare directive.

As Scott discusses in the video above, the healthcare power of attorney and durable power of attorney let people help you when you become incapacitated. All the operational pieces can be done in your home to allow others to make health decisions for you when you aren't able to do so on your own behalf.

How Do You Prepare a Durable Power of Attorney?

Thanks to LegalZoom and a ton of other online sites, you can download or buy a power of attorney template online. However, because of how the requirements vary by state, we recommend you contact a asset protection attorney to guide you through the process.

While a POA is extremely useful, it doesn’t allow the delegations of a few rights, such as the right to vote, the right to make, amend, or revoke a will, and (in some states) the right to contract a marriage.

While the requirements of a POA vary from state to state, here some general recommendations:

Choosing an Agent and the Risks Involved

Creating a durable power of attorney can have tremendous advantages: it means you can still be in charge (in a sense) if you are incapacitated. However, in essence, you are signing over your entire financial and legal life to someone else to control. Even though there are means to help make creating a power of attorney safer, such as choosing multiple agents and having them check each other, you should take note of who you select as an agent.

Here are some characteristics you should check for when naming an agent:

  1. Trustworthiness: the agent should be someone you trust to handle your affairs diligently and fairly. Avoid agents with a history of substance abuse, gambling, stealing, and unreliability. You should be able to trust that they will follow your instructions, even over other peoples’ objections.
  2. Competence: your agent should not have a history of irresponsibility with their finances.

Do You Need a POA?

A durable power of attorney document will help safeguard your investments when you’re not able to do so personally. You should take care to select an appropriate agent when creating one, to ensure optimal protection.

Interested in learning more? Check out our articles Using a Power of Attorney With a Land Trust and Do I Need a Medical Power of Attorney?

Estate Planning for Unmarried Couples

There are many reasons couples decide not to get married. Some choose to live together before getting married, while others see no need to walk down the aisle to make the relationship official. According to a Pew Research study, there is a growing acceptance of cohabitation in America.

The study also revealed that the number of adults in the U.S. who are currently married is down from 58 percent in 1995 to 53 percent today. Over the same period, the number of Americans living with an unmarried partner increased from 3 percent to 7 percent.

In spite of these trends, unmarried couples may not realize that they do not have the same legal rights as marriage partners. This article will explore estate planning for unmarried couples and why it should be a priority for you and your significant other.

lionsWhy Unmarried Couples Should Have An Estate Plan

The law protects spouses and children in the absence of a will or an estate plan. However, no such safeguards are in place for surviving unmarried partners.

When you have an estate plan in place, you are able to dictate who gets your assets after your death and who can make decisions for you if you cannot make them for yourself.

Here are two scenarios to illustrate why it is so important that you and your partner create an estate plan.

#1 If you die without an estate plan, your partner will not be entitled to receive your Social Security or other benefits, any notice of probate proceedings, or any homestead rights usually granted to married spouses. Your partner also may not be able to inherit any of your property or belongings.

#2 If you are unconscious or otherwise unable to communicate, your partner will not have the legal authority to make decisions for you or even receive medical information from the doctors.

The good news is that you can take care of these concerns with an estate plan.

9 Steps Unmarried Couples Should Take

Here are nine steps unmarried couples should take to safeguard their future.

#1 Discuss your wishes for your estate with each other. No one likes to talk about what happens to their assets after they die. It is an uncomfortable topic at best. But having a frank discussion now about who you would like to get what can alleviate many problems and concerns later for the surviving partner.

#2 Write a letter of instruction. Especially in today’s digital world, a letter that tells your partner and your estate representatives the details they need to know to manage your estate can be invaluable. This letter might include the following:

#3 Tell family members about your estate plan. To avoid any unpleasant surprises, let your parents, siblings, and children know that you have included your partner in your estate plan.

#4 Own property jointly. You can avoid probate, which can be expensive and time-consuming, by owning property together with your partner. With joint ownership, if one tenant dies, the surviving tenant owns the entire property.

#5 Designate your beneficiaries. An unmarried partner will not have access to your bank accounts, retirement funds, or life insurance unless you have named them as the “pay-on-death” beneficiary. Review these accounts and make any changes that reflect your desires for your estate.

#6 Name a Durable Power of Attorney. As part of this critical step, you can appoint one or more individuals to act on your behalf in legal and financial matters in the event you are unable to manage them yourself. Without a power of attorney document in place, your partner might have to go to court to seek the appointment of a conservator. Not only would this take time and money, but it would cause your partner more stress at an already difficult time.

#7 Appoint a Health Care Proxy. By naming your partner as your health care proxy, you enable them to make medical and end-of-life decisions for you if you cannot make them for yourself. Without this document, your family members may make medical decisions for you without your partner’s knowledge or agreement.

This document will also give your partner access to your medical information. Without it in place, the Health Insurance Portability and Accountability Act (HIPAA) prohibits medical personnel from sharing private information with others.

#8 Write your will. A will is an integral part of an estate plan because it allows you to name guardians for your minor children and to name your personal representative or executor. The executor, who should be someone you trust implicitly, will be responsible for distributing your possessions, paying any remaining bills, filing your last tax return, and closing out all your accounts.

#9 Create a revocable trust. A revocable living trust is a legal entity that holds an individual's or a family's property and other assets. Creating a trust allows you to state how you want your assets handled during your lifetime and after your death. You can name your partner as a trustee to manage and make financial decisions over your assets after your death or if you become incapacitated.  The assets placed in the trust would not have to go through probate since their ownership remains unchanged after your death.

The law is definitely on the side of married couples when it comes to asset distribution. By carefully creating an estate plan, you and your partner will gain valuable peace of mind in the event something happens to either one of you. Your attorney can help you create an estate plan that is right for your situation.

Image by Christine Sponchia from Pixabay