Roth IRA: Top Benefits You Should Know For Retirement Planning

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

Roth IRA Benefit #1: Massive Tax Savings

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

Roth IRA Benefit #2: Exemption from Required Minimum Distributions

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

Roth IRA Benefit #3: No Early Withdrawal Penalties

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

RMD Penalties

If you don’t take Required Minimum Distributions, you might get hit with an incredible 50% penalty. That’s almost half!
The 50% penalty is applied to any distribution you were supposed to take from your IRA. We’re going to need a philosopher to justify this one. “But you see, your income exists…in potentiality.” Well, your tax penalty exists
in actuality and it is a big one.

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

Why You Need a Real Estate Corporation

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

Insurance vs. LLC: Which is Better?

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

What Type of Company Structure is Best For You?

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

4 Pet Law Facts Animal Owners Should Know

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

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

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

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

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

3. Pet custody issues are real: understand them.

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

4.  Include your pet in your estate plan.

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

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

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

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

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

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

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

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

pet ownership laws: bird law

Laws regulating the treatment of pets vary from state to state

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

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

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

Pet custody issues are real: understand them

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wrapping It All Up

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

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

Moving Money Overseas? Tax Information For U.S. Expats

There are a lot of reasons for U.S. citizens to move money or other assets overseas. In many cases, there are clear advantages to moving overseas completely. But there are clear tax obligations for American citizens. 

But before you or your money leave the USA, there are a few tax and legal consequences you need to be aware of. Remember: If you're an American citizen, it doesn't matter where you go in the world. You can't outrun the taxman.

Tax Reporting Obligations for U.S. Citizens

If you (or your money) are moving overseas, there will be lots of tax forms to be filed annually. The bureaucracy is a thick fog that conceals many rocks for you to dash your financial ship against. The government will beat you down with forms, so file carefully and stay on top of your paperwork.

If you're a U.S citizen, Uncle Sam wants to know about your foreign assets, investments and bank accounts. In fact, Uncle Sam says that you have two legal obligations. Let's review them.

Obligation #1: Disclose Foreign Bank Accounts and Assets

First, if you’re a U.S. citizen, you need to declare all foreign bank accounts if they total more than $10,000 (all foreign accounts are combined to reach the $10,000 threshold) and you must report any foreign asset (e.g. foreign stock, company ownership, etc.) whose value is $50,000 or greater.

The form required to be filed annually to disclose foreign bank accounts in excess of $10,000 is known as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The form filed annually to disclose foreign assets with a value in excess of $50,000, is IRS Form 8938, Statement of Specified Financial Assets. The first obligation U.S. citizens have to their home country is the disclosure of foreign bank accounts and foreign assets.

Obligation #2: Pay Your Federal Income Taxes On Foreign Income

As a U.S. citizen, you are required to pay U.S. federal income tax on the foreign income you receive. The U.S. taxes its citizens on income no matter whether it was earned in the U.S. or abroad. That's one of several reasons our GNP is so high.

So, even if you make money outside the U.S., as a U.S. citizen, Uncle Sam says that you are still required to pay federal tax on that income. If you paid foreign income taxes to the country where the income was derived and if that country has a tax treaty with the U.S., then you’ll typically receive a credit in the U.S. for the foreign taxes paid, which reduces the amount of federal taxes owed in the U.S. You can look online for a current list of countries who have a tax treaty with the U.S.

Some U.S. citizens presume that if they leave the U.S. that they are no longer subject to federal income tax in the U.S. But this is not the case. Uncle Sam wants your (his) money. Failure to comply could result in a nasty tax dispute. And who has the time or energy for that?

Even if you relocate to a foreign country and no longer earn income from the U.S. you are still subject to U.S. tax your foreign income (and potential state income tax depending on your state of residence).  There's one last question on this topic some rebels or activists in the crowd may be wondering about.

Can I Avoid Paying Taxes While Living Abroad?

The only way to keep Uncle Sam out of your pockets, (AKA the tax jurisdiction of the United States), is to renounce your U.S. citizenship. However, this is a costly and expensive process with numerous tax repercussions.

Here's a common example that demonstrates how the disclosure and income tax reporting requirements work:
Say you have a bank account in Luxembourg with a balance of $99,999. That account generates income of $10,000 this year. Let's say that the $10,000 in income resulted in taxes owed to Luxembourg of $1000 and that you reported and paid the tax to Luxembourg.

In addition to compliance with Luxembourg law, you would need to file FinCEN Form 114 (FBAR) to disclose the foreign bank account. The FBAR form filing is due by June 30 for the prior year’s accounts. You would also need to file IRS Form 8938, since the account was at or over $50,000. Form 8938 is due with the filing of your federal tax return.

In addition to the two disclosure forms that are filed in the U.S., the $10,000 of income from your Luxembourg account must be reported as taxable income on your income tax return (form 1040).

The $1000 paid in tax to Luxembourg will be credited to you as the tax owed to Uncle Sam because Uncle Sam and Luxembourg have a tax treaty.

Conclusion

All U.S. citizens are subject to federal income tax regardless of where they live or do business. Even if you no longer earn income in the U.S., Uncle Sam wants his money. Even if you renounce your citizenship (which is expensive and has a whole host of tax repercussions), Uncle Sam can and will get his money.

(On a related note, see Why Ordinary People Set Up Offshore Bank Accounts).

You are required to pay federal income tax on foreign income you receive. This means the U.S. taxes the income that you earn, even if you earn every penny abroad. If you pay taxes in the country where you are earning income and there is a tax treaty with the US, you’ll receive a credit in the U.S. for foreign taxes paid.

These are just the basics; there are many special rules and numerous exceptions to the filings you read about here. If you plan on leaving the U.S. or moving assets outside the U.S., you should seek out experienced professionals to assist you with U.S. tax reporting obligations.

Color inside the lines of the law, and you can avoid paying a hefty cost.

Joint Ventures in Real Estate Investing: How They Work

After the recession, Joint Ventures were hotter than documentaries about corruption at investment banks. If you’ve been in real estate investing since then, you’ve probably entered into one at some point.

These tasty commodities were attractive because they gave loan-to-value ratios as high as 70%. Not many real estate investors like to gamble with those kinds of numbers, at least not alone. However, get a pack of lemmings together and they’ll pretty much gamble on anything, up to and including jumping off of a cliff.

What is a Joint Venture in the Context of Real Estate Investing?

A JV agreement is a contract between two or more parties that divides up the investment, the responsibilities, and the profits or losses. You know, an agreement. It’s for those entering into a one-time deal. You aren’t wining and dining here. You’re in and out fast for a quick and tidy profit.

Parties usually form a new company to own and operate an investment if it is a long-term deal. For short-term investments, a Joint Venture does have some great benefits.

Example of Joint Venture Agreements in Real Life

This is a common JV Agreement scenario for real estate investors. My friend Randy purchased a property with his LLC that he intended to restore and then sell for a profit. Then he hired a contractor, our buddy Johnny.

Together, they agreed that Randy would reimburse Johnny his expenses and they would share the profits from the sale, in accordance with the terms of the JV agreement they’ve drafted.

By the way, you can add a contractor to your S Corporation or LLC in order to share profits, but that can be a bad idea. If you don’t want to give up a permanent piece of your company (and there are a lot or reasons why you might not want to do that) a JV agreement will bridge can bridge the gap without giving away your firstborn. It is a collaborative contract between companies, rather than a permanent marriage.

By creating a venture-specific LLC, all of the parties acquire some much-needed liability protection.
If you find that the arrangement is worth keeping to explore new opportunities, there is no reason why you can’t modify the terms.

Who knows? Maybe this short-term fling will become the real thing.

Your new LLC will also isolate the JV’s capital and resources in the event of litigation. Your other companies are safe from being liable for this new one.

Is a Joint Venture Right For Me?

As in so many things finance related, your decision really depends on the size of the deal. If you are pushing millions around, the added liability protection of an LLC is essential. If you’re just puttering around with tens of thousands of dollars, as was often the case between Randy and Johnny, that JV agreement is the cheaper option.

JVs work well where the goal is quick cash and in cases where the partners do not qualify for financing. They also let you partner with companies that have different skills than you. The investor/contractor arrangement like Randy and Johnny’s is a perfect match for quick flips on real estate.

In the end, no matter how short-term a deal is, you’re going to have to work with the person you go into business with for longer than you think. Whether starting a new company or signing a Joint Venture, find people who you trust and who you like to work with. Make sure you understand Joint Venture liability. Forge business relationships that have potential for growth and leave the door open for more collaboration. A good deal is an awful thing to waste.

Do you still have questions about your Joint Venture or LLC? Take our quick investor quiz and we'll help you find the solution that is best for your situation.

Keep Your Individual 401k Compliant: 5 Steps For Self-Employed Investors

Investors love the self-directed, or solo 401(k)—or what the IRS calls a one-participant 401(k)—because it’s perfect for businesses with sole owners. These retirement plans offer serious benefits. These are like self-directed IRAs made just for investors and the self-employed.

This may seem like a dream come true, but when you’re busy investing or running a business, the management of a 401k can get overlooked. Mistakes can be costly. Making sure your plan is compliant comes down to five easy steps.

1. Update Your 401k Account on Time

Updates are required by the IRS every six years. If you don’t update them, you’ll face costly fines and possibly even plan termination. Just like your phone, if it’s out of date, you are vulnerable to all kinds of attacks. Fortunately this one is straightforward. If your plan is out of date, get it updated.

2. Keep Track of Your Funds

Your income sources must be accounted for. My friend’s wife used to make contributions to one of his accounts, but he tracks everything to the letter. Make a spreadsheet in Excel. Those night classes you took are good for something and excel feels is feeling so neglected.

3. Separate Your Funds By Plan and Participant

If two people are contributing to one account, make sure they contribute from their own accounts. Also keep Roth accounts in their own space separate from traditional funds. By now, you’re more organized than the foreman at an ant farm, and you have to be. There is a lot to keep track of.

4. File a 5500 with The Department of Labor

Yes, another form. I often wish I’d gone to art school, but then I remember that artists fill out less forms because they have no money.

There are two situations that demand a 5500 for your individual 401k. First, if you have more than $250,000, start stretching your writing hand. Second, if you terminate a plan, regardless of assets, you need to file a 5500. You have to do this annually, so make sure you have enough money in the plan to make it worth it.

You can opt for a 5500-EZ. This is, as you might suspect, an easy file version of a 5500. This has to be filed by mail. If you opt for a 5500-SF you can do it online through the Department of Labor. This is obviously more convenient.

Online filing can be tracked immediately. The SF skips portions of the 5500 like an EZ. Opt for the SF and get the best of both worlds if you qualify for EZ filing.

*See Form 5500 EZ Filing Requirements For Solo (One Participant) 401(k) Holders for more information.

5. Document Contributions and Rollovers

If you make contributions or roll over funds from an IRA or 401k into your individual 401k, you need to state that the rollover is coming from another retirement account. The company rolling over the funds will issue a 109d9-R to you. It states that the source of the roll over so you don’t get taxed on it. Unless you like paying tax. If that’s the case, you’re on the wrong website.

If you are making new contributions to an individual 410k, track them on personal and business tax returns. If you’re an s-corp, employee contributions show up on your W-2 and your employer contributions will show up on your 1120S s-corp return, unless you are the sole proprietor, in which case your contributions show up on your personal 1040 on line 28.

Head spinning yet? Yes, this portion of tax law is confusing. You may be better off with a professional, but if you can make sense of it, you will save yourself a lot of money.

In short, be updated and organized to keep your enemies at the IRS from sticking you with non-compliance. If you suspect you are out of compliance, meet with your attorney or CPA and get that treated before it is malignant.

To give you a sense of what is at stake, the penalty for not properly filing a 5500 is $25.00 a day to a maximum of $15,000.00 on your return. A mistake made on a filed return might keep you from retiring at all. See to the boring stuff. Get your paperwork done. Be up to date. The rewards are worth it. 

As always, if you're struggling to manage your retirement plan, get professional help. Royal Legal Solutions has experts and attorneys who can help you decide which of the many retirement options is best for you.

How to Fund Your Business with Self-Directed IRA Investors

Private companies need start-up funding.
There are trillions of dollars in retirement plans across the United States. These funds can be invested in your business.
Most entrepreneurs and investors don’t know this. Which is a shame, because everybody who owns a retirement fund is a potential source of financing. Most people who have a retirement account don’t actually know what their retirement package is invested in. This is an untapped resource just waiting for your pitch.
Industry surveys show that there are over one million self-directed retirement accounts invested in private companies, real estate, venture capital, private equity, hedge funds and start-ups.

Investing with Self-Directed IRA Funds

 
So how can you tap this wellspring? If you ask your CPA or your lawyer, they’re going to tell you that it’s possible but inadvisable. This is because they don’t have any idea how to do what you are asking them to do, or they are too shortsighted to see why you want to. Your financial adviser is going to tell you this is a bad idea because he doesn’t get the fee that he collects on your mutual funds, annuities and stocks. I’m not going to tell you this is a conflict of interest, but it does lower your adviser's motivation for alternative investments. He’s trying to make money too after all.
There are different sets of risks in private investment, so self-directed IRA investors need to be strategic. Keep a diverse profile. Don’t hitch your entire wagon to an unproven company. There will be tax and legal issues, so make sure you get help when and where it is necessary.
Selling corporate stock or LLC units to self-directed IRAs can generate capital in exchange for stock or equity in other companies. You can offer shares or units in your retirement account without going public.
This was what employees at Google, PayPal, Domino’s, Sealy, and Yelp did. They invested their self-directed IRAs before their companies were publicly traded and made enough money to retire very nicely.
Popular investment options include:

You must be in compliance with state and federal securities laws when raising money from investors.

Avoiding Prohibited Transactions/UBIT

Be careful to avoid prohibited transactions. For example, you cannot invest your retirement money with close family members. If an error occurs, an investor will have their ENTIRE ACCOUNT DISTRIBUTED. Don’t make this mistake.
You may also be subject to an Unrelated Business Income Tax. A UBIT applies to an IRA when it receives business income. Learn more from our previous article about the UBIT.
Generally, IRA’s and 401k’s don’t pay tax on gains because they’re considered investment income. When you wander outside of standard investments, such as mutual funds and annuities, you may find yourself in the cold wilderness outside of investment income parameters. UBITs are very costly at 39.6% of $12,000 of taxable income. That’s steep.
The most common situation where a self-directed IRA will be subject to a UBIT is when the IRA invests in a business that does not pay corporate tax.
If you are trying to raise capital from retirement funds, you should have a section in your documents that notifies people of potential UBIT on their investment. This doesn’t cost you, but it does cost the investor, and at 39.6% you might do some damage to someone’s retirement plans if you aren’t clear with them.
If the investment from a self-directed IRA was via a note or debt instrument, then the profits are considered interest income. This income is always considered investment income, which is not subject to a UBIT.
Many companies raise capital from IRAs for real estate or equipment purchases. These loans are often secured with the assets being purchased. In this case, the IRA ends up earning interest like a private lender.
So, to Recap (because that was a lot!)
There are trillions of dollars in retirement plans across the U.S.
These retirement accounts can be used to invest into your private company, start-up or small business.
You must comply with the prohibited transaction rules.
Anyone can invest into your company, except you & your close family members.
There may be UBIT, depending on the structure of the company.
UBIT usually arises within IRAs that operate businesses structured as LLCs where the company doesn’t pay a corporate tax on their net profits. This income gets passed down to IRA owners & can cause UBIT liability.
Retirement account funds can be a huge source of funding and investment for your business, so it’s worth the time and effort to learn how to access them as investment capital. Just make sure you follow the rules.
How you handle your retirement money matters at money matters.

Finding a Trustee For Your Estate Plan

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

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

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

What Will My Estate's Trustee Do?

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

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

Here are a few things to consider.

How Big is Your Estate?

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

Now that’s a haunting.

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

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

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

Does Your Trustee Have Solid Financial Skills?

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

What Are Your Family Dynamics?

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

Are You Compensating Your Trustee?

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

Conflict of Interest

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

Co-Trustees

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

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

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

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

Disinheriting Your Heirs: Your Legal Options

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


Why You Will Need to Legally Disinherit An Heir

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


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

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

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

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

How to Protect Your Reputation in the Digital Economy

Bad reviews hurt a business. If you own the business that they hurt your soul. Nonetheless, Platforms like Yelp are the gatekeepers to quality now You have to accept that not everyone is going to like what you are doing.The good news is that you can protect your business against untruthful, inflammatory remarks. There is a point at which negative reviews become defamation.
There have actually been hundreds of lawsuits over negative reviews posted in online forums, but few people take action.
The first amendment only protects the truth. No one has the right to tell lies about you or your business. If a negative review in any public platform is negative AND untruthful, you can sue for damages. That is the definition of libel.
Now, you are going to have to prove that a negative comment was untrue if you are going to silence it. If a customer says that they were served a cold bowl of soup, you’re going to have a hard time proving the remark untrue. I suppose maybe the customer’s bowl of soup could have spilled on someone else who is suing you because the soup was too hot. If they have burn scars, you might be able to disprove that the soup was cold.
This is an insane example, but it demonstrates a case where a business is actually damaged by a negative review that you be proven untrue. This is grounds for a Defamation Lawsuit.
There are two types of defamation. We mentioned libel. Libel is the act of defaming someone by telling nlies about him or her, in the written form. This includes online reviews.
The second type of defamation is slander, which is spoken defamation.
You see a lot of slander during political campaigns.
The reason the top brass isn’t busy suing one another is because defamation is tricky business.
In order to win a defamation lawsuit you must prove the following:
a) That a statement was made.
b) That it was published for others to see (comments, reviews, etc).
c) That the statement caused you injury (emotional distress, loss of business, etc).
d) That the statement was false.
Awards in a defamation lawsuits generally require the offending party to remove false statements. Damages might be awarded for lost profits or injury.
You really need to pick your battles carefully though. You can spend a lot of money silencing negative reviews that may not actually be costing you anything. It’s also difficult to prove that the offending party is lying.
My personal advice to business owners who are on the receiving end of negative or untruthful reviews is that you respond to it once and only once. It’s enough to show that you are a business owner who cares. It allows anyone who reads the review to hear your side. Reach out to the customer directly if it’s possible and figure out if you can resolve their issue. Maybe you can get a negative review taken down just by showing a potential client that you want to do better by them. That’s how you win over people whom you disappointed, and we all have off days.
Now, if you’ve taken these steps and you are unable to resolve a negative and untrue comment or review that is causing your business injury, you can file a lawsuit against the perpetrator.
Just remember that lawsuits are a long and costly process. Don’t drag yourself into a fight if there aren’t sticks or stones involved. If the injury is real and the comment is false, take legal action. Just be sure you’re in a fight over something that matters, because that’s what matters at Money Matters.

Real Estate Contingencies: A Beginner's Guide

The paperwork piles up fast in real estate. Like a nasty rodent problem, you need to stay ahead of it.

Real estate contingencies are an important part of your real estate contract. They provide protection like a suit of armor. Here’s how to use them.

What Are Real Estate Contingencies?

A contingency clause says that your purchase is contingent on a number of conditions specified.

So, if the buyer insists on having a complete roof repair and rodent inspection, they are going to write those contingencies into the contract. If they buy the property and find mice playing in the halls and the shingles falling from the eaves, the contingencies haven't been honored.

These are a few of the contingencies you might want to consider in a purchase agreement.

#1 Appraisal Contingency

Simple enough. Your purchase is contingent on an appraisal that evaluates the property at or above the purchase value.

#2 Financing Contingency

The purchase in contingent on the buyer obtaining financing terms acceptable to a the buyer. Make sure your purchase agreement specifies that you must obtain acceptable financing. If your contingency simply says you will purchase upon obtaining financing, you could find yourself in trouble if the financing offers unfavorable terms. For example, if all you can afford is 7% on your financing, put 7% into your contingency as your acceptable financing rate for purchase.

This may sound confusing, but it’s actually pretty simple. If you can’t afford the financing, don’t buy. Make sure your contracts say as much.

#3 Inspection Contingency

Get your property inspected and make sure that you approve of its condition before purchase. If you’re buying a fixer-upper, make sure that you aren’t putting more into repairs and than you can afford. Don’t buy a money pit. Buy a money-maker. You can ask the owner to make repairs or lower his price as contingencies.

More About Contingency Clauses

#1 Earnest Money

Make sure your contract states clearly that you get your contract money back if the owner fails to address any of your contingencies. If you don’t do this, you are going to risk losing a lot of cash.

#2 Don’t Miss Deadlines

These clauses almost always have a deadline so give yourself enough time to meet them.

You need time to obtain financing. You need time to properly inspect the property. You time to review the seller’s disclosure documents. Two-week deadlines are the norm, but this is often ridiculous for anybody who actually plans to exercise any due diligence.

If deadlines are approaching and you need more time, ask the seller for an extension. If the seller refuses, haul out your contingency and drop it on the table like a hot mic.

#3 Get it in Writing

Make sure that you are communicating via whatever format is required by the contract and its contingencies. You need a hard copy, not a digital one. The pen is mightier than the sword, and in this case, the printer is mightier than the screen.

Telephone calls and emails will not invoke contingencies unless a contract permits emails as notice. Make sure everything is in writing and sent to the seller on a date that can be tracked.

Contingencies are sometimes the difference between buying a sound investment or a money pit. If you don’t have contingencies, you may be forced to buy a property at a loss or lose your earnest money.

Real Estate Contingencies Protect Your Ass

Don’t get caught with your pants down. Contingencies are like a pair of suspenders that will keep you from exposing your bare ass to the world.

Real estate buyers should always use contingency clauses. Your purchase contracts are only as good as the contingencies you’ve written into them, as they dictate the terms of your purchase. If you don’t have them, you may find yourself spending a lot of time and money before your investment pays off.

When a friend purchased his fishing business, the wharf on the property had to be completely replaced. My friend wrote in a contingency that made the owner finish the task so that he could be on the open water on day one, generating a return on his investment right away.

If you handle your contingencies right, you should be able to open for business the day your receive the deed to the property.

Keep your pants up when you purchase real estate. Start with our investor quiz and we'll help with contingencies or any of your other investing needs. 

Real Estate Contingencies: A Guide For Buyers

The paperwork piles up fast in real estate. Like a nasty rodent problem, you need to stay out ahead of it.
Contingency clauses are very important to your real estate contract because provide they protection. Think of them as a suit of armor. Or a glue trap, if you prefer.

Here’s how to use real estate contingencies to your advantage.

A Beginner's Guide to Real Estate Contingencies

When Randy purchased his fishing business, the wharf on the property had to be completely replaced. Randy wrote in a contingency that made the owner finish the task so that he could be on the open water on day one, generating a return on his investment right away.

If you handle your real estate contingencies right, you should be able to open for business the day your receive the deed to the property.

A contingency clause says that your purchase is contingent on a number of conditions specified. So, if like my friend Randy, you insist on having a wharf replaced (or, more likely, a complete roof repair or rodent inspection), you are going to write those contingencies into your contract.

If you buy property and find that Ratatouille is cooking pasta in a kitchen full with water up to your ankles, then you haven’t been careful about your contingencies.

Real Estate Contingencies: RatThese are a few of the contingencies you might want to consider in a purchase agreement:

Appraisal Contingency

Simple enough. Your purchase is contingent on an appraisal that evaluates the property at or above the purchase value.

Financing Contingency

The purchase is contingent on the buyer obtaining financing terms acceptable to the buyer. Make sure your purchase agreement specifies that you must obtain acceptable financing. If your contingency simply says you will purchase upon obtaining financing, you could find yourself in trouble if the financing offers unfavorable terms. For example, if all you can afford is 7% on your financing, put 7% into your contingency as your acceptable financing rate for purchase.

This may sound confusing, but it’s actually pretty simple. If you can’t afford the financing, don’t buy. Make sure your contracts say as much.

Inspection Contingency

Get your property inspected and make sure that you approve of its condition before purchase. If you’re buying a fixer-upper, make sure that you aren’t putting more into repairs and than you can afford. Don’t buy a money pit. Buy a money-maker. You can ask the owner to make repairs or lower his price as contingencies.

Interested in learning more? Check out our articles, How To Assign A Real Estate Contract and Real Estate Contingency Clause Examples: How Buyers Avoid Getting Burned.

Other Things to Remember About Contingencies

1. Earnest Money: Make sure your contract states clearly that you get your contract money back if the owner fails to address any of your contingencies. If you don’t do this, you are going to risk losing a lot of cash.

2. Don’t Miss Deadlines: These clauses almost always have a deadline so give yourself enough time to meet them.

You need time to obtain financing. You need time to properly inspect the property. You time to review the seller’s disclosure documents. Two-week deadlines are the norm, but this is often ridiculous for anybody who actually plans to exercise any due diligence.

If deadlines are approaching and you need more time, ask the seller for an extension. If the seller refuses. Haul out your contingency and drop it on the table like a hot mic.

3. Get it in Writing: You need a hard copy, not a digital one. The pen is mightier than the sword, and in this case, the computer is as well.

Telephone calls and emails will not invoke contingencies unless a contract permits emails as notice. Make sure that you are communicating via whatever channel is required by the contract and its contingencies.

Make sure everything is in writing and sent to the seller on a date that can be tracked.

The Takeaway

Contingencies are sometimes the difference between buying a sound investment or a money pit. If you don’t have contingencies, you may be forced to buy a property at a loss or lose your earnest money.

Don’t get caught with your pants down. Real estate contingencies are like a pair of suspenders that will keep you from exposing your bare ass to the world. Real estate buyers should always use contingency clauses.

Your purchase contracts are only as good as the contingencies you’ve written into them, as they dictate the terms of your purchase. If you don’t have them, you may find yourself spending a lot of time and money before your investment pays off.

Keep your pants up when you purchase real estate. Contact Royal Legal solutions for help with contingencies, or any of your other investing needs. Set up your personalized real estate consultation in minutes with our online tool.

 

College Savings: Coverdell Education Savings Account Vs. 529 Plan

So, your little angel has graduated. The dream has come true. 

They are finally getting the hell out of your house. 

Let’s be real, though. They  aren’t going to last a second out there among the piranhas. You’ll sleep a little easier if you can give them a little leg up. To that end,you may want to start a college savings account.

Planning for college is tricky. Especially where your taxes are concerned. Here’s what you need to know.

There are two types of accounts that you can open to help your child graduate without a crippling amount of debt. 

You can reduce your decision between these account options to two accounts to one question: Do you want control over your investment options or tax-free contributions? 

Coverdell Education Savings Account 

A Coverdell Education Savings Account is set up to cover a child’s secondary education. The growth on your contribution is tax-deferred until the funds are spent. If they are spent on education, they are tax-free.

There is no tax deduction for the amount you contribute to a Coverdell, but you have some fantastic investment options and you can opt to self-direct. The rules are similar to those that cover an IRA.

 Coverdell has the following rules and benefits:

Coverdell Rules

Coverdell Benefits

529 Plan Account

The 529 Plan is invested in a state-managed fund and may be eligible for a state income tax deduction (contributions are tax deductible in 35 states). Money contributed to your 529 Plan account is invested into a state managed fund. A 529 has the following rules and benefits:

529 Rules

529 Benefits

College Savings Account Recap

Planning financially for college can be tricky, especially when it comes to taxes. As you can see, the main difference between the two accounts is that Coverdell accounts have the benefit of allowing you to decide how your contributions will be invested, but the money is not tax deductible.

On the other hand, contributions to a 529 Plan account must go to a state run fund, but that money is usually eligible for tax deductions.

 

Choose Royal Legal Solutions For Your 401k

Lots of companies claim to be 401k experts. You know what the difference is between us and them?
We’re actual tax attorneys. That’s right. Instead of having your finances planned by some guy with a printed certificate from an online university, you’ll get a real tax lawyer, as in an educated and trained tax professional. Some other Solo 401k providers will offer you Employee Retirement Income Security Act guidance that they are not qualified to give.
We also work with sharp, detail-oriented CPAs to ensure your compliance Additionally, we offer lots of free educational information on your part in keeping your 401k compliant.
 

Why You Don't Want To Skimp on Retirement Planning

Other companies will tell you that you don’t need a tax attorney or specialized professional to establish a 401k plan. They’re right. You technically don't. But if you want to save money and stay off the IRS naughty list, you want to get your 401k done and managed right. That's what Royal Legal Solutions can help you do.
The problem with trying to save money initially is that you'll end up paying to repair the damage in the long run. If you're unfortunate enough to hire a less-than-stellar outfit to create and manage your 401k, you'll end up needing an attorney to clean up the mess eventually. We’re just trying to save you that first costly step. Pass on the amateurs. Go with the pros at Royal Legal. Unless you enjoy extra attention from Uncle Sam.

401ks Work Best For You With Qualified Professional Assistance

The Solo 401k plan is based on the rules of the Internal Revenue Code. This is a complicated document that tax professionals are paid to understand. Royal Legal’s experts know the code inside and out. They make it work to your best financial advantage every time.
Royal Legal will help you retire earlier and wealthier. Other providers forget about you once your retirement plan has begun. You’ll be able to consult with our expert navigators when you get lost in some of the murkier waters of investment and retirement planning.

How Royal Legal Solutions Helps You Retire Wealthier

We take care of your annual maintenance so that you’re investment plan maximizes growth and always remains in compliance with IRS regulations.
We’ve helped thousands of people across North America achieve great success with their Solo 401ks. Call Royal Legal Solutions today for your personal retirement planning consultation. Let us help you achieve your financial goals.

Attorney Client

Attorney Client Privilege: Talking to Your Lawyer.
“I said Luca Brasi sleeps with the fishes and I want to know if my IRA is updated”.
If you tell this to your lawyer, he will probably call the police and turn you in yourself unless you have millions of dollars. Lawyers tend to be unscrupulous where money is concerned. Just ask anybody with money.
Now, while I’m sure very few of you are in the “murdering for the mob” business, so the parameters of attorney client privilege are undoubtedly less exciting in your financial parlance.
The point remains the same though. You should know what information is protected by attorney client privilege and what information is not. Violating the privilege might lead to catastrophe, or it might just be embarrassing. Either way, knowing when to keep your mouth shut is a handy skill that you need to learn.
Attorney client privileged information is that information that a lawyer is not required to give to anybody. Not the plaintiff who is suing you. Not your creditors. This information is even protected from government agencies except in more extreme scenarios, such as mob killings.
However, like so many legal concepts, attorney client privilege is multi-faceted. There are some common mistakes thattyou can make that will compromise your protection. If you fall under these exceptions, your confidential information can be opened up. Even if you’re squeaky clean, you aren’t going to like it when the IRS gives your finances a prostate exam.
If there was a third party present, attorney-client privilege is compromised. Anyone from your financial advisor, to your accountant, to your dear old mother who spends her days in chair by door waiting for you to get a phone call because it’s her primary form of entertainment. Your attorney may not have to talk, but there is nothing keeping your accountant from getting a subpoena, and there is nothing keeping Grandma from gossiping on bridge night.
So, you can do like mobsters do and keep your mob shut, or you can have your lawyer hire third party professionals like accountants. Your attorney can extend attorney-client privilege to other unscrupulous sorts, but you my friend, cannot. This is called a “Kovel” hiring and its origins are worth a read if you like legal history. You should really know
something about this. In recent cases the IRS has been dissolving extensions of attorney-client privilege and I’d hate to give you advice that gets you caught with your pants down.

So, in the meantime, be a gangster and keep your mouth shut.
Attorney Client privilege isn’t a carte blanche either. Only legal advice is protected. Companies with in in-house legal teams can struggle with this.
My man Randy had an employee at his old company who was a lawyer that handled assets. So, if Randy has a chart that organizes the company’s holdings that he gives to his lawyer, he knows that the chart is admissible. Even if it weren’t, once his employee shows it to every accountant and property manager who needs to see it, attorney client
privilege is meaningless.

The solution here is a lot like the last one. Stay-tight lipped. If you have documents that you only want to share with your lawyer, have your lawyer identify them as “Attorney Client Privileged” and keep them out of the hands of non-lawyers. Always tell your attorney what information is privileged when you share it so they can proceed accordingly.
In short, keep everyone on a need to know basis. When you give your attorney privileged information, keep it privileged through the endless web of secrets and lies that is financial law.
Cheers. This has been a Money Matters Matter.

How to Get Out of Annuities

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

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

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

Cancelling Annuities: Beware the Surrender Penalty

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

Bottom Line: Know What You're Investing In

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

11 Crucial Questions to Ask About New Investments

You want to hear a horror story?
As early as 1999 a forensic accounting and financial fraud investigator named Harry M. Markopoulos told the Security and Exchange Commission that it was legally and mathematically impossible to for Barry Madoff to deliver the gains he was promising.
He was ignored.
When it turned out that Madoff was a crook, people lost millions in the largest Ponzi scheme of all time.
Investment is a gamble, and where there are gamblers there are crooks. These are shark-infested waters.
How do you spot a deal that’s too good to be true even when the SEC can’t?
Well your first clue is that the deal looks too good to be true (see: BUBBLE).
You also need to understand the SEC isn’t there to look after your interests and they are guessing at all of this data the same way you are. You need to protect yourself against crooks.
Here are the 11 questions you need to ask of a potential investment opportunity if you want to avoid being a sucker.

1. Does This Help Me Diversify?

Diversity. The first commandment. This is sort of a reverse-engineered security system. If you own investments in a lot of places, if one of them turns out to be a junk, you aren’t sunk.
This doesn’t really protect your swimmers from sharks, rather, it makes sure that you have so many swimmers in the water that if you lose a few, your species will carry on. Again, think survival. If a swimmers breaks away to look for big opportunities in uncharted waters, afford to lose him. This way, you can take risks in a calculated way to maximize returns and give yourself lots of security against unforeseen economic shocks.

2. Am I Caving to Pressure?

We learn this one in high school. If you’re being pressured to do something that you don’t think is good for you, don’t do it! This is such an old scam it’s a cliche. They use this bogus trick in every finance movie from Wall Street to the Wolf of Wall Street. In Boiler Room you watch a man’s life come undone because he invests with crooks following a classic scene in which the protagonist pressures him to buy big into stocks that are a scam.
This one is easy, if you’re being pressured to buy, it’s too good to be true. Hard Pass.

3. What Evidence Do I Have?

Don’t invest in anything until you see evidence. Would you invest in stocks sold on real estate in heaven? I know you’re a believer, but don’t be a sucker.

4. Is it in Greek?

If you don’t understand the business model, the revenue stream or the way in which the business generates a return, don’t put your money in. If you can’t make sense of it, it’s because it doesn’t make sense.

5. Am I Being Asked to Accept a Shady Commission?

If you’re told you can receive commissions for bringing in other investors, you’re being taken for a ride. You need to be licensed to receive commissions on investments.
You aren’t allowed to sell side bets in a casino unless you are the casino. The world of high finance is greedy. If the investment is sound, they don’t need help selling it. This is illegal, which means the business in unscrupulous. They will screw you over.

6. Can I Get a Deed or Trust?

Always collect a paper trail. If you lend somebody money, get it in writing. If these guys disappear, it will be hard to get anything back. It will be impossible without documentation. If a company doesn’t have letterhead, then it’s not a legitimate company.

7. Is This Business on File with the SEC?

You can get in touch with the SEC and make sure they've filed. And you should.
Once again, legitimate businesses take legitimate steps to be legitimate. Trustworthy companies are going to be transparent companies. You want outlines of the investment’s projected growth and the use of funds; you want to know what the managing company’s president ate for lunch. Make sure the company clearly outlines what you are entitled to as an investor.

8. Background Check: Are These People Credible?

You need to do more than a Google search here. Investigate the people who are handling your money. Banks do a credit check. So should you. Find out whom they’ve worked for. Get a damn resume!
You need to be vigilant. This is your ship and as the captain, you’re going to sink with her. It’s not unreasonable to want to who is managing your funds, unless they have something to hide. If a bank won’t clear them, it means they aren’t safe.

9. What Do the Experts Think?

Time to call in the cavalry. If you’ve done your due diligence and you’re ready to veto an investment, you need to get a real pro to look at it next. A real tight lawyer. The kind of person who likes saving money the way you like spending it.
Two heads are better than one and even if an investment is tight, there still might be some nonsense in the fine print. Spend a few dollars and get a pro to double-check your work. Some of these guys write insane salaries into their contracts so make sure your lawyer has your best interest at heart. Don’t use your money to make money for other people.

10. What Does a Veteran Investor Think?

As long as you’re getting a second opinion from your lawyer, why not get a more experienced investor to take a look as well. They will see things you cannot see. They will ask questions you will not ask. They may even want to buy in. If they think it is worth investing in, there’s a good chance they are right.

11. Don’t Invest What You Can’t Lose.

Okay, this isn't so much a question as it is a strong suggestion. No matter how well you play your cards, you can still lose to the luck of the draw. Don’t invest money you cannot afford to lose. A pushy salesmen trying to take your life’s savings is a conman. Invest with someone who understands your interests and your limits.
Bottom Line: If you do not know what you are doing, you don’t want to be sitting at the table. Gamble within your means. If you want to play a little home game with low stakes, that’s exactly where you should start. Only sharks survive among sharks. You can sharpen your teeth, but it takes time. Be patient. LEARN. Get help. If, after that, an investment still confuses you, it’s time to cash in your chips and walk away.

Protect Yourself from Swimming Pool Liabilities

For those that don't remember, we're going to start with a real case that was all over the news. You may have even heard about it at the time.

We're doing this to make some general points about the risks all pool owners face. Being rich and famous won't save you from an improperly maintained or managed pool. It sure didn't help Demi Moore.

Swimming Pool Lawsuit Case Study: What Happened to Demi Moore

Demi Moore’s assistant had a pool party in 2015 at Demi Moore’s California home where alcohol was served. Somebody drowned. It was an unfortunate accident and Demi Moore, who wasn’t even at the party, was quickly swimming in litigation. 

It sounds so ridiculous it could be the plot of one of Demi’s erotica thrillers.

There are carefully outlined state safety regulations that you have to comply with if you don’t want to end up on the witness stand with Tom Cruise screaming at you. In most states you are responsible for keeping your pool reasonably safe.

It doesn’t matter that it was Demi’s assistant who held the party. Demi owns the pool. Demi is responsible.

Understanding How Swimming Pool Lawsuits Happen 

There are two ways you can be considered too lazy, cheap or careless to own a pool under the law:

#1 You violate a local pool safety law

In this case, you’re strictly liable, like Demi Moore.

The solution here is simple. Bring your death trap up to code. Find out what the law is and comply. Build a fence and put on a pool cover. These are the basics.

# 2. Your pool is deemed “unsafe”

This is trickier, from a liability standpoint. Broken fences, rusty nails, lack of depth markings, and more can make a pool unsafe. Once again, this varies, but I’m sure through the use of the computer you are using to watch this video, you can figure out your local regulations. Better yet, contact an asset protection attorney to help you understand them.

Here’s another issue, and this one is key. If you party by your pool and your friends enjoy drinking cocktails, you may want to consider hiring a lifeguard for the afternoon. Preferably a sober lifeguard.

It’s a small expense that may keep somebody alive. If the conditions at the party are deemed unsafe (SEE: Rooftop cannonball championships) you might be on the hook.

Remember, like Demi, you might be liable even if you are not at the party so be sure that there are safety measures in play. It’s the summer time, so party hard. Just don’t end up paying for it.

In short, if you own the pool, you are responsible for its compliance with safety regulations. Landlords must keep this in mind when considering tenants. But you also have to make sure that everything you own is up to those same safety standards. Sorry fellas, but it’s not all collecting rent checks. Even trespassers can hold you liable if they get hurt in your unsafe pool.

How to Prevent Swimming Pool Lawsuits

Here’s a short summary of what you need to do if you want to avoid fishing dead bodies out of your pool and the costly lawsuits that come with it.

1. Comply with all safety requirements for your city and state. If you can’t afford them, you can’t afford a pool. But you’re a good little saver. Maybe next year.
2. Include a clause or separate pool disclosure and waiver. This is a tip for landlords or investors with rental property. Taking a few minutes to do this could save your ass in court. That way if some fool wants to work on his swan dive after his tenth martini, he’s already assumed the liability at least in part.

Your waiver should include the following:

Asset Protection with Royal Legal Solutions Can Keep You Above Water

Losing your investment, as noted above, is terrible. Losing your house is much worse. When it comes to owning a pool, be PROACTIVE with your liability before you have to be REACTIVE to a lawsuit.

Yes, there is work, responsibility and expense here, but you need to own a pair of big boy trunks before you go swimming in liability. Royal Legal Solutions can help you address legal matters relating to  your pool and construct an asset protection plan that keeps you out of court. If you would like advice on how to navigate this issue or begin protecting your assets like the pros, send us a message take our quick investor quiz for landlords and investors.

IRA Rollovers, Explained

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

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

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

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

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

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

How Often Can I Do a Rollover?

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

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

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

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

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

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

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

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

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

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

Can a Traditional IRA be Rolled Into a Qualified Plan?

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

The term “eligible retirement plan” includes:

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

Can I Rollover a Traditional IRA I inherited?

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

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

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

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

Are There Reporting Requirements For Traditional IRA Holders?

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

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

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

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

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

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

 

How To Flip Houses & Avoid UBTI/UBIT

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

Use a Self-Directed IRA for Flipping Houses

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

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

Understand and Avoid UBTI & UBIT

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

"Regularly Carried On"

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

"Unrelated"

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

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

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

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

What Happens If You Trigger UBTI or UBIT?

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

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

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

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

 

A Series Of Landmark Prohibited Transaction Cases: Peek & Fleck Vs The IRS

This article is part 2 of a series with the goal of educating you, the Self-Directed IRA LLC investor, on how to successfully invest & avoid triggering prohibited transactions.

At this point in your life you know two things in life are certain, those things being death & taxes. It almost feels like a no-win situation, doesn't it? Funny enough, according to Greek mythology, you even have to pay to book passage on the boat that takes you to the afterlife.

Why You Should Understand Prohibited Transactions

Try to think of prohibited transactions as the sharks circling you and your state of the art Self-Directed IRA LLC investment boat.
The prohibited transaction rules are extensive, and the penalties even more so. Penalties for triggering a prohibited transaction range from excise taxes to instant dismantlement of your IRA plus fines.  (Can you say "ouch" ?)

As you can see, anyone investing with a Self-Directed IRA LLC should be careful to avoid engaging in prohibited transactions, for to do so is doom. Not to mention, the IRS will always have an eye on you from then on out. (But then again, they already did, didn't they?)

Peek & Fleck Vs The IRS

In 2001, two taxpayers, Mr. Lawrence Peek and Darrel Fleck decided to use Self-Directed IRA's to acquire a business. They established Self-Directed IRAs using 401k rollovers, created a new company named FP Company, and then directed the IRAs to purchase the stock of FP Company with the cash in their IRA's.

To finalize their purchase, in addition to the cash and other credit lines, FP Company provided a promissory note to the sellers. This promissory note was backed by the personal guarantee of Peek & Fleck, and the guarantees were then backed by the deeds to the Peek & Fleck's homes.

In 2003 and 2004, Peek & Fleck converted their traditional IRAs to Roth IRAs. In 2006 and 2007, the IRAs sold FP Companies stock, which had increased in value, for a gain. Peek & Fleck used their Roth IRAs to ensure there would be no tax on the gain from the sale of the stock.

The IRS, believing a prohibited transaction had occurred, audited the income tax return for both Peek & Fleck for the tax years of 2006 and 2007.
After reviewing the individuals’ tax returns, the IRS adjusted their tax returns to include the capital gains income from the sale of the stock as well as imposed excise tax for excess IRA contributions.

Both Peek and Fleck contested the IRS’s adjustment and went to the Tax Court with a petition.

Why Was This A Prohibited Transaction Case?

The IRS argued that Mr. Fleck’s and Mr. Peek’s personal guarantee of a promissory note from FP Company to the sellers of the business in 2001 as part of FP Company’s purchase of the business assets were prohibited transactions.
Unfortunately for Peek & Fleck, The Tax Court agreed with the IRS. The Tax Court found that Peek & Fleck had committed prohibited transactions, that their IRA's had ceased to be IRA's as of the beginning of 2001, and that their capital gain from the sale of FP Company by the IRA's should've been taxed.

The Tax Court pointed to Internal Revenue Code Section 4975, which prohibits direct and indirect lending of money or extensions of credit between an IRA and its owner.

The Tax Court found that it did not matter if the loan guaranteed by Peek & Fleck was to FP Company and not the IRAs directly. Why? Because IRC Code 4975 clearly prohibits the lending of money or extension of credit between a retirement plan and a disqualified person.
Then Peek & Fleck countered this, claiming that the IRS’s notices issued in 2006 and 2007 were too late because the loan was made in 2001. The IRS disagreed and so did the Tax Court.

The court cited that since the non-recourse loan was ongoing, the prohibited transaction continued and on January 1, 2006 it remained true that both Mr. Peek and Mr. Fleck personally guaranteed the company loan.

Case Outcomes & Summary

The Tax Court found that Mr. Peek, his attorney, and his business colleague's  (Mr. Fleck) personal guarantees of a loan/note from their newly-formed corporation stock of which was owned by Peek & Fleck's Self-Directed IRA's, to third party incident to asset purchase transaction, was an IRC Section 4975 prohibited transaction.

The Court set a precedent, finding that whether or not their IRA's were involved directly was irrelevant since IRC Section 4975 was broadly worded to include both direct and indirect loans and guaranties to IRAs.

What Happened to Peek & Fleck?

The Tax Court found Peek and Fleck liable for a 20% tax penalty because their underpayments of tax were a “substantial understatement of income tax”. But unfortunately for them, that wasn't the worst part.

Most prohibited transactions are resolved with the owner paying a tax, such as UBTI or UBIT. But in this case, because a prohibited transaction occurred between an IRA and its owner, which results in the tax disqualification of the IRA, Peek & Flecks IRAs were disqualified and totally distributed.

What You Can Learn From This Prohibited Transaction Case

The Peek case affirmed that, in the eyes of the Tax Court and the IRS, an IRA holder can legally use retirement funds to invest in a wholly owned entity that is controlled by him or her without triggering the IRA prohibited transaction rules. That entity could be an LLC, to give a clear example.

What was not mentioned above is that Peek & Fleck relied on the advice of a certain CPA, who was also advocating for the transaction, no doubt for personal gain. (Conflict of interest, anyone?)

When it comes to investing with a Self-Directed IRA, you should always seek the help of a professional who knows the ins and outs of the IRS rules so you don't find yourself in a situation like Peek & Fleck.

If you want to learn more about investing with a Self-Directed IRA LLC and how to avoid triggering prohibited transactions, take our Tax Discovery Quiz.

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