A business trust is an IRS-approved entity for handling IRA investment funds. With a business trust, the investor becomes the trustee and gains management rights over investment funds. We’ve seen investors gain checkbook control over their self-directed IRA using this method. Besides more control, investors can enjoy reduced cost and investor confidentiality. Let’s discuss these benefits and how we can help you get started with a business trust for a self-directed IRA today.
Using a business trust for a self-directed IRA allows for more efficient investing. We’ve seen investors wait up to three days for their investments to go through the typical custodial review process. The advantage of a business trust is that the IRA owner become trustee. As trustee, they gain management control over investment decisions, rather than giving up this control to a custodian. Once a business trust is established, the trustee can open a checking account for IRA funds to be held. Investing then becomes as easy as writing a check. With this ease, investors no longer have to worry about delays on investment opportunities or recurring fees. Our technology uses a similar trust structure to cut out custodial involvement and the need for in-person or mail transactions.
Business trust are exempt from state franchise taxes, which are taxes imposed on corporations, partnerships and LLCs for doing business within a state. These taxes are usually charged annually. In California, the minimum franchise tax is $800. However, a 2016 Chief Counsel Ruling decided that business trusts are not considered corporations and thus exempt (1). In contrast, self-directed IRA LLCs don’t enjoy this exemption.
The self-directed IRA for real estate investing is popular for several reasons. However, choosing an LLC as the holding entity for a self-directed IRA can incur costly fees. This is especially true for out of state real estate investments. Investors must register and pay a fee to conduct business in a new state. They may have to hire an additional agent to comply with state by state licensing requirements. Like the franchise tax, these IRA management fees can be avoided by using a business trust for the self-directed IRA.
A business trust can avoid filing both federal and state income taxes by qualifying as a “disregarded entity.” According to Professor Carter G. Bishop: “Under a default rule, all business trusts are considered either disregarded entities (one beneficiary) or partnerships (two or more beneficiaries) (2).” When using a business trust for a self-directed IRA, the IRA becomes the sole beneficiary and thus qualifies the trust as a “disregarded entity.” In contrast, using an LLC that qualifies as a “disregarded entity” isn’t guaranteed both federal and state tax filing exemptions. In California, LLCs are required to file state taxes regardless of entity status. Using a business trust owned self-directed IRA can save on these costly and time consuming tax filing requirements.
A business trust self-directed IRA allows investors more confidentiality. Unlike an LLC, where the agent’s name must be kept in public record, a business trust keeps the trustee name confidential. Some states also require the LLC agent’s address be included in its Articles of Organization. Unfortunately, in Nebraska, Arizona and New York LLCs are still required to give public notice in local publications. With a business trust, IRA owners can enjoy anonymity. Investors can establish their business trust and enjoy self-directed privated investing all in one online platform. No leaving home or filing public documents required.
Like an LLC, forming a business trust begins with drafting required legal documents. For a business trust, the starting point is the Declaration of Trust. This document is similar to an LLC’s articles of incorporation in that it defines the nature or purpose of the trust. The rights of the trust beneficiary and who is named trustee are all critical to obtaining the benefits mentioned above. We can help ensure accuracy and position investors like you for maximum cost savings and tax benefits. We also streamline the self-directed IRA setup process, including business trust formation.
We’ve discussed some of the benefits of using a business trust for a self-directed IRA. These benefits all lead to time or money savings and increased confidentiality. However, structuring a business trust for a self-directed IRA is a detailed process. Several of the compliance requirements you’d find with an LLC and basic custodian managed self-directed IRAs still apply. We’ve developed a wealth of expertise when dealing with these compliance concerns. We can help you form your business trust owned self-directed IRA and provide further consultation on plan structuring and IRS regulations. Call us today at (425) 449-4554 for a consultation.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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