The Wall Street Journal recently reported on the radio advertising that promotes an ability to store gold owned by a self-directed IRA at the IRA owner’s own home. Based on the Journal’s reporting and investigation, the IRS issued a statement warning against such storage. I’ve written about this topic on a number of occasions and our firm has always recommended against home storage for precious metals owned your IRA or your IRA/LLC.
The recent statement by the IRS against home storage is an important development and one that all self-directed IRA investors who own precious metals should be aware of. Keep in mind, there are two rules that apply to precious metals owned by an IRA.
First, the precious metals owned by an IRA must qualify under IRC § 408(m)(3). In short, these rules approve certain specifically approved coins (e.g. American Eagles) and gold, silver, platinum, or palladium that meet certain fineness requirements. Check my prior article for more detail as not all precious metals qualify to be owned by an IRA. In addition, Chapter 12 of my book, The Self Directed IRA Handbook covers the subject in detail.
And second, qualifying metals must be stored in accordance with IRA rules. Precious metals must be stored with a “bank” (e.g. bank, credit union, or trust company). Personal storage of precious metals owned by an IRA is not allowed. A broker-dealer, third-party administrator, or any company not licensed as a bank, credit union, or trust company may not store precious metals owned by an IRA. Additionally, an IRA owned LLC (aka, IRA/LLC) is subject to the same storage rules and must store metals the LLC owns with a “bank”.
If an IRA purchases precious metals that do not meet the specific requirements of IRC § 408(m)(3), then the precious metals are deemed collectible items. As a result, they are considered distributed from the IRA at the time of purchase. IRC § 408(m)(1). Similarly, if the storage requirement is violated, then the precious metals are also deemed distributed as of the date of the storage violation. IRS Private Letter Ruling 20021705. The consequence of distribution is that the value of the amount involved is deemed distributed and is subject to the applicable taxes and penalty.
Given the warning against home storage from the IRS, self-directed IRA owners should think twice before storing precious metals owned by their IRA or their IRA/LLC in their home.
For a detailed legal analysis, please refer to our Whitepaper on the topic found at the link below.
In 2012, the JOBS Act amended the rules for private placement offerings (aka “PPMs”) to allow companies to advertise and solicit their offerings to prospective investors. Under prior law, a PPM could not be marketed or solicited to people whom the offeror did not have an existing relationship with. Hence, the use of the word “private offering” in the labeling of these types of investments.
This new type of offering allows advertising and general solicitation and is known as a Rule 506 (c) Offering. Under Rule 506 (c), the company raising money could create a website soliciting the funds, or they could hold seminars or meetings with potential investors and could solicit the investment of funds from those in attendance. This is a significant change to the prior offering rules that clearly prohibit such activities.
Under the new Rule 506 (c) Offering there is one hitch: the person raising funds may only accept funds from accredited investors. An accredited investor is someone who has $200K in annual income ($300K if married) or $1M in net worth (excluding equity in home). The accredited investor status must be documented by the investor or certified by a third party such as an accountant or financial planner. This verification rule is a new requirement for Rule 506 (c) Offerings and is ALWAYS required if you make general solicitation and marketing efforts for investors.
Under the traditional Rule 506 offering, now known as Rule 506 (b), you may not make general solicitations for investors and that is the major downside. However, you may raise money from up to 35 unaccredited investors per offering and that is something you cannot do under the new Rule 506 (c). Keep in mind, the offering must remain private. So, moving forward, those seeking to raise money under Regulation D approved offerings have two options. First, raise money under the current rule and you can accept up to 35 unaccredited investors but are restricted from advertising. Or, second, only accept money from accredited investors but be allowed to advertise the offering. You don’t get both options in one (advertising and unaccredited investors) but at least you now have another option in being allowed to advertise and solicit under the new rules.
Here’s a quick chart the outlines the two Rule 506 Options. The key differences are highlighted below.
||Rule 506 (b)
||Rule 506 (c)
Total Amount You Can Raise
|Offering Docs Required
|Offering Memorandum, Sec Form D Filing, State Securities Filing, Company LP or Operating Agreement, Investor Suitability Quest.
Offering Memorandum, Sec Form D Filing, State Securities Filing, Company LP or Operating Agreement, Investor Suitability Quest.
Un-limited accredited investors and up to 35 unaccredited investors who are sophisticated enough to invest.
|Accredited investors only. Unlimited accredited investors. Must verify they are accredited.
|Marketing of Offering
||Must remain private. Can only market to persons with an existing relationship.
Marketing and general solicitations are allowed. You amy market via websites, e-mail campaigns, and at events or meetings.
If you are establishing an estate plan, it is likely that you will have a Revocable Living Trust (“Trust”) as the primary document that outlines who will receive your assets upon your death and what conditions, if any, will be placed on those assets. As many persons are aware, a Trust has numerous advantages over a will because upon the death of the owner(s) of the Trust, the surviving trustee of the Trust will have control and authority to distribute the estate of the deceased person without having to go to probate court. A will, by contrast, typically must receive Court approval and distribution of the assets occurs only after going through probate court and getting orders from the Court. The probate process of a will is expensive, time consuming, and is part of the public record.
When establishing a revocable trust you will be outlining your assets and who will receive those assets upon your death. You will also outline certain conditions that may be placed on your assets. For example, you may state that your children will receive an equal share of your estate upon your death and the death of your spouse but your children shall not receive a distribution if they have a drug or alcohol addiction or if they have a creditor who would cease the funds. The trust may also restrict distributions to minor children so that they don’t receive a large inheritance when they are 18.
One of the most significant decisions you will make when you establish your Trust is who will be the Trustee of your Trust upon your death. In most situations, you will be the trustee during your lifetime and if you have a spouse your spouse will be trustee if they survive you. However, you will need to select a successor Trustee of your Trust who will manage your estate following your death (and the death of your spouse, as applicable). This successor Trustee may be a family member, friend, bank or trust company, or an attorney or other professional. When determining who should be your Trustee, you should consider the following issues and factors.
- What Will the Trustee Do? The Trustee will need to undertake the following tasks.
- Typically will make funeral and burial arrangements along with family members (generally the Trust pays for these things).
- Inform family members and heirs of the estate plans of the deceased.
- Will pay off creditors and hire professional as needed to assist with the estate (accountants, attorneys, real estate agents, etc.).
- Determine assets. They will need to know the assets of the deceased in order to ensure that they are distributed to the heirs/beneficiaries of the Trust.
- Organize assets for distribution. This may include listing and selling real property. It will likely include coordinating the distribution of bank accounts and insurance policies. It will also include organizing and distributing personal effects (e.g. jewelry, furniture, art, personal effects). And finally, it may include the winding down, sell, or transfer of businesses.
- Size of the Estate. Most Trusts will list a family member as the Trustee of the estate and for estates of a couple million dollars or less this is generally a good fit. However, for estates over $3M you may want to consider listing a professional (attorney or law firm) as the successor trustee of your estate and for estates over $10M you may want to consider listing a trust company or bank as the trustee of your estate. Large estates can overwhelm a family member who has never handled such matters before and having a professional with experience can go a long way. The Trust will need to pay for these services (generally in the tens of thousands of dollars) so it isn’t typically advisable for smaller estates unless there is no other adequate family member of friend available.
- When to List Non-Family? If you have heirs/beneficiaries who are likely to disagree and cause contention, you may want to list a non-family member or a friend as the Trustee so that a third party can make decisions and so that you can avoid potential contention and litigation over your estate.
- Financial Expertise of the Trustee. If you are selecting a family member, choose one who has shown good financial skills over their life. If you’re selecting a child over another, consider their financial expertise, work background, location, and family dynamics in selecting one child as Trustee over another. Also, choose someone who is well organized and who is task oriented. The Trustee will have many things to accomplish and you want someone who will take care and responsibility for these things.
- Family Dynamics. All families are different and all situations are unique. As a result, you may select a brother or sister as your successor Trustee instead of choosing a child or other family member. This may be because your children are younger or because a sibling is better equipped to handle the administration of your estate.
- Trustee Compensation. If you are listing a family member as Trustee, they typically will serve without compensation but will be reimbursed for any expenses they incur while serving as Trustee. You may compensate them or give them something extra from the estate for taking on the responsibility but generally family members are listed to serve without compensation.
- Can an Heir/Beneficiary be a Trustee? Yes, you may have a beneficiary/heir serve as Trustee and this is very common. In fact, most persons who have adult children will list a child as the successor Trustee and this person will also typically be a beneficiary/heir. While there is some conflict of interest in this arrangement, the Trustee is bound to the terms of the Trust and can’t abuse that discretion for their own personal benefit.
- Should I Appoint Co-Trustees? Some persons will consider listing co-beneficiaries as successor Trustees. Typically, this is done as a way to involve more than one family member in the distribution of the estate so that one person doesn’t feel left out. While there can be some benefits to involving another person as Trustee (e.g. sharing the workload, combining skills of persons listed) it can cause contention and confusion as to who is doing what so be specific about their authority and responsibility if you are listing multiple trustee.
- Who is Most Commonly Listed as Trustee? Most persons with adult children will list one of their children as successor Trustee. Most persons with younger children will list a sibling or close friend as their successor Trustee.
Your Trustee has an important and critical task in managing your estate following your death. Choose wisely as they will need to make critical decisions that will effect your loved ones.
I’ve had a number of inquiries lately about when to use a separate IRA Trust as the beneficiary of your IRA. IRAs, like bank and savings accounts, are passed on to the heirs of the deceased IRA owner according to the beneficiary designation form that is on file with the IRA custodian. This form will typically list a spouse as beneficiary and then maybe the children of the IRA owner as the contingent beneficiary. In the event that the spouse has already passed away, the IRA would then be inherited by the children listed as contingent beneficiaries. Many individuals with large IRAs would like their IRA accounts to pass on to their children or grandchildren according to the terms of a trust document whereby the funds, and their heirs access to the funds, can be controlled over time. For example, if the IRA owner were to die and pass on the IRA account to a minor beneficiary then that minor could withdrawal the entire IRA upon their 18th birthday. Not only is a large sum of money in the hands of a teenager a bad idea, but if the child takes a distribution of the entire sum then it will cause a significant tax liability to the 18 year-old heir that could have otherwise been stretched out over the heir’s lifetime if the IRA has been passed down and distributed over time according to the terms of the the IRA Trust. In other words, the legacy left to the child is eaten up by poor tax planning and teenage decision making. When an individual (or properly drafted trust) inherits an IRA, that IRA must be distributed according to the required minimum distribution rules (“RMD”). These rules allow a spouse to roll over the IRA to their own IRA and that is common option for spouses who inherit an IRA. However, children or other beneficiaries who inherit an IRA cannot roll the IRA over to their own IRA but do have the option, if exercised properly, to take the annual RMD over the heirs lifetime. This is a great option for younger heirs (e.g. children or grandchildren) of IRAs as it allows them to keep the IRA in a tax deferred or tax free account for a longer period of time and allows the IRA to continue to stay invested. That being said, just because an IRA heir is better off taking the IRA and the RMD over their own lives doesn’t mean that they will actually do so as many IRA heirs simply take a lump-sum distribution and subject themselves and their inheritance to significant up-front tax . As a result, many IRAs are better off being distributed over time and an IRA Trust can be used to properly plan and restrict the IRA such that the distributions do occur over time.
While the IRA Trust is great for planning the distribution of a large IRA over time, I have seen it marketed improperly to clients and as a result I wanted to clear that air regarding a couple of myths I have seen regarding IRA Trusts.
Myth #1. IRA Trusts do not give an IRA owner the ability to stretch out their IRA any longer than could occur if the IRA named individuals on their IRA beneficiary designation. I recently had a client ask me about an IRA Trust. This client was told that the IRA Trust would allow the IRA owner to pass on their IRA to their children and that the IRA would not need to be distributed within 5 years of the IRA owner’s death but rather could be “stretched-out” and distributed over the lifetime of inheriting child. They were told that the only way to accomplish this “stretch option”, whereby distributions from the IRA occur of the heirs lifetime, was through an IRA Trust. This unfortunately is a half-truth because the IRA Trust is not providing or allowing the “stretch” option. In actuality, the so called stretch option can be achieved simply by naming the younger heirs on the beneficiary designation form. As a result, the IRA Trust should not be set up solely because the IRA owner would like to stretch out the IRA to their heirs. As discussed previously, the IRA Trust can be drafted to ensure that the IRA is actually stretched out and not drained by an heir but it is not the Trust itself that is giving the heir this option. The laws regarding IRAs and RMD already allow the younger heir to inherit the IRA and have it distributed over their lifetime regardless of whether the IRA is inherited via an IRA Trust or not.
Myth #2. IRA Trusts Should Not Cost $5,000. I had a client ask about setting up an IRA Trust and this client was quoted a little over $5,000 by another attorney simply to establish an IRA Trust. While an IRA Trust is its own stand-alone document, it should not cost more than a couple thousand dollars to establish and we can handle them for even less than that. Unless you have a very significant IRA (over a few million dollars) and you have some pretty unusual plans for distributing your IRA, an IRA Trust can be set up at a reasonable fee.
Now that we have the myths out of the way, I’d like to make note of two important facts to know about IRA Trust.
Fact #1. IRA Trusts are Unique and Take Special Planning. While an IRA Trust doesn’t need to cost $5,000 to set-up, it also shouldn’t be set up for $99 . There are special rules and requirements for IRA Trusts and the Trust need to be established such that it is a “see-through” trust under law. This requires some special drafting and planning in the estate plan process. While a well drafted revocable living trust should contain a clause regarding IRAs and while it will contain “see-through” trust language for the IRAs, that alone should not be relied on for those persons with large IRAs who would like their IRA to be inherited by younger heirs and distributed over time. As a result, I recommend having a separate IRA Trust to ensure that the IRA is properly distributed and managed upon your death.
Fact #2. Your Spouse Shouldn’t Be an Heir Under an IRA Trust. Spouses should not receive an IRA inheritance through an IRA Trust. Rather, in most situations, they should be listed on the beneficiary designation form of the IRA. The reason for this is simple, spouses can directly inherit and IRA and can roll their deceased spouses IRA over to their own IRA. This spousal rollover isn’t possible with the IRA Trust and in general, the IRA Trust doesn’t need to be used to control distributions of an IRA over time to a spouse in the same way it can be used to distribute an IRA to a child or grandchild.
Fact #3. If Your IRA Is the Be Inherited By Multiple Children Then Special Planning Should be Taken. If you are planning to have your IRA be inherited by multiple children or grandchildren, then special attention must be taken as the rules for Trusts for IRAs states that the RMD rules of the oldest living child listed on the Trust will be used as the RMD for all beneficiaries. This is troublesome for a younger child or grandchild as they could otherwise “stretch-out” their share of IRA distributions over time but if proper planning and drafting doesn’t occur. They may be forced to take distributions from the IRA under a compressed and accelerated RMD schedule based on the oldest living heir that is part of the Trust. Consequently, it is highly recommended that you take addition planning steps to ensure that the IRA is distributed to each child or grandchild through a properly drafted trust so that they can use their own younger life-time in stretching out the IRA and its tax deferred benefits.
In sum, an IRA Trust is a great tool to ensure that assets from an IRA are passed on in the most tax-deferred manner possible. The IRA Trust protects the heirs from themselves, and their potential impulse to drain the IRA, and also protects the IRA from the creditors of the IRA’s heirs. As a result, an IRA Trust should be considered as an additional item for persons with large IRAs who intend to pass on their IRAs or other retirement accounts to children or grandchildren.
By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook
If you’ve been named as an executor in a will or as a trustee in a trust, you have some important responsibilities and obligations that arise upon the death of a loved one. Here’s a quick list of items to consider as you begin managing a deceased persons estate.
1. Understand the Estate Documents. The first item to understand is the estate documents. The estate documents will determine the rules, persons, and procedures that will apply to the distribution and management of the estate.
If you were appointed as an executor or personal representative in a will, you will need to understand the terms of the Will and who are the heirs pursuant to the Will. The executor, also known as personal representative, has the authority to administer and distribute the estate. In most situations where only a will is used, you will need to go to court to be appointed as the legal executor of the estate and will need court approval to transfer certain assets such as real property.
If you were appointed as a trustee in a Trust, you will need to understand what assets are owned by the Trust and what assets are owned outside the Trust. In general, a Trust is used by individuals to avoid probate and to provide better direction and control of their estate. If the Trust was established correctly and if it was properly funded (e.g., it owns the assets of the deceased person), then you will not need to go to court to get approval to administer the estate.
In addition to understanding the operative will or trust, you will need to identify other documents that may be included in the estate plan. These documents may include funeral and burial instructions where the deceased person has indicated whether they are to be buried or cremated and what services should accompany their funeral (e.g. church, military). There may also be a memorandum of personal property that outlines how specific items of personal property are to be distributed to heirs. Common items identified and handled on the memorandum of personal property are jewelry, pianos, guns, precious metals, and valuable personal effects.
2. Determine the Assets. You will need to determine what assets are included in the estate. In many instances, this can be difficult to determine, as the deceased person may not have provided complete information as to their bank accounts, investment accounts, real estate, retirement accounts, and life insurance policies. Many children who become executors and trustees have a difficult time locating the assets of their deceased family member despite having an otherwise close relationship.
3. Identify the Heirs. Most estate documents such as a will or a trust will list the heirs to the estate and these heirs (aka, beneficiaries) are whom you are serving for as executor or trustee of the estate. In most instances, the heirs are clearly identified. However, what happens if the will or trust listed one of your siblings as an heir and what if that sibling in longer living? Does that portion of the estate go to your sibling’s surviving spouse or children or to the other siblings? Ideally, the will or trust will state what shall occur in this instance but in many instances this item can be overlooked and not considered in the estate plan. As a result, as executor or trustee, you are left to determine who shall take the place of your deceased sibling and this decision is subject to the terms of the document and state laws. In general, you will need to seek the guidance of an attorney and those legal expenses shall be paid and/or reimbursed to you by the estate. Depending on the terms of the documents and the heirs involved, you may need to get a court order to identify and determine heirs.
4. Identify the Creditors. Almost every estate has creditors who need to be paid. From credit card companies and other consumer debt to mortgage lenders with liens on real estate owed by the deceased. As executor or trustee of the estate, you have an obligation and responsibility to ensure that all creditors claims are paid from the estate. Failure to do so may result in liability to you as the executor or trustee or to the heirs who receive distributions from the estate that should otherwise of been paid to creditors.
Whether you are working with a secured or unsecured creditor, you will need to provide evidence of your position as executor or trustee, which in the case of a Will would include a copy of the Will or in the case of, a Trust would include a copy of the certificate of trust.
In general, secured creditors such as mortgage lenders or car lenders will be paid upon the sale of the property or asset unless the estate otherwise ahs cash available and intends to hold these assets. Regardless of whether the asset will be held or sold, you should immediately notify secured creditors of the death of the deceased person. Where possible, you should ensure that payments are made to these creditors so that penalties and late fees do not accrue to the estate. If properties or assets subject to the secured creditor are paid, then the proceeds from the sale will resolve these debts.
As to unsecured creditors, you should notify them of the passing of your loved one. However, these creditors are not always paid in full. From personal experience in handling estates, I have found that unsecured creditors, such as credit card companies, will generally negotiate amounts owed to close the account. Maybe start with an offer of 1/3 of the amount owed and see if the unsecured creditor will accept that amount as a payoff. While they do have legal recourse against the estate, they do face significant legal fees in probate court to collect on the debt. If the estate must probated in court, as will typically occur if there is only a will, then as executor you are required to notify creditors of the probate court action and of the assets of the estate. Un-secured creditors then have a certain amount of time to assert their claim against the estate. I have been surprised at how many unsecured creditors actually follow up and make a claim against the estate despite being given notice of the assets of the estate. As a result, look to negotiate with these creditors and if you are in probate already, wait until they actually make a claim in the probate court (following notice of the case and deceased persons death you will be required to provide) before paying those creditors. You have a good chance that the creditor won’t even make a claim.
5. Conduct the Proper Process. The estate documents and the assets of the deceased will determine the process to administer the estate. Also, if the deceased person had assets in multiple states if they only left a will, you may need to conduct probate in multiple states.
There are a number of common situations where you will need to go to court to obtain court approval in administering the estate.
First, in the case of a will, you will typically need to go to probate court to be appointed as executor by the Court and to get court approval to transfer any real estate assets to heirs or in a sale from the estate.
Second, if the identity of heirs is in question, you may need to get approval from the court as to the proper heirs to receive proceeds from the estate.
And third, you may be required to go to Court if the estate documents leave contradictory, improper, or confusing provisions that cause disagreement amongst heirs. In this situation, obtaining approval from the court is advisable in order to avoid claims against yourself and the estate.
As executor or trustee, you must also ensure that appropriate individual income tax returns and estate tax returns are filed. There are important procedures to follow when filing a deceased persons final tax return. For example, you must write the word DECEASED across the top of the tax return. In addition to a final income tax return, or the deceased, you may be required to file an estate tax return using IRS form 1041. This is required if the estate receives $600 or more in gross income.
In short, the responsibilities of an executor and trustee to an estate are significant. As an executor or trustee, you should seek out licensed professionals to advise you in the process. Whether these are attorneys, CPAs, or investment professionals, their expertise can aid you in quickly understanding and completing the tasks that are part of your responsibility as an executor or trustee. Keep in mind, the estate can pay the expenses of professionals and if you incur out-of-pocket expenses as executor or trustee then the estate can typically reimburse those expenses. In most situations, you are not paid to serve as executor or trustee, unless the estate docs specify provide for such compensation.
Your IRA can buy real estate using its own cash and a loan/mortgage to acquire the property. Whenever you leverage your IRA with debt, however, you must be aware of two things. First, the loan your IRA obtains must be a non-recourse loan. And second, your IRA may be subject to a tax known as unrelated debt financed income tax (UDFI/UBIT). This comprehensive webinar explains the non-recourse loan requirements, as well as the non-recourse loan options and goes into detail on how UDFI tax may be applied and how it is calculated. Below are the slides from the presentation as well as the recorded video presentation of the webinar. Note that page 27 in the pdf slides below was up-dated from the webinar as I made a calculation mistake on the debt owed. The final tax numbers were still correct though. Thanks to Roger St.Pierre, Sr. VP at First Western Federal Savings Bank for co-presenting the topic with me.
Comprehensive Webinar: Buying Real Estate with Your IRA and a Non-Recourse Loan Mat Sorensen from Mathew Sorensen on Vimeo.