Many self-directed IRA investors use an IRA/LLC (aka “checkbook-controlled IRA”) to hold their self-directed IRA investments. For an overview, see my video here. When using the IRA/LLC structure, the name of the LLC is on title to the assets, and the LLC’s bank account receives the income. As a result of this structure, the self-directed IRA owner may be asked by a title company, property management company, or other third-party to complete an IRS Form W-9 form for the IRA/LLC. Form W-9 is the document these parties request in order to issue 1099’s for rental income or for sale proceeds for real estate, stock, or other assets sold by the LLC. Form W-9 can be tricky and needs to be handled differently when you have a single-member IRA/LLC (i.e. when the IRA owns the LLC 100%) than when the LLC has two or more owners (aka “partnership”). It is important that the W-9 is completed properly so that the IRS does not confuse whether the LLC is owned by the IRA or by the IRA owner personally.
The W-9 can be tricky to complete in the single-member IRA/LLC situation. Many IRA owners will include the LLC EIN in Part I of the form or will provide the owner’s SSN. Both of those answers are incorrect. I have provided a sample W-9 form for “ABC Investments, LLC” below:
Let’s go through each line to explain the responses. I’ll start on line 1.
- Name: In the instance of a single-member IRA/LLC, the IRS considers the LLC to be disregarded, which means that the LLC is not a separate taxable entity and instead the tax reporting goes directly to the owner. In this instance, the owner of the LLC is the IRA. Consequently, the name on line 1 should be the name of your IRA. If you have a self-directed IRA with our company, that name would be something like, “Directed Trust Company FBO John Doe IRA.”
- Business Name: Line 2 is where you will list the name of the LLC. So, for example, if your IRA/LLC is called “ABC Investments, LLC,” then you would provide that name on line 2.
- Tax Classification Box: This is the section that causes confusion and often results in incorrect selections. In this section you would check the first box, “Individual/sole proprietor, single-member LLC.” When the IRA owns the LLC 100%, the LLC is considered a single-member LLC.
- Exemptions: IRA/LLCs and IRAs are an exempt payee, and as a result, you should include Code 1 on the first blank space on line 4. See line 4 instruction on Code 1 for more details.
- Address: On line 5 and 6 you will include the mailing address for the LLC. Do not include your IRA custodian’s address as any 1099s for the IRA will be sent to the IRA custodian’s address. While most 1099s and tax reporting forms generated from a W-9 do not result in a reporting or tax obligation for the IRA, it is best that the IRA owner, who is responsible for the account and decisions, receive the 1099s at their address.
- Address (Cont’d): See line 5 response information above.
- List Account Number (Optional): You may include the IRA account number with your IRA custodian on line 7, but this is optional and is not required. If you have multiple IRAs with the same custodian, it would be helpful to also provide your account number for the specific accounts involved. Otherwise, if needed, the IRA is identifiable by the name line 1.
The next section is called Part I, and is the section where a social security number or employer identification number is used. This section is often completed incorrectly. The correct response is the EIN of party on Line 1. In this instance, Line 1 is the IRA. Most IRAs should not have their own EIN, and you should not obtain an EIN for the purpose of a W-9. You may have an EIN for your IRA because you have Unrelated Business Income Tax (UBIT) for your IRA (which is less common). However, most self-directed IRA custodians do not have an EIN for their IRA. Instead, what you should use is the reporting EIN of your IRA custodian. All IRA custodians have an EIN that is used for their customer accounts, and this EIN can be obtained by contacting your IRA custodian.
Most IRA/LLC owners have an EIN for their LLC and some will use that EIN in Part I. While that is the correct response in the multi-member IRA/LLC (“partnership”) context, it is not the correct response for the single member IRA/LLC. Another incorrect response on Part I is to use the social security number of the IRA owner. This is also incorrect as you do not personally own the LLC. An incorrect response on Part I doesn’t cause a prohibited transaction or disqualify the IRA, but it could create tax reporting confusions with the IRS.
Finally, the manager of the LLC would sign on Part II.
If your IRA/LLC has more than one owner, it is considered a multi-member IRA/LLC. Most multi-member IRA/LLCs are taxed as partnerships and as a result, the W-9 for a multi-member IRA/LLC is different from the single-member IRA/LLC.
The multi-member IRA/LLC is far more straightforward. I have provided a sample W-9 below. The important items for the W-9 in this instance are as follows:
- Line 1 is the name of the LLC: In a multi-member IRA/LLC, the entity files a tax return and is recognized at the LLC level by the IRS.
- Line 2 is blank as line 1 is the LLC name and they are the same.
- Check the box limited liability company and then indicate letter “P” for partnership.
- Skip the exemption code since the LLC itself has its own tax status (partnership usually). Even though it may be owned by IRAs the exemption doesn’t apply at the LLC level.
- Include the LLC mailing address.
- Continued mailing address.
- There is no need to list the account numbers of the IRAs here as the taxable entity itself is the LLC – not the IRAs – and there isn’t an account number for the LLC.
The LLC’s EIN should be used and provided in the box for employer identification number. Since a multi-member LLC is taxable itself as an entity (partnership return), it provides its own EIN for reporting uses on the W-9. The IRA custodian’s EIN is not used in this instance.
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.