Self Directed IRA - LLC

[Harpreet Singh]

My wife just opened a self directed IRA account with Quest Trust Company. She was told by the attorney that Quest won't allow her to be the manager of LLC. Attorney said that most other custodians allow that. I got great recommendations about Quest from BP. So I don't understand how this can be true???

[Brian Eastman]

@Harpreet Singh

The IRA owned LLC structure has been around for 25+ years. The IRA account holder can be the manager, so long as they adhere to the IRS rules and limit their role purely to administrative actions wholly for the benefit of the IRA. There are thousands and thousands of such structures out there. We have setup structures like this for clients who have subsequently been audited and the IRS had no difficulties - precisely because these folks had been following the rules.

Some IRA custodians support the IRA LLC model and some do not. Whatever reasons they may provide to you, the real reason that many custodians do not like the IRA LLC is that it eliminates the majority of their fee revenue. Plain and simple.

In the last few years, several custodians have come up with the requirement that someone other than the IRA account holder be the LLC manager. This is purely a mechanism to make the structure more cumbersome, so that their custodial processing services will look more appealing by comparison.

Here is the big joke in all of this. The custodians are essentially telling you, "You should not trust yourself with this much responsibility". They promote the idea that it is very easy for investors to break the rules and that the risk is too great. Do you trust yourself and are you willing to learn about and follow rules? If so, then there is no issue with a Checkbook IRA LLC where the account holder is the manager.

The truly cynical point about custodians saying you should not trust yourself to follow the rules is that the corollary of their marketing effort is "We have your back when it comes to IRS compliance."  Unfortunately, that is a big lie.  Read the disclaimer on the investment direction of any custodian.  Here is what is on the Quest form:

"I acknowledge that the Custodian has not provided or assumed responsibility for any tax, legal, structuring or investment advice with respect to this investment.  I understand that the Custodian has not reviewed nor will review the merits, legitimacy, appropriateness or suitability of this investment for my account, and certify that I have done my own due diligence prior to instructing the Custodian to make this investment for my account.  I understand that the Custodian does not determine whether this investment is acceptable under the Employee Retirement Income Security act (ERISA), the Internal Revenue Code (IRC), or any applicable federal, state, or local laws, including securities laws.  I understand that it is my responsibility to review any investments to ensure compliance with these requirements."

This translates to; "so long as you provide all of the appropriate paperwork to document the transaction, we will generally process the transaction".  That said, if there is something glaringly wrong with a planned transaction that the custodian sees, they will usually put the brakes on things, but they have no obligation to do so.  

So, ultimately, you are the one responsible for ensuring your IRA transactions are within the rules, regardless of which structural approach you choose - custodian held or truly self-directed with the checkbook LLC model.

In some cases where the dollar value is lower and the account is being invested in relatively static assets without time-sensitivity or frequency of transactions, a custodian serving as intermediary can be a fine solution. For investors who will have larger or more dynamic portfolios in the IRA, a plan offering checkbook control will provide much greater utility and eliminate a considerable amount of processing delays and fees inherent in the custodial model.

Kindgom Trust Co. and IRA Services Trust Co. are two of the larger custodians that fully support the IRA-owned LLC and have a long track record of doing so. There are several others.

As an aside, starting the checkbook IRA LLC process from the custodial side will generally result in an inferior overall service. The specialty firms that provide turnkey solutions for this type of program will integrate the process and work with a custodian that supports this concept. Quality providers will also be able to fully support you as you utilize the tool with meaningful guidance about IRS rules compliance. Starting with the custodian, especially if they merely accept but do not embrace the LLC concept, will generally result in a hand-off to an outside legal firm that produces a set of LLC documents at low cost and nothing more. Support is usually minimal or non-existent.