Self Directed IRAs Questions

[Justin Robinson-Howe]

Seeking a bit of guidance on SDIRAs.

Background: I own a handful of properties in Maine and am looking to grow my portfolio. My grandmother has a sizable IRA and is becoming more and more apprehensive about her traditional investments (stocks, bond, etc.), and more and more interested in moving her funds to a SDIRA to invest in real estate.

Now from my research I understand that she cannot use the funds to be a private lender to my business, as I am considered her direct lineage. That said, there’s a bit of a plot twist in that her husband is my step grandfather in which I have no relation to. It seems to be a “grey” area with step relation, but wondering if it would be permissible to transfer funds into a SDIRA under my step grandfather and he be a private lender to my business?

In addition, I understand that my grandmother can partner on deals with disqualified persons (i.e. me). This could be a very powerful option as an alternative to continuing to grow my portfolio. But from what I see, equity split is based on capital contribution. This method seems to limit any fair equity split for being a deal finder and/or doing any of the hands on work or coordinating value add projects. So my question is, am I understanding this partnering criteria correctly? Are there ways to fairly compensate for non-capital contributions? Lastly, as for property management, can we self manage? Is she allowed to hire me as the property manager or will we need to outsource?

As always I appreciate the help/guidance from the BP community! Always an invaluable resource!

[Dmitriy Fomichenko]

@Justin Robinson-Howe

It is not possible for your grandmother to transfer an IRA to her husband. The only way name change would be possible if she passes away and her husband inherits the IRA, then it can be transferred to his name (not an option here).

You are considered to be a "disqualified person" to your grandmother's IRA. While technically it might be possible to partner with disqualified person under certain circumstances, this is really bad idea as in most cases this would lead to a prohibited transaction and will disqualify the IRA. If you did so - the equity split must be based on capital contribution. If structured any other way - this would be prohibited transaction.

Also as a disqualified person her IRA can't hire you to manage the property, would be violation of the rules.

The bottom line is this: if she decides to convert to SD IRA all investments she makes must be "arms length" which means that you can't be involved in those transactions in any way.