Question: Two years ago my spouse and I caused our IRAs to make self-directed investments into an LLC that purchased a rental home. Each IRA is a 50% member of the LLC. The property needs repairs that will cost more money than the LLC has available. Can we cause our IRAs to make additional capital contributions to the LLC to fund the repairs?
Answer: No. If either IRA were to make an additional capital contribution to the LLC, it would create a prohibited transaction under Internal Revenue Code Section 4975(c), which provides that a:
“prohibited transaction” means any direct or indirect— . . . transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan”
Because the two IRAs each own 50% of the LLC, the LLC is a disqualified person under Section 4975(e)(2)(G). This provision says that a disqualified person is an entity 50% or more of which is owned by a fiduciary. Each IRA custodian is a fiduciary with respect to its IRA account and because the custodian owns 50% of the LLC, the LLC is a disqualified person. Therefor a transfer of money from the custodian to the disqualified person (the LLC) to fund the repairs is a prohibited transaction.
Question: Why do some document preparers and attorneys charge substantially more than the $997 you charge to form an IRA LLC?
Answer: Because they can get away with it. Most attorneys who may routinely form limited liability companies never form an LLC that has an IRA or a retirement plan as a member so they are unlikely to form this type of LLC when asked. Most of the small number of attorneys and document preparers who actually form IRA LLCs charge far too much because they have little, if any competition, and they know that is it very unlikely a prospective client/customer will be able to find somebody else with the knowledge and experience to form an IRA LLC. These types charge far too much because they believe they have a monopoly and can set a high price because clients/customers have no other place to go to form an IRA LLC.
A few years ago I went to a seminar here in Phoenix, Arizona, about how to use self-directed IRA funds to invest in real estate through an IRA LLC. The person who gave the presentation was an attorney not licensed to practice law in Arizona. He told the group the many reasons they should form an IRA LLC, and said he formed them for $4,000. Since I was forming Arizona LLCs (not IRA LLCs) at that time for $599 including all the costs, (which is the same amount I charge today) I was shocked that he not only charged so much, but that people actually paid him that off the charts amount. I asked the speaker how he justified charging that much, but the answer he gave did not justify the price in my mind. That is when I decided I would learn about IRA LLCs so I could form them for my clients at a much lower cost and provide an outstanding total package.
No Specific Language Required by IRS or Tax Law to Form an IRA LLC
If an attorney or document preparer tells you that there are some “magic” provisions that must be in the Articles of Organization or in the Operating Agreement or some special hoops that must be jumped through to form an IRA LLC, that person is not being truthful. LLCs are formed pursuant to state laws, which do not require any special provisions or actions to be taken to form an LLC just because an IRA or a retirement plan will be a member of the LLC. Nor does the Internal Revenue Code of 1986, as amended, require that the Articles of Organization, the Operating Agreement or any other documents used in connection with the formation of an IRA LLC contain any specific language.
Specific Language I Include in the Operating Agreement of an IRA LLC
Even though neither Arizona law nor federal income tax law require that any IRA specific provisions be included in the formation documents of an IRA LLC, I do include IRA and retirement plan provisions in the Operating Agreement I prepare for my IRA LLCs. My Operating Agreement contains selected language from Internal Revenue Code Sections 408 and 4975 (prohibited transactions). Section 408 prohibits an IRA from pledging any of its assets as security for a loan and from investing in collectibles. Section 4975 contains the prohibited transaction rules.
I include these IRA specific provisions in my Operating Agreement because:
- I want the people involved with my IRA LLCs to where to find the prohibited transaction rules and the other restrictions that if violated by the IRA LLC could cause tax penalties and/or disqualification of the IRA.
- I hope the people involved with my IRA LLCs will actually read the provisions.
Why I Charge $997 for an IRA LLC & $597 for a non-IRA LLC
I charge more to prepare an IRA LLC than I charge to form a non-IRA LLC because:
- I do add the Internal Revenue Code Section 408 and 4975 language in the Operating Agreement, which I believe does add value, but not $3,000 of value.
- I get a federal employer ID number for each IRA LLC.
- I am an attorney who does not charge for questions about forming IRA LLCs.
- The entire package I give my IRA LLC clients is worth a lot more than the $997. See “What We Do When Hired to Form Your IRA LLC.”
An IRS private letter rulings (PLRs) is a statement by the IRS given to a taxpayer who submitted a request to the IRS for it’s position with respect to one or more federal tax issues set forth in the PLR. The PLR process is a way for a taxpayer to determine in advance of taking action if the proposed action will cause a problem with the IRS. PLRs annot be relied on by any person except the person who applied for and obtained the PLR. Although PLRs do not have any precedential value, they are instructive because they do indicate IRS thinking with respect to the issues addressed in the PLR.
Note: As we discuss IRS Private Letter Rulings we are not giving any tax or legal advice.
IRS Private Letter Rulings have little precedential value. The statements made by the IRS in Private Letter Rulings can be relied on only by the taxpayer(s) who requested the Private Letter Ruling. The IRS Private Letter Rulings listed below are for informational purposes and to inform you as to positions and statements made by the IRS with respect to IRA investments and transactions.
IRS Private Letter Rulings 200732026 and 200732027: The IRS said that shares of exchange-traded funds (ETFs) that acquired gold and/or silver did not constitute a collectible if the metals were acquired in an IRA. The ruling found that money invested in shares of gold and silver ETFs within an IRA was not a distribution subject to an early withdrawal penalty.
IRS Private Letter Ruling 200705032: Allocation of IRAs to a trust after an IRA owner died were not treated as an inherited IRA to decedent’s spouse. The rollover of the entire amount into the spouse’s IRAs were allowed if accomplished within sixty days and the funds attributable to the decedent’s IRAs were not included in the spouse’s or the trust’s gross income. The spouse and the trust were not required to withdraw any required minimum distributions with respect to any calendar years before the rollover.
IRS Private Letter Ruling 200652028: The assignment of a decedent’s IRAs to two charities in satisfaction of their share of the residue of a Trust created by the decedent was not a transfer under Internal Revenue Code Section 691(a)(2).
IRS Private Letter Ruling 200650023: After her husband’s death a surviving spouse was allowed to rollover her deceased husband’s profit sharing plan and SEP-IRAs account balances to an IRA in decedent’s name from which she could receive penalty-free distributions before age 59 and a half in accordance with Internal Revenue Code Section 72(t)(2)(A)(ii).
IRS Private Letter Ruling 200217059, January 31, 2002: The transfer of possession of bullion coins and bars from the IRA custodian to a non-bank entity that provides precious metals safekeeping services would cause the bullion to become collectibles under Internal Revenue Code Section 408(m)(3) because the IRA custodian would not possess the coins and bullion. Therefore, an IRA that deposits bullion coins and bars with a non-bank entity must treat the deposit as a distribution from the IRA to its owner.
IRS Letter Ruling 200008044, December 3, 1999: Dividing an inherited IRA into four separate trusts was not a distribution.
IRS Letter Ruling 200027061, April 12, 2000: IRA funds acquired from the estate of a deceased spouse can be rolled over tax free into the survivor’s IRA.
IRS Letter Ruling 199929029, April 27, 1999: IRA’s investment in an entity taxed as a Subchapter S corporation will terminate the entity’s S corporation tax method.
IRS Revenue Ruling 2000-2: An executor may elect under Internal Revenue Code Section 2056(b)(7) to treat an IRA and a trust as qualified terminable interest property (QTIP) when the trustee of the trust is the named beneficiary of the decedent’s IRA. The surviving spouse may compel the trustee to withdraw from the IRA all the income earned by the IRA assets at least annually and to distribute that amount to the spouse, and no person has a power to appoint any part of the trust property to any person other than the spouse.
IRS Revenue Ruling 2008-5: If a taxpayer sells stock for a loss and causes the taxpayer’s IRA or Roth IRA to purchase substantially identical stock or securities within thirty days before or after the sale, the taxpayer’s loss on the sale of the stock will be disallowed because it was a wash sale.