Warren Baker’s post on the WealthCounsel blog states: “Let’s assume for a moment that your client’s goal is to invest into a piece of residential rental real estate. Your client can either: (1) request that the new custodian purchase the property directly on behalf of the IRA; or (2) direct the custodian to first invest the IRA into a Limited Liability Company (“LLC”) that is thereafter 100% owned by the IRA and purchase the property using the LL (note: your client will act as the Manager of this LLC). The latter option gives your client the flexibility to purchase the property using a check from the LLC’s checking account, which depending on the custodian’s ability to move quickly, will be quicker than option number one.”
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.”
The Street: “Some Americans are using their Individual Retirement Accounts to invest in cattle, sports teams and restaurants, betting they can make more money than in the stock and bond markets. . . . Popular options include real estate investments and small-business loans.”
San Francisco Chronicle: “With many properties at bargain-basement prices, more people have been turning to their self-directed IRAs as a ready source of capital to make real estate investments. Companies that manage self-directed IRAs say real estate investments by their clients are up as much as 30 percent over the past year. . . . Self-directed IRAs account for just 2 percent of the $4.2 trillion IRA market, but are among its fastest- growing segments. They allow access to a variety of investment vehicles beyond just stocks and bonds. The IRS closely regulates them, and any real estate investments must be handled by IRA custodian firms that hold the property inside the IRA.”
Forbes: “Church bonds. Mexican land. Pay telephones. Swiss annuities. Bus shelters. Gold coins. Paintings. Mortgages. Untraded stock. Bull sperm. Bet you don’t know which five of these ten assets are permissible investments in Individual Retirement Accounts. . . . If you’re interested in unconventional assets, it’s worth boning up on the rules, because most lawyers and IRA custodians have only partial knowledge.”
See the table of custodians that allows self directed IRA investments.
CNBC: “If you recently watched your individual retirement account or 401(k) drop by double digits, you may wonder if there is a better way to sock away money in an uncertain economy. What if you could replace some of your investments with tax-deferred holdings not tied to the troubles on Wall Street? Maybe you’d prefer to invest in cattle in Wyoming, a gas station in Philadelphia or an underwater cemetery in Miami.”