Understanding Roles in a Checkbook IRA
A Checkbook IRA is a great tool for unlocking your retirement plan and taking control of your investments.
Whether deployed as an IRA LLC or IRA Trust, the point of the structure is to give you as the IRA account holder full authority to make the investments you choose.
There are several roles related to ownership, control, and inheritance that figure into the program. We get a lot of questions on these topics, and thought it would be good to outline how it all fits together.
Checkbook IRA LLC or Trust?
Safeguard plans provide checkbook control via the use of either an LLC or a trust that is owned by the IRA and controlled by the IRA account holder. There are advantages of each structure depending on your specific investment goals and geographic nexus.
At the core level, however, the plans are identical for purposes of this conversation about roles. The names of the players can be different, but the results are the same.
Following are the different roles associated with each structure:
|Owner||Member||Grantor & Trust Beneficiary|
|Backup Authority||Successor Manager||Successor Trustee|
|Taxable Party||Member||Trust Beneficiary|
|Inheritor||IRA Beneficiary||IRA Beneficiary|
Let us take a look at how each of the above roles fits into the checkbook IRA construct.
Owner – The IRA
The ownership interest in the LLC or trust entity belongs to the IRA. In an LLC, the owner is referred to as a member. For a trust the IRA is classified both as the grantor (sometimes called trustor) who places value in the trust and the beneficiary who receives the benefit of the trust.
All capital contributed to the entity comes from the IRA, and all distributions of income from the entity will flow back to the IRA.
An IRA is not a person. While the IRA can own the checkbook entity, it cannot direct the affairs of the LLC or trust, and therefore needs someone to fill that role.
The person who runs the show is referred to as a manager for an LLC or a trustee for a trust.
The IRA account holder holds this position. That means they can operate the entity to make investment choices, signing contracts, issuing funds from the plan checking account, and so forth.
Some IRA owners will choose to operate their IRA plan themselves, but this is not always the case, and that is where a secondary authority can come into play.
An LLC can have a co-manager and a trust can have a co-trustee.
While we refer to this person as secondary, the authority they wield is equal to the primary manager or trustee. Any single manager or trustee can execute contracts, manage the entity bank account, and otherwise control the entity.
There are a few cases where a secondary authority can be beneficial.
We have setup plans where one spouse has the retirement savings, but their wife or husband is the one with the expertise and/or time to put the money to work in investments like real estate, private equity, cryptocurrency, or other alternative assets.
Sometimes a parent wants to setup a plan for a minor child, and in that situation the parent will need to be a manager or trustee.
It is also common for an elderly parent to seek assistance from an adult child who can help them manage and protect their savings.
While it can be helpful in many cases to have a co-manager or co-trustee, we recommend against just naming your spouse in this role because they are your partner. You should only name a secondary authority if that person will actively be involved in helping manage the checkbook IRA. The reason is that while our plan documents stipulate that the signature of a single manager/trustee is sufficient to enter into a contract, some plan counterparties will ignore that and want both signatures. This is especially common with real estate title attorneys or companies.
What happens if there is no manager or trustee capable of managing the plan in the event of incapacitation or death?
Ultimately, someone who is named as an IRA beneficiary can step in and assume the role of manger or trustee, but it can take some time to make that happen.
There might also be issues if the IRA beneficiary who you want to inherit the value of the IRA may not be capable of administering the plan – such as a minor child or a person with disabilities.
The solution is to name a successor LLC manger or successor trustee for a trust. This person is designated in advance to take control of the entity if there is no manager or trustee available.
Safeguard plans include a successor manager or trustee designation resolution that can be used to name such a successor. If the managing role is vacant due to death or incapacitation, that person can step into the role of manager or trustee.
The IRA is always the taxable party. The whole idea behind the self-directed IRA is to keep the investment activities under the tax-sheltered umbrella of the IRA.
The tax liability of the LLC or trust flows through to the IRA that is the owner.
It is important to understand that control and inheritance are two entirely separate concepts.
Many people want to name their spouse a co-manager or successor trustee because they think that is necessary for their spouse to inherit the IRA. That simply is not the case. Management roles are strictly about the administration of the entity.
Beneficiary inheritance is not designated at the LLC or trust layer. The IRA is where this happens. When the IRA is setup with the custodian, you will name those who will inherit the IRA – and the LLC or trust it owns – if you pass.
You can name one or more primary and/or contingent beneficiaries, for your IRA. Those beneficiaries can be individuals, trusts, or other non-persons like a church or school. You can also update your IRA beneficiary designations at any time simply by submitting a form to your IRA custodian.
Options Are a Good Thing
We hope the outline we have presented here helps you better understand the different ways you can setup a checkbook IRA to achieve your specific goals.
Do you want help managing investments? You can make that happen.
Do you want to ensure your heirs are both enabled and protected with respect to inheritance of your IRA? There are several ways to ensure your desired outcomes after you take your leave.
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