I am pleased to announce the publication of my latest article in the WSBA Real Property Probate and Trust Section newsletter. The full article can be found here: Self-directed IRAs – Top Five Complexities for Estate Planning Attorneys – by Warren L Baker – WSBA RPP&T Sec – April 2014.
Although the article was directed toward estate planning attorneys, the concepts/complexities discussed are equally important for a self-directed IRA owner and/or his or her other advisers to understand.
The use of self-directed IRAs and IRA-owned LLCs to purchase nontraditional assets has increased in recent years and will likely continue to increase as a result of greater public awareness. As account holders age, it will become more important for estate planning attorneys to understand the fundamental legal, tax, and practical complexities that these accounts present for their clients. Specifically, attorneys should recognize the following potential complexities that SDIRA and SDIRA/LLCs can raise:
- Prohibited transactions. Prohibited transactions can occur at any time and the financial consequences to clients (and/or their beneficiaries) can catastrophic. Avoiding potential IRS scrutiny with regards to prohibited transactions involves careful recordkeeping. Attorneys should be prepared to, at a minimum, ask the SDIRA owner questions that will reveal the whether the client is on track with regards to legal and tax compliance.
- Asset Management. Attorneys should encourage clients to consider how the SDIRA’s or SDIRA/LLC’s unique assets will be managed if the client is unable to do so, whether due to incapacity or death.
- RMD. Required minimum distributions (generally beginning when the IRA owner reaches age 70 ½) raise unique challenges for clients with nontraditional assets within SDIRA or SDIRA/LLC structures because of the illiquid nature of these assets. Attorneys need to encourage clients to plan for the inevitable day (whether during their life or when the SDIRA is inherited by their beneficiaries) when required minimum distributions will occur.
- Current IRA Taxes (UBTI/UDFI). Attorneys need to recognize that an SDIRA’s investments are not always tax deferred and the SDIRA can potentially be required to file a current tax return and pay a tax as a result of UBTI and UDFI.
- Beneficiary Designations. SDIRA assets pass to beneficiaries in the same manner as any other IRA, i.e., according to the account’s beneficiary designation form. However, because of the difficulty in legally dividing unmarketable assets, attorneys must consider the practical difficulties that SDIRAs can present when advising clients to fill out beneficiary designation forms in a particular manner