Buying Notes with your Self-Directed IRA
Now that you know the basics of a Self-Directed IRA, let’s dive into some of the leading trends in Self-Directed Investing. With all of the stock market uncertainty, investing in notes has become increasingly attractive using tax-deferred funds in your IRA or retirement plan. Notes can be a great option because the payment streams come into your IRA and in the final analysis, on a first trust deed, the worst case is that you own the property. Best of all, discounted notes can be purchased for pennies on the dollar.
Investing in real estate and notes is just like any other transaction that uses a third-party entity as the owner. Here are some rules to keep in mind when considering note-buying with your Self-Directed IRA:
- The IRA owner cannot receive any benefit from the IRA or its assets. Specifically:
- No living on the property.
- No direct receipt of income related to the property. Income is only permissible when it is proportionate to the investment.
- The IRA cannot deal with you or any disqualified persons. This includes parents, spouses, children, and some business associates.
- Qualified plans assets, such as an office building invested in or by a plan, can have a certain part allocated to having you rent space for the purposes of the plan (we suggest consulting an attorney for more information).
How to get started buying notes with your self-directed IRA:
Once you’re ready to start investing, a direction of investment form must be completed when purchasing a real estate note. By utilizing an IRA administrator, you can guarantee your directions will be executed in a detailed and timely manner, assuring efficient transactions.
When a title or escrow company is involved, make sure that all instructions are provided for all documents in your account. Title or escrow companies may have additional requirements for your transactions than ours, so please be aware.
Your administrator must receive all loan documentation before funding can take place. Funding may not be initiated without a full loan package; this includes a trust deed and note, title insurance (if applicable), and appropriate vesting.
As your record keeper, your IRA administrator may receive payments directly from your payer as well as process loan payments. They also keep all original documentation for your convenience.
By investing in notes, you are investing in a tangible asset. By investing with your Self-Directed IRA, you are guaranteeing tax-free returns on those investments, making it a great alternative to the stock market. For more information on buying notes in your Self-Directed IRA, or any of the options available to you by Self-Directed investing, call us toll-free at 888-938-5872.
Take back control of your retirement and stop losing money to the fund managers. Contact us today!
What is Self-Directed IRA Investing?
Posted on: April 6, 2017 at 4:25 am, in
Self-Directed Investing 101
The Self-Directed IRA industry is growing at a staggering pace and is expected to see over $2 trillion enter the market over the next few years. With over 45 million retirement account holders and less than 4% of those being held in nontraditional assets, the time to consider Self-Directed investing is now. The Investment Company Institute- the national association of U.S. investment companies, estimates that nearly $4.7 trillion in IRAs were held in the U.S. last year. Of this, an estimated $94 billion or a mere 2 percent are Self-Directed IRAs.
So, what is Self-Directed IRA Investing?
A Self-Directed IRA allows you to decide how to invest your retirement funds. Many people assume “Self-Directed” is a unique type of IRA. However, “Self-Directed” is not a type. Any IRA, whether it’s a Traditional, ROTH, SEP, or SIMPLE IRA can be self-directed.
Using your IRA to invest in non-traditional assets like real estate has been available to investors since 1974. You may be learning about this for the first time because large banks and brokerage firms don’t typically offer these investment options. You may ask – “Is this really legal?” The answer is yes. With the exception of life insurance contracts, collectibles, and stock in an S corporation, IRS rules allow all other investment types as long as they comply with the rules governing retirement plans.
Stock market volatility and the economy have many investors considering alternative assets for their retirement accounts. A Self-Directed IRA gives you control over your retirement funds by making tax-free investments in assets that you’re familiar with.
What Can I Invest in?
Below are some examples of investment opportunities available to you through your Self-Directed IRA:
|Types of Self-Directed IRA Investments Allowable by IRS:
|Residential real estate
||Tax Lien Certificates
|Commercial real estate
|Undeveloped or raw land
|Real estate notes
||Oil and Gas
||Stocks ,bonds, mutual funds
|LLC and C-Corp
||LLCs, LPs and C-Corporations
What are the Rules?
Prohibited Transactions. IRS rules forbid certain types of transactions in IRA accounts. Some examples are listed below:
- Collecting management fees for your properties is also prohibited as it is a direct benefit for you, the account owner.
- Collecting commissions on properties purchased through your IRA.
- You may not buy, sell, or lease your real estate from disqualified persons.
- All profits generated from an IRA owned asset must be paid back into the IRA and all expenses incurred by the asset must be paid by the IRA (they may not be paid with personal funds and reimbursed by the IRA).
- Any debt used to acquire an asset in an IRA must be non-recourse. In other words, the IRA owner is prohibited from guaranteeing the note personally.
Disqualified Persons. IRS rules define certain individuals that are unable to participate in any transaction with your IRA:
- Your Spouse
- Your Children
- Your Children’s Spouses
- Your Parents
- Certain Business Partners
Additional Regulations. Here are a few examples of prohibited transactions using your IRA that you should become familiar with:
- The property must remain in the IRA until distributed or sold to a third party.
- Property owned within an IRA will not be able to take advantage of write-offs, such as depreciation or other expenses relating to the property.
- All rental profits must be returned to the IRA.
- When purchased, the property becomes an asset of the IRA.
- If you are an owner, you may not lease to a disqualified person, or in any way have a disqualified person occupy the property while it’s owned by your IRA.
- While an IRA owner cannot manage the property, they can hire a property manager or real estate broker to collect rent and maintain the property.
- Neither the IRA owner nor his/her family members (siblings excluded) may have access to or utilize the property while it’s in the IRA.
- Borrowing money from an IRA. IRA’s are prohibited from making loans to IRA owners as well as any other disqualified persons.
- IRA owners are prohibited from using their IRA as collateral for any loan, as the amount they pledge as security will be deemed a distribution by the IRS.
- Selling assets you already own to your IRA or to a disqualified person’s IRA.
- Purchasing a property for personal use, either by the IRA owner and/or a family member.
- Purchasing a property owned by a family member who is a disqualified person.
- Lending money to a disqualified person.
So should I open a Self-Directed IRA account?
Self-Directed investing isn’t for everyone. For some, the idea of having total control of their investments is a daunting one. We recommend reviewing your investment strategies with your tax advisor prior to investing. For more information about what a Self-Directed IRA can do for you call us toll-free at (888) 938-5872.
Pros and Cons of an Offshore Asset Protection Trust: Is it the Best?
Posted on: April 5, 2017 at 3:18 am, in
Pros & Cons Offshore Asset Protection Trust: When to use an Offshore Trust
Today many estate planning firms tout the benefits of Offshore Asset Protection Trusts as instant asset protection solution for every individual looking for the end-all, be-all. It feels to them like finding a the last raft on a ship that has a pin-sized hole in it. Their first instinct is to throw out the raft and jump off the boat immediately. Unfortunately, things since 9/11 and the global financial crisis of 2008 have changed in this country. Prior to 9/11 we recommended Offshore trusts for a much larger percentage of clients, but that is no longer the case.
The problem is that 99% of the time, jumping off the boat is not the best solution because the nearest land is thousands of miles away and the hole is not that large. What they actually need is for the captain to help them analyze all of their options, the safest and easiest of which is to simply plug the hole. Of course if someone is selling rafts, then it’s even more difficult to expect them to recommend a thoughtful and unbiased solution.
And this is the real challenge if you are considering an Offshore Asset Protection Trust. I am a big advocate of the Offshore Asset Protection Trust (just like I am an advocate of rafts) – but in both cases only when they are absolutely necessary and appropriate. In fact, offshore asset protection trusts are only recommended to a very small percentage of clients these days; those with at least $7-10M liquid assets.
Why an Offshore Asset Protection Trust is a Bad Idea for Most People
Because of the new regulations from the Patriot Act and subsequent banking acts, offshore asset protection trusts are very expensive to maintain.
Going offshore to establish asset protection trusts means going out-of-pocket for between $5,000 to $10,000 per year in maintenance fees. Because of these expenses, many of these offshore trusts will only last about three to four years for the average individual, particularly if they were created in a rush to thwart a perceived upcoming risk; for this reason, grantors often question whether their hasty decision was indeed the right one at the time.
Offshore Trust Maintenance Fees Explained
There are quite a few mandatory and compliance forms to file when going offshore. At a minimum, there’s Treasury Department form 90-22.1
, Report of Foreign Bank and Financial Accounts to consider. There may also be a requirement to file a Foreign Bank Account Report (FBAR), which falls under the authority of the Financial Crimes Enforcement Network (FinCEN) form 114
Aside from filing TD and FinCEN forms, offshore trust grantors may also have to respond to the Internal Revenue Service (IRS) by filing forms 3250
and 3250A. These forms, which require disclosure of trust assets, are handled by a foreign trustee and a CPA based in the United States. As of December 31st, 2012, the U.S. Foreign Account Tax Compliance Act
(FATCA) is creating an additional burden on offshore trust grantors and trustees by requiring financial institutions abroad to report on the financial holdings and income of their clients.
With the new filing and compliance requirements also comes uncertainty as to how offshore trusts are managed. It calls for retaining the services of an attorney to work in conjunction with the foreign trustee. If you take into consideration all of the aforementioned factors, it is easy to see the $10,000 annual maintenance cost of an offshore trust.
Why $10,000 Offshore Trusts Are Not Always Sustainable
The mid and long-term costs of maintaining offshore trusts for asset protection simply do not add up for most individuals. With regard to offshore trusts being sustainable solutions, consider the following scenario:
An offshore trust with a $10,000 set-up fee and $5,000-$10,000 in annual maintenance costs will end up adding up to:
- Between $25,000 and $50,000 after five years and five IRS Form 3250 filings.
- Between $50,000 and $100,000 after 10 years and 10 IRS Form 3250 filings.
- Between $100,000 and $200,000 after 20 years and 20 IRS Form 3250 filings, assuming no inflation.
It’s not just the sizable amount of money required to keep offshore trusts active year after year that prompts most individuals to dissolve them after just three to four years; there’s also the experience and expertise of the firm to think about. Many financial planners rushing their clients through a $10,000 Offshore Trust lack the real-world experience of a firm that actually files and executes documents, disclosures and compliance forms.
As an alternative, some of our competitors propose a better plan that avoids much of the heavy compliance of the foreign trust because they use a foreign trust in combination with a domestic limited partnership structure for a $25,000 inception cost and “only” $1,500 per year maintenance cost (who knows how much these costs will rise each year once you are locked in). They justify the fee because they insert themselves into your trust as a trust protector. Essentially giving themselves the ultimate control over your assets. Their costs will work out to:
- $25,000 in the first year
- $32,500 by the 5th year
- $40,000 by the 10th year
- $55,000 by the 20th year
Prospective grantors looking for asset protection strategies should not throw caution into the wind. If anything, shielding assets in advance of a knowingly potential adverse situation should be approached with circumspection. Offshore trust structures are actually very good for grantors who fund their nest eggs with about $7M to $10M, and they can offer a enormous amount of asset protection if executed correctly; however, some plaintiffs have found cracks in the armor and some judges are beginning to formulate a dim view of these instruments
A Better and More Affordable Long-Term Asset Protection Strategy
A much more optimal alternative to offshore asset protection is the Ultra Trustâ„¢. It is designed to last 21 years beyond the death of the youngest heir and is easy and inexpensive to maintain. This domestic trust is supported by a firm that has 30 years of experience and a spotless record of asset protection in civil cases. A properly drafted, implemented, and funded domestic irrevocable trust has 150 years of success including challenges from the IRS and other sophisticated creditors. Click here for laws and actual cases
Comparing the cost savings of the Ultra Trustâ„¢ versus offshore trusts is easy. The inception cost is $14,500 and there are no annual fees; also, there are no IRS Form 3520 filing requirements since this is a domestic instrument. To this effect, the long-term costs of an Ultra Trustâ„¢ are as follows:
- First year: $14,500 set up cost.
- After 5 years, the grantor has only paid $14,500 and avoided the IRS Form 3520 filings.
- After 10 years, the grantor has only paid $14,500 and avoided the IRS Form 3520 filings.
- After 20 years, the grantor has only paid $14,500 and avoided the IRS Form 3520 filings.
Ultra Trust® clients can reach the firm by telephone and in person without having to worry about billing hours. All client services are included in the setup cost. The Ultra Trustâ„¢ is supported by one of the top 3 experienced and respected asset protection firms in North America that takes pride in shielding the holdings of clients; this is the most important factor for prospective clients to consider since there they do not have to worry about what may happen to their assets in an offshore jurisdiction they are not familiar with.
The Ultra Trust® asset protection plan is perpetually effective and does not need to be created in a rush. As a matter of fact, the best time to create this domestic trust is when things are tranquil and before problems arise. With the Ultra Trustâ„¢, clients can rest easy in knowing that their assets enjoy true legal protection all the time.
It is your money. Spend it wisely.