Schwab estimates workers need $230,000 for every $1,000 in monthly retirement income. As of July 2005 the national savings rate was -.

Transcription

1 Schwab estimates workers need $230,000 for every $1,000 in monthly retirement income. As of July 2005 the national savings rate was -.05% 408(a) ''individual retirement account'' means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:

2 Buy Real Estate? Make Mortgage Loans? Borrow Money? Loan Money? Anything except Life Insurance Contracts Collectibles Client wants to invest in Real Estate, but doesn t want to take on too much risk A real estate developer needs to raise funds for their next project Client s IRA loans them the money with the loan fully collateralized by real estate

3 If the IRA only loans $60,000 on a $100,000 property, is it protected? What if the market drops 30%? Is it still protected? An IRA can not engage in any transaction with anybody or anything considered related to the IRA The penalty for doing so is the IRA will be considered fully distributed IRA/Retirement Plan Owner Ancestors of the Owner Offspring of the Owner Spouses of the above Business entities where the Owner is a 50% or greater shareholder

4 DOL Advisory Opinion A 26 CFR (a)(6) Example (6). F, a fiduciary of plan P... With authority respecting the management of P, retains S, the son of F, to provide for a fee... administrative services necessary for the operation of the plan. F has engaged in an act described in section 4975(c)(1)(E), because S is a person in whom F has an interest which may affect the exercise of F's best judgment as a fiduciary. Such act is not exempt under section 4975(d)(2) irrespective of whether the provision of the services by S is exempt. Taxes in IRAs? Not all income is tax free inside IRAs Active Business Income Debt Financed Income (Qualified Plans Exempt for RE) Allowed all normal deductions to offset the income Allowed $1000 without taxes

5 Transfer IRA assets to a self directed custodian Have the custodian create an LLC Apply for EIN for LLC Open bank/brokerage account for LLC Tell the custodian to transfer assets to the LLC You now control your IRA s checkbook You don t have to ask for anyone s permission or approval for investments You just write a check Estate Planning Concepts

6 What if you leave part or all of the IRA to your kids or grandkids? Will they have unfettered access? Will their spouses? Will they keep the assets in the IRA? Will their spouses? What happens if they distribute the IRA? Fred leaves his IRA to his 18 year old daughter, Paris Paris decides she would rather have a fancy car than money in the bank. Fred moves his IRA assets into a Limited Partnership A friend/trusted advisor is the General Partner of the LP LP owned by the IRA IRA Assets If Paris liquidates the IRA, all she gets is LP units

7 LP owned by the IRA IRA Assets The General Partner(s): Provide Investment Experience (Level Head) Follow Fred s wishes on distributions Instead of naming an individual as the beneficiary of the IRA, name a trust A Tax Exempt Trust Lets use A Charitable Remainder Trust A Tax Exempt Entity No Forced Distributions Pays an income to your loved ones Upon their death at least 10% of the initial value of the assets should go to your favorite charity (could be your own charity)

8 During your life you receive payments Trust Upon death remaining assets go to your favorite charity Charity If your IRA is paid to a charitable remainder trust, no taxes are due. (Private Letter Ruling ) This means 100% of the value stays in the trust Assets can still enjoy tax deferred growth The CRT needs a trustee to manage its assets You can name multiple beneficiaries

9 Trustee controls when and if to make distributions If you don t need the income right now, you don t have to take it. You now don t have to pay taxes needlessly. Fred has a $1,000,000 IRA Fred names a charitable remainder trust as the beneficiary The full value of the IRA, $1,000,000 stays in the CRT No taxes due on the transaction Fred names his brother, Ted as the trustee Ted invests the assets and earns 10% annually. No taxes are due on the income earned inside the trust. Kids can t force the trustee to distribute assets

10 Under certain conditions, the money can be accessed and taxed at long term capital gains rates. This would otherwise be taxed at potentially the highest rates During your life you receive payments Trust This is a property right known as an income interest Sale of an income interest generates LTCG Rev. Rul , C.B. 233, PLR , PLR , PLR , PLR Beneficiaries need the full million dollars Taxes on distribution (350,000) Net $650,000

11 Beneficiaries need the full million dollars FMV of her income interest $800,000 LTCG taxes on sale ($120,000) Net $680,000 Plus Charity still receives $100,000 Will this open markets for you?