As our population ages more and more wealth will be passed between generations. In fact there will be more wealth transferred over the next twenty years than in anytime in our country’s history. IRA assets will comprise a large portion of the dollars transferred.
Many will pass IRAs with balances of $100,000+ to their children. Many will transfer balances of $1,000,000+. So why should you care?
What do you think your children will do with $100,000 – $1,000,000+ cash in an IRA after you have passed on? Will your children continue to invest the money wisely and save it for their retirement?
A major concern should be the reality that your children will do things with that money that you would not approve of or might even make you roll over in your grave. Just because it took you 30+ years of disciplined savings to accumulate the money, shouldn’t your children have the right to burn through that money in three to six months of self-gratification? Remember there will be income taxes due and potentially estate taxes as well and even If your children do not blow your nest egg all at once they might slowly burn through it over a several year period by spending well above their normal standard of living. Why would they want to save that money for retirement or your grandchild’s education when they can buy a new boat and schedule to take a month long trip to Europe?
Question: if you had the ability to control your IRA assets from the grave would you?
I believe that well over 80% of those reading this article will say yes.
How can you control IRA assets from the grave?
By using a simple LLC (limited liability company). An IRA can invest in all sorts of interesting assets including an LLC interest. There is a specific way an IRA needs to purchase an LLC interest which is outside the scope of this article. However, the transaction is not difficult to accomplish.
Why have an IRA transfer all of it’s assets to an LLC? The reason is simple and powerful. Once the money is funded into the LLC, the manager of the LLC will control what happens to the LLC assets NOT the IRA owner. In fact, the IRA owner can not be the manager of the LLC. Doesn’t this result make sense? You may be asking yourself, does this prohibit your son or daughter from distributing the IRA and getting the moneyt? The answer is It does. When the IRA distributes assets what is it distributing? It is actually distributing the LLC interest and not cash. An IRA distribution DOES NOT get the money out of the LLC. So your son or daughter in the above example now has ownership of the LLC interest and the manager of the LLC still controls the money (including distributions to pay estate and income taxes). If the LLC manager has enough discretion in the LLC operating agreement, the manager does not have to take money out of the LLC for any reason he/she does not feel is appropriate.
What’s not appropriate?
The list is long and would probably include many fantasies your children held that were not shared by you. The LLC structure acts much like an irrevocable trust (IT) after you die. You are probably familiar with how ITs are used to make sure our kids spend inherited money wisely (per the trust agreement and with the watchful/discretionary eye of a trusted trustee). An IRA with the LLC structure basically does the same thing. You would simply setup this structure inside your IRA and have a trusted person or institution act as the managing member of the LLC. Direction will be given to the manager of the LLC through a well drafted operating agreement. The manager of the LLC not the IRA beneficiary controls the money in the LLC.
So I’ll ask you again, would you like to control your IRA assets after your death and make certain the assets it took you 30+ years to build are spent wisely by you heirs? My guess is your answer is yes. If so consult an advisor who knows this very interesting concept and an IRA administrator to administer the IRA.