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Controlling IRA Assets From The Grave: Protect IRA Assets From Your Children's Poor Decisions.

By Roccy M. DeFrancesco, JD, CWPP™, CAPP™ - Email Editor

Date : Oct 17, 2006

Dear Subcriber:

More and more wealth over the coming years will transfer between generations as our population ages. Those that know say there will be more wealth transferred from one generation to the next over the next 20 years than in any time in our country’s history. Much of the assets transferred will be IRA money.

Many readers of this newsletter will pass IRAs with balances of $100,000+ to their children. Many readers will have balances of $1,000,000+. So what’s the big deal?

You know your children better than I do, but what do you think your children will do with $100,000 to $1,000,000+ cash in an IRA after you are gone? I’m sure “your” children will continue to invest the money wisely and use it in their retirement? …

What many of you should fear is the reality that your children will do things with that money that you would not approve of or that would make you roll over in your grave. But don’t worry about it; just because it took you 30+ years to accumulate the money, has nothing to do with your children having the right to burn through that money in a weekend in Vegas. If your children do not blow it all at once (and don’t forget there will be income taxes due on that money and potentially estate taxes), maybe they will slowly burn through it over a several year period by taking trips around the world, buying expensive cars, throwing lavish parties, and otherwise living well above their normal standard of living. Heck, why would they want to use that money for the grandkid’s education when they can buy a new Hummer to drive around in or 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?

My guess is that well over 80 percent of those reading this newsletter will say “yes.”

How can clients control IRA assets from the grave?

By using a simple LLC (limited liability company).

If you’ve read any of my material on IRAs, you know that an IRA can invest in all sorts of interesting assets including an interest in an LLC. There is a specific way that an IRA needs to buy an LLC interest, which is outside the scope of this newsletter. I want you to simply assume that it’s not difficult to accomplish it.

Why have an IRA transfer all of its 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 cannot be the manager of the LLC.

Think about that for a second. It makes sense, doesn’t it?

You may be saying to yourself that this does not prohibit your son or daughter in the above example from distributing the IRA and getting the money, does it? It does. When the IRA distributes assets, what is it distributing? It is distributing the LLC interest. 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 a week long bender to Vegas, a Ferrari, a new 60-foot speed boat, diamonds for a part-time girlfriend, etc. ...

Hopefully you are getting my drift. The LLC structure acts similar to an irrevocable trust (IT) after a client dies. 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). The LLC structure with an IRA basically does the same thing. A client will set up this structure inside their 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-written operating agreement. The manager, not the child/heir, controls the money in the LLC.

So I’ll ask you again, would you like to control your IRA assets from the grave to make sure the money that took you 30+ years to build is spent wisely by your heirs? My guess is your answer is “yes.”

Not many people know this topic, and fewer know an IRA administrator to administer it. If you would like further information, please contact, info@trustmakers.com.

Roccy M. DeFrancesco, JD, CWPP™, CAPP™

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