Using the same Trustee for various entities

Hello Quincy,

It was great spending time with you on the cruise.  We all

enjoyed it immensely.  Can’t wait for the next one.

Question below:  Names have been changed to protect the innocent.

1) Ann is trustee of our land trust for our LLC in Georgia (normal entity not in our Roth).

Can we also do transactions with Ann in our Roth IRA?

2) Can we do transactions with the same person/entity inside and outside of the Roth?
Thanks.

 

Answer:

 

Great questions!  I’m not so sure about protecting the ‘innocent’ though.

 

Anyway, to answer your first question, you have to go to Internal Revenue Code Section 4975(e)(2)(G)-(H).  Per 4975(e)(2)(G), a trust of which 50% or more of the beneficial interest is owned directly or indirectly by a fiduciary of the IRA (which includes ownership by close family members of the fiduciary/IRA owner) is a disqualified person.  So, assuming you or you and your husband own 50% or more of the trust through the LLC, the trust would be a disqualified person to your IRA.  No surprise there.  When you have a disqualified entity, you then must look further to see who in the entity also becomes a disqualified person to your IRA.  Per 4975(e)(2)(H), an officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10% or more of the yearly wages of an employer) of any disqualified entity becomes a disqualified person to the IRA as well.  In this case I would argue that the trustee of an otherwise disqualified trust would be considered to be “an individual having powers or responsibilities similar to those of officers or directors” and therefore would be considered a disqualified person to your IRA.  So just based on the information provided it appears that a transaction with Ann would be a prohibited transaction.

 

The answer to your second question is, it depends (of course).  There would be many circumstances when a transaction outside of an IRA would not cause the person to become a disqualified person to the IRA.  For example, if I just simply made a hard money loan to an individual outside of my IRA, that person does not, merely by virtue of that loan, become a disqualified person to my IRA.  In other situations dealing with the same person inside and outside of the IRA might be a prohibited transaction.  Unfortunately, there is no way to answer your second question absent the specific facts of the transactions in question.

 

I realize that may not be the answer you’re looking for, but that’s why they call me Dr. kNOw.  J As always, keep in mind that I cannot give you tax, legal or investment advice.  Hopefully the information about will help guide your legal counsel anyway.  Have a great day!”

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