Protect IRA Assets from Your Children’s Poor Decisions

More and more wealth over the coming years will transfer between generations as our population ages. Investment News stated recently that 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 over $100,000 to their children, and 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 – $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 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, shouldn’t your children have 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 tax penalties), 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 their grandkid’s education when they can buy a new SUV to drive around in or schedule 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 90% of those reading this will say yes. But how can you control IRA assets from the grave? By using a simple Limited Liability Company (LLC).

While you may not be aware of this, an IRA can invest in all sorts of interesting assets including an interest in an LLC. You do need to know, however, that there is a specific way an IRA needs to buy the LLC interest; but that is outside the scope of this newsletter. I want you to simply assume it’s not difficult to accomplish.

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, this doesn’t prohibit my son or daughter in the above example from distributing the IRA assets 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 remove the money from the LLC.

So your son or daughter in the above example now has ownership of the LLC interest, yet 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 similarly to an irrevocable trust (IT) after an IRA owner dies. You are probably familiar with how ITs are used to make sure children 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. An IRA owner will set up this structure inside an 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 it took you 30+ years to build is spent wisely by your heirs? My guess is, yes. If that is the case and you would like to learn more about how to use an LLC inside an IRA to control your assets from the grave, please contact me to discuss.