A Caution To Practitioners About Trying To Use An LLC As A Qualified IRA Hot

0.0 (0)
Write Review

The debtors, Mr. Pink and Mr. Porter, initially held traditional IRAs at Merrill Lynch. They then distributed the funds from these accounts and deposited them in accounts in an LLC which was established as a qualified self-directed IRA. A year later, the debtors transferred a portion of these funds to a lawyer in Panama to be held for a real estate deal. This portion the funds were now outside the retirement accounts. These funds were never used to finance a real estate deal and later, at the debtor’s direction, a portion of the funds were transferred to pay for the debtor’s living expenses. Another year later, the debtors filed for bankruptcy.
The debtors argued that the remaining funds held by the Panamanian lawyer were once in retirement accounts, were being held for the accounts, and thus could be exempted from the bankruptcy estate. However, the Bankruptcy court disagreed. The Court noted the relevant statutory language only covers funds held in a retirement plan and the rights to receive pension payments under a retirement plan – funds being held outside a retirement account are not mentioned.[1] The Bankruptcy Court, affirmed by the Northern Illinois District Court, concluded that since the accounts of the Panamanian Lawyer were not a tax-qualified retirement plan the funds could not be excluded from the Bankruptcy estate.

The Courts come to a seemingly strict legal conclusion: funds derived from a retirement account are not protected from bankruptcy. In this case, the retirement account holder’s behavior was not consistent with their later desire to have the funds exempted from the bankruptcy estate. There are two significant problems with their actions as we see them: (1) they made withdrawals from the funds held outside of the retirement accounts for living expenses; (2) the funds to finance the real estate deal were held outside of the account for over a year. These two facts strongly suggest that the funds outside the retirement account were being treated as personal or business funds, rather than retirement funds. If the debtors had not been so “loose” with the formalities, the Courts might have been more sympathetic.
Like many others, this case is a notice of caution to practitioners; especially those trying to use an LLC as a qualified IRA.

[1] Importantly, these are Illinois statues.

This Website Is For Financial Professionals Only

User reviews and Comments

There are no user reviews/comments for this listing.
Already have an account? or Create an account