Question on "disqualified person"

30 Replies

Thank you in advance for taking the time to read my question.

My uncle passed away and left a trust. I would like to purchase some property from his trust using funds from my SDIRA. So my question is if that Trust is a disqualified person.

- The Trust has 2 trustees - 1) My Mother, 2) unrelated friend of my uncle

- The Trust has 3 beneficiaries - all charitable organizations

- My Mother is only a trustee and not a beneficiary.

My reading of the IRS rules of disqualified persons for a trust is that it pertains to who the beneficiaries are and not the trustees, but hoping to get some confirmation.

Thanks,

First off, sorry for your loss.

I'll offer my thoughts but please clarify this with a tax attorney as my thoughts shouldn't be construed as advice. Also, please let me know what you discover as I'm curious to hear about your findings.

An IRA can conduction business across the table from any entity as long as the entity isn't already 50%+ owned by disqualified person(s). Furthermore, the entity cannot be controlled by a disqualified person.

That being said, I'd have to guess that because the decision making authority surrounding the trust is executed by your mother (a disqualified person), the transaction itself would be prohibited.

Again, run that logic by an attorney to validate it before taking any actions.

Best of luck!

Hi Loren, thank you so much for your reply. I think I will need to consult with a Tax Attorney to confirm. I'm optimistic that the Trust will not be considered a disqualified person based on the IRS definition...

(5) any direct or indirect owner of 50% or more of any of the following:

  • the combined voting power of all classes of stock entitled to vote, or the total value of shares of all classes of stock of a corporation that is an employer or employee organization described in (3) or (4);
  • the capital interest or profits interest of a partnership that is an employer or employee organization described in (3) or (4); or
  • the beneficial interest of a trust or unincorporated enterprise that is an employer or an employee organization described in (3) or (4);

The 3rd bullet references a Trust and it mentions the beneficial interest and not the trustees. But, you along with some other things I've read have raised enough doubt that I need to get professional confirmation. The penalty can be severe enough that I don't want to mess around. Once I get an official statement, I'll post back.

Thanks again.

Your citations are correct but that only represents (E). You should really be paying attention to letters (H) and (I).

@Todd Michael when you are looking for an attorney to advise you on this you need to be looking for one that specializes in ERISA matters. A tax attorney will likely not be your best bet. Let us know what you discover as I am curious as to what you find out as well.

Loren, you likely are correct on (H). My initial reading was that (H) was specific to a corporation or partnership, but it really applies to any entity. And, a trustee holds a position that could influence decisions pertaining to the Trust. My Mother is a trustee in name only, but that has no bearing on the legalities. Sure wish my uncle hadn't made her a trustee. I'll still post back what I learn from a tax attorney.

Todd

Matt... I appreciate your response as well. I first contacted my attorney who set up my Trust with the assumption that he would know this... but he responded that he can't advise on these kinds of matters. Finding an attorney who can answer this 10 second question is proving rather difficult.

Todd

If it does turn out to be prohibited, perhaps your spouse (if you're married) has the funds available in an IRA/401k. Your mother would not be disqualified from her shoes.

@Loren Whitney the spouse would still be a disqualified person. From the IRS site:

A member of the family of any individual described in (1), (2), (3), or (5). (A member of a family is the spouse, ancestor, lineal descendant, or any spouse of a lineal descendant.)

The first couple numbers covered the usual ancestral lineage stuff.

@Matt Devincenzo

=) This used to trip me up too.

Look at the transaction closely though, it would be between Todd's wife and Todd's Mom. From his wife's shoes, a mother-in-law is neither a direct lineal family member or a spouse.

This transcation really only works one direction. I could buy an asset from my in-law but they couldn't buy from me.

I love that one.

Well, I needed to decide what to do so I took the wise approach to not involve my SDIRA in this transaction. I could not ever really get an official answer from anyone I connected with, so that worried me. I found this nice chart on the IRS site...

http://www.irs.gov/irm/part4/35960002.html

I may not be reading it correctly, but under the "Trust or Estate (T)" part, it has a box that simply states Trustee of T. So, to me, that seems clear.

Thanks for taking the time to consider my dilemma and respond.

Todd

One more thought. The purchase of this property is not just me, but my brother and sister as well. The 3 of us. Would it work for my brother and sister to form a partnership that would own this property and my SDIRA invests in the partnership? Based on my understanding, my SDIRA can transact with a partnership in which I am not at least a 10% parnter and have no managerial responsibilities.

Todd

@Todd Michael

The transaction into your brother/sister's partnership would be acceptable by IRS law but the second transaction across the table from the trust would still be an over the table transaction with an entity managed by a disqualified person.

Originally posted by @Loren Whitney:

@Matt Devincenzo

=) This used to trip me up too.

Look at the transaction closely though, it would be between Todd's wife and Todd's Mom. From his wife's shoes, a mother-in-law is neither a direct lineal family member or a spouse.

This transcation really only works one direction. I could buy an asset from my in-law but they couldn't buy from me.

I love that one.

 I know this is old but it's the closest thing I've come across that pertains to my question.  So based on what you wrote above, my SDIRA would be able to transact with my father-in-law... but he (if using his SDIRA) would not be able to transact with me.  Is that correct? 

I ask because I read the IRS info the way that you did but when looking at custodians to setup an IRA LLC I read this,

"A “disqualified” person is: 
• Yourself 
• Your lineal descendants (children, grandchildren, etc)
• Your lineal ascendants (parents, grandparents, etc)
Your spouse, your spouse’s lineal descendants, and your spouse’s lineal ascendants"

According to this they would disqualify a transaction between my SDIRA and my father-in-law.  

@Cory Damon

That's correct. Your SDIRA can engage an in-law but an in-law's IRA cannot engage you. The one-way road example holds true. Good catch!

@Loren Whitney

Thank you for the reply.  But in looking at the "rules" of the custodian they make dealing with my in-law's a disqualified person.  Which would mean that I am disallowed to invest in them at all.  Or am I not reading this correctly?

@Cory Damon

It sounds to me like you should contact your custodian and question the content on their website.

@Cory Damon also understand that the custodians "rules" aren't necessarily representative of the IRS guidelines directly....what I mean is they may have taken a more conservative approach since they may have to defend the actions they allow and don't at some point. Professional type services often have things like this, and it's all about what they feel comfortable allowing if they did ever have to defend their position. 

A member of the family of any individual described in (1), (2), (3), or (5). (A member of a family is the spouse, ancestor, lineal descendant, or any spouse of a lineal descendant.)

That is from the IRS, and like Loren said it's a one way street since your IRS can engage with your FIL, but not the other way around. Personally were it my company on the line I would very likely disallow the transaction as well. Reason being it seems like they covered every other ascendant/descendant combination, which makes me feel as though they might not want you to do it.

The two options are they're (IRS) ok with this one ascendant type transaction, or they overlooked it. I'd personally, for my own plan, prefer to see a case where they allowed it, or get some sort of legal opinion from a lawyer I pay for ect. That way if I become the test case and end up in court, I have a position to defend or at least a lawyer's E&O insurance to pursue to cover my legal bills.

Updated over 2 years ago

This sentence should read - "That is from the IRS, and like Loren said it's a one way street since your IRA can engage with your FIL"

@Matt Devincenzo

Great point(s)!  Thank you for your insight.  I agree, I'll error on the side of caution and avoid this... unless things become more clean-cut in the future.  

Thanks guys @Loren Whitney , @Matt 

@Matt Devincenzo for the breakdown.  

So does my sibling have to have an LLC entity or can they just do a personal loan my CheckBook IRA LLC funds to do real estate - transfer from sibling personal bank to my IRA LLC bank?

Also, I've been mulling over this one: my IRA as a CheckBookIRA LLC teaming up with my wife's sister's husband ( in form of a loan to my CheckBookIRA LLC). This sounds like an okay transaction right as there is no ancestor/decendant lineage?

Thanks for your suggestions.

   

@DJ S. either way is fine. The point being that they (a sibling) is not disqualified so you can take advantage of borrowing from them just as you would a completely unrelated person. Personally I prefer to borrow my sister's IRA funds in my personal name because I'm not wanting to trigger UBIT on my IRA. But if I was going to borrow from her IRA to my IRA I would just have the loan written the same as before...it will just need to be non-recourse since it's to my IRA.

As far as the brother in law loaning goes, I'd dig just a little to make sure, but believe that is fine as well. As you said no ascending/descending lineage so it should pass.

Thanks @Matt Devincenzo . I'll verify the brother in-law part.   

I may be misunderstanding you on the sibling part: my siblings don't have an IRA - just cash in checking account. Because I cannot co-mingle my personal bank a/c with my CheckBook IRA LLC a/c (till retirement age), and because my CheckBook IRA LLC does not have enough funds to do a complete flip, my only option is to borrow private loans from qualified individuals - or partner with another flipper LLC. In this case, the private loaners will NOT be using LLC or IRA. So will UBIT still be triggered on my CheckBook IRA LLC? I will be calling my IRA custodian when they open soon to check on the UBIT and brother-in-law.

Thanks.

My goal is to grow the CheckBook IRA LLC via flips.

Originally posted by @DJ S. :

My goal is to grow the CheckBook IRA LLC via flips.

The answer to both your questions is yes you will trigger UBIT. Your sister's funding source (or BIL), and/or how they lend it to you (personal vs LLC) is irrelevant to the discussion.

Borrowing within an IRA triggers UBIT no matter what the source of the funds is. Also doing flips in an IRA triggers UBIT as it's a "business activity", as opposed to an investment.

So in answer to your first question, yes your sister can lend personally to your IRA. I borrow from my sisters IRA to my personal name because she wants something passive and secure (which I am) and I have no interest in triggering UBIT in my IRA. Though UBIT is not necessarily a bad thing as long as you really understand it an you've accounted for it in your analysis.

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