Forming a Series LLC under a SD IRA or 401k?

Question

Considering setting up a (TX) Series LLC under my self-directed 401k trust.  Has anyone done this?  I set up a series LLC last year, to handle my rentals, where I am the sole member.  I'm wondering if there are wrinkles specific to the IRA/401k context?   Or is the procedure identical to setting up a regular series LLC, except that the 401k trust will be the sole member, instead of an individual person?

Mike Ry · Answer

George, good point.  The 401k protection you mentioned applies if you were in a car accident, for example, and someone wanted to pursue your assets.  But it wouldn't help you if you bought a rental in the 401k, and the tenant decided to sue.   In that scenario, all of the 401k assets would potentially be exposed, bc the 401k is itself a party to the transaction.  Same problem if you are making owner finance loans from the 401k, and the borrower decided to sue the 401k as lender, alleging a violation of Dodd Frank or whatever.  The purpose of introducing the Series LLC under the 401k is that each project is sealed off from the others, so that an unfavorable legal outcome on one project does not risk the other assets in the 401k.

George Blower · Answer

@Mike Ry

It is also worth noting that both IRAs and solo 401k plans are already fully protected from creditors in the great state of Texas.

Mike Ry · Answer

Brian,  Thanks for your reply.  I understand your concerns about the Series LLC, but decided in favor that option, since I'm going to wind up with 8-10 owner finance loans under the solo 401k, and 8-10 individual LLCs seems cumbersome and expensive.

Brian Eastman · Answer

@Mike Ry

When establishing a LLC under the umbrella of a parent self-directed IRA LLC or Solo 401(k), there is nothing particularly special about that LLC that is required.  The parent will be the sole member and you will want to establish the tax ID of the new LLC to point to the parent as the responsible party for tax purposes. The focus is really on building a robust LLC for the intended purposes, such as holding real property in Texas.

That said, we are not tremendous fans of the series LLC.  The concept holds a lot of promise, but creates administrative complexity and has not been fully tested in the courts to ensure the promised cell segregation.  Sometimes individual LLC's are a better way to go.