Starting a Self Directed IRA for Person in Jail

13 Replies

Hi there. My dad is in jail. He will soon go to prison for the rest of his natural life since he is already old. I am his general durable POA. I am also his vanguard POA/full agent. He has a traditional IRA. I would like to make it a self-directed IRA so I can purchase real estate or do deals with it on his behalf. Obviously this introduces a lot of complex questions. I have access to my father for him to personally sign documents and get them notarized but I live very far away and this is reserved for once or twice a year. I am able to mail him documents and he can sign and notarize them. Here are questions I am trying to figure out:

1) A self-directed account requires an LLC to be created. What additional POAs or management structure is necessary so that I can act on his behalf of the LLC?

2) If me acting in a manager role or on-behalf/POA for his LLC isn't possible, can I simply setup a partnership LLP where I am 50% owner in my own LLC and my dad's self-directed LLC is 50%, but I make all the investment decisions and he is a passive investor?

3) What type of attorneys/cpa/tax strategists should I seek out to help me make sense of this situation?

I eventually plan on setting up the things I mentioned in question 2, but I would like to buy some things directly with his LLC and diversify things. The issues are also with banks, because they want to see people in person with ID cards. They don't make visits to the local jail. I have struggled a great deal with his own personal bank account even with general durable POA. Checkbook control can be a bit of an issue in that regard. I just don't know how picky the IRS is with LLC operating agreements and having people act on behalf.

I would recommend that you get an attorney and a CPA because you are correct in that the banks will be difficult with this POA and because this is a multi-faceted problem. If they allow Dad to take an early distribution and gift them to you to reinvest (if it is in range) then you could avoid taxes on the income and gift tax. But you need a CPA for that and the limits. The CPA would need to know how much is involved. Plus, a big question would be what is he in jail for? If he is in jail for a financial crime then funds might be frozen or options normally available will not be available to you.

This is a really sticky situation with a lot of questions from what did he do, what state is he is, you are in, etc.

As far as your last statement regarding how picky the IRS is with LLC operating agreements - they don't see them and an anonymous structure would take care of that.

Good luck!

A self directed IRA has all kinds of pitfalls regarding meeting all the requirements. Based on the additional complications, I'd explore other options and leave the IRA as is... just make sure the beneficiaries are set up correctly.

Is he going to personally need any of these funds in the future? It sounds like not but of course we don't know much about the situation. If not, then having him "gift" monies to those he wants to receive it as mentioned above is probably a viable solution to accomplishing some of the same goals.

You probably want to leave it alone. As a non-attorney and a non-cpa, I would say you are a disqualified person, so you can not provide and service or derive and benefit from the self directed ira. You might be able to look for properties (but that would be a service you are providing for the account holder. So maybe not?), you can’t inspect them, you cant work on them. You probably can’t answer questions from the PM or qualify tenants?

If you want to take his money see if he can take a withdrawal and gift it to you but you’re increasing the taxes and decreasing the performance. 

You would have to confirm this with an attorney who specializes in LLCs in your state, but POAs are typically applied only to natural person accounts, not entity accounts like LLCs, trusts, corporations, etc. You would have to be added as a managing member (or partner for LLP) along with your father.

As for your concern with executing documents, the LLC operating agreement (or LLP partnership agreement) specifies the delegation of authority of the managing members (or partners), so you can set it up to explicitly state that each member can act independently to make decisions on behalf of the trust.

At a minimum, your father would have to sign the operating/partnership agreement and some banks may require him to sign the account opening documents as well. But any documents or investment decisions in future would not require his signature; they can accept yours alone. 

As for presenting IDs in person, I've seen places like Bank of America who can open a business checking account with just the LLC Certificate of Formation, Certificate of Beneficial Owners (provided by BofA), and your unexpired IDs. The account would be open, but it isn't active. Being "inactive" means that you can fund the account, but you can't withdraw or invest funds. Once the account is open, a form will automatically be mailed to you which you must sign and return ASAP to make the account "active". The process of opening a self-directed IRA may be slightly different, but establishing a relationship with the bank - like via a checking account - could make opening the IRA easier.

@Jacob R.

You do not need an LLC with a self directed Ira. Many people have POA for their elderly parents etc. I think it can easily be accomplished with the right people. Your father age, amount of money, government id, investment type as you alluded to, etc all factor in.
It is basically the same problem you have with the Ira now -where ever it is. Most of our clients rarely visit the office and a lot can be done on line. Research and you can find an easy legal way. 

Quite a few responses so far. Thanks to everyone for your answers and interest. My dad did not commit any financial crimes. He has a criminal and asset management attorney so far. Asset management attorney says the IRA is safe due to state laws and it is okay to convert to a self-directed IRA. No issues with fraudulent conveyance/transfer since it remains in an IRA. Transferring via gifts is unfortunately not a viable thing at this time as that is something where fraudulent conveyance laws do come into play. Basically this account is all that he has left. I want to grow this account since I am a beneficiary, hence the reason for all of these questions. I do believe I have an unexpired ID card for him, so I will look around for it and call some banks to get the scoop from them. I am the type of person that wants to understand every step of the process. I don't want to get in a pickle with transferring all this stuff over and then running into impossible roadblocks of "what do you mean he can't come to the bank in person."

@Bill Brandt: I believe you are misinterpreting the IRS's concept of a disqualified person. His IRA can't sell me the person a property nor can it benefit me (the person) in a way that violates fiduciary responsibilities. It can be a defined percentage partner in a business partnership. Example is IRA LLC plus my personal LLC are 50/50 partners in a newly formed LLC or LLP. Since the ratio is 50/50, his account isn't giving away any money or stake to benefit me personally. Read more here

Thanks again, and any others that wish to offer advice please do. Any advice is helpful to make the best of this situation. I am pretty saavy with real estate, flips, renting, etc and hate to let his IRA account languish when RMDs hit since he turns 70 this month.

@Jacob R. there may be a way to do what you want to do However that is way beyond the scope of most people here.

1) a self directed account does not require an LLC to be formed. Some IRA custodians may require it.

2) You and your father are "disqualified persons" for each others IRA. That will rule out a lot, if not all structures you can think of. I suspect you and your father would each have to own less than 50% of any structure. I believe that to be true combining ownership some inside and some outside of the IRA. (IE: you own 30% and your IRA owns 30% together you own 60%)

This is an area where a lot of people screw up their self directed IRAs.

3) The problem is most that have the knowledge are custodians, administrators and have a self interest in getting you to work with them. They may be experts on IRAs but know little or nothing about Solo 401ks for example. You average CPA or attorney is not going to know enough.

I'll tag a few that may help. @Dmitriy Fomichenko , @John Hyre @Brandon Hall

Not a CPA but if he is 70 and has no income since in jail I can’t imagine super big tax bills and just withdrawing it. I’m assuming it’s not a substantial amount. Worth checking the math and see what the irs would actually get them you’d have unrestricted cash.

Also, sorry to hear and that’s a tough life pill to swallow.

@Jacob R. Why not just take the money out the account and let your dad take the hit he is already in jail for the rest of his life what are they going to give him another life sentence for not filing taxes sounds the easiest way to me. Unless I’m not I’m understanding something

@Jermell Shavers This is not a normal situation. This is a situation where civil suits are possible at any point up till the statute of limitations. Removing protected money from an IRA and gifting it is something that is not a good idea, period. I agree with your assumption of tax liabilities as his liability would be extremely low since he has no other income source. After the threat of civil suits is over, then I can consider cashing it out if he is okay with that.

@Jermell Shavers

IRA accounts have protections at the state and federal levels to a degree. Federal bankruptcy is one of the exceptions where an IRA can be gobbled up. Anything else is subject to your state laws regarding debt collection. If you have a car wreck and the other driver is seriously hurt, then you have the potential for civil suits (this is an example, not the situation I am in). If you, the driver at fault, transferred the deed to your home and did a bunch of things pre-emptively to a suit being filed, a court will look back at all transactions from the date of the incident as fraudulent transfers/conveyance. So if I dumped his accounts and gifted it to me, and he gets sued a year or so from now then I am on the hook for that money. I hope this answers your question/curiosity.