DIY Investment Management of Retirement Assets: Is There an LLC in Your Self-Directed IRA’s Future?

An idea worth considering.

As baby boomers begin to retire, the burden of making management decisions regarding their retirement assets may seem daunting. This is especially true for those who choose to forego using professional investment advisors and instead manage their assets by themselves. If DIY appeals to you, just know there are many pros and probably as many cons.

 First, the pros of choosing to manage your own retirement funds, particularly if you are a business owner with expertise in the area in which you invest. By doing it yourself, you can:

  • Exercise greater control over investment choices,
  • Enjoy greater flexibility in allocating and diversifying these investments, and
  • Avoid high fees associated with having a financial advisor.

If you choose to pursue the DIY method, a reasonable option for you to explore is the self-directed Individual Retirement Account (IRA). A self-directed IRA is like other retirement accounts that allow individuals to save for retirement. A self-directed IRA can take the form of any of the more common ROTH, SEP, and traditional IRAs, allowing your investments to enjoy benefits like tax-free growth or specified tax-deferment. The self-directed IRA’s unique attribute relates to the types of investments that are permitted. Unlike standard IRAs, a self-directed IRA extends beyond mutual funds and stocks. With a self-directed IRA, a custodian can also invest in real estate, private company stock, precious metals, and all other investments available by law.

(Some investors have taken the self-directed IRA a step further and set up what is referred to an “IRA/LLC” or “checkbook control IRA,” an arrangement by which investors may directly manage their IRA investments through an LLC owned 100% by a self-directed IRA. This arrangement is beyond the scope of this short blog post, but since it’s an option worth considering, it’s one worth mentioning.)

Pros inevitably are accompanied by cons. Self-directed IRAs are no exception. In fact, there are considerable risks and other considerations, you should take into account:

  • Clarity of Goals. One significant limitation for individuals attempting to manage their own retirement accounts is that they haven’t given serious thought to their financial goals, let alone their retirement plans. To successfully manage retirement assets, you must understand exactly what you are trying to achieve and strategically align your investments with those goals. Failure to do so may result in inadequate savings or over-spending. Both mistakes can lead to complications once you retire.
  • Understanding of Financial Concepts. In addition to having a clear vision for your financial future, you must understand basic financial concepts associated with investing. For example, anyone interested in managing their retirement funds should be able to develop an asset allocation strategy that incorporates factors like tax rates, age of retirement, required income, and current assets. Without a solid understanding of how these various factors influence each other, you could under-save and outlive your retirement funds.
  • Compliance with complex investment rules. Understanding your goals and navigating complex financial concepts will not matter if you violate one of the many rules associated with investments. The federal government has a variety of regulations that govern the types of permitted transactions, who can be a party to such transactions, and the extent to which various taxes apply. For example, in a self-directed IRA, clearly defined rules prohibit certain transactions characterized as self-dealing. To that end, your self-directed IRA is not allowed to engage in transactions with certain people, including the account owner, family members, and business partners. What constitutes self-dealing is defined by the Internal Revenue Service and case law. Figuring out which transactions are allowed is tricky, and failure to comply with IRS rules can result in hefty fines.

In short, going DIY? Be careful out there. Better, don’t DIY in every aspect of managing your retirement funds. Be honest with yourself: Seek advice where you lack knowledge.

Business Trademarks: What’s Really in a Name?

This name is not available.

If you’re thinking of starting a business (or already have a business in the works), make sure that the name you use is not already taken.  Original names are essential for three reasons:  marketing power, clarity, and trademark infringement avoidance.  For example, if you’ve decided to open a coffee shop, it’s fairly easy to determine that the name “Starbucks” is notan option.  But, what about “Smith’s?”  And what happens if the “Smith’s” trademark is an auto insurance company in your town? 

What’s Really in a Name When it Comes to Business Trademarks?

Before attempting to trademark your business’s name, find out if the name is available on the U.S. Patent and Trademark Office’s website.  TESS, the Trademark Electronic Search System database, will indicate whether someone else has already claimed the name or symbol you want to use. 

  • While U.S. trademark protection is granted to the first company to use it in its operational geographic area (regardless of registration), a company that grabs the trademark first will generally have a stronger case in court.
  • In some situations, the similarities between names or symbols may be negligible.  That’s where an experienced business attorney with intellectual property experience can help. 

Often, there’s generally a way to accommodate both companies – especially when it comes to businesses with similar names, but dissimilar products (the “Smith’s” example above); those whose geographical locations may not conflict; and those whose names are too generic (for example, “The Clothing Store”).

Domain Extensions as Trademarks

In today’s marketplace, many businesses have both a physical location and an online presence.  The question then becomes whether to trademark the company name (for example, Amazon), the URL (www.amazon.com), or both.  It’s generally recommended that companies with an internet presence not register their web extensions (such as .com, .net, etc.) with their name unless planning to register the mark both with and without the web extension.  The reason is that other businesses registering the same name can do so by just adding a different (non-registered) extension and cause a great deal of confusion for customers.

A prime example is Craigslist.  The multi-purposed classified ad site is technically a “.org” site, but those who searched for craiglist.com or craiglist.net were often led astray.  The company now has trademarks for all, so typing in the latter extensions now brings you to the main .org site.

Series LLCs: (Some of) What You Need to Know

A series LLC, a relatively recently authorized form of LLC, is composed of a master LLC—the Mother Ship—which houses a series of LLCs. Each series, silo, or cell (the potential synonyms are almost endless) within the series LLC often has separate owners, and each must always maintain separate records, especially records that account only for the assets of that series—at least if the series LLC is formed in Utah or Wyoming and other ULLCA states that allow for series LLCs.

Series, Silos, or Cells: more protection at less cost?

Similar to a corporate/subsidiaries business model and like their more well-known parent LLCs, series LLCs offer asset-protection benefits, but they avoid the complexities of corporate taxes, structure, and other required formalities. 

This type of entity is well suited for certain businesses that may benefit from its relative simplicity, reduced costs, and increased asset protection. But especially because they are so new, there are also some uncertainties associated with the series LLC.

Potential Benefits of the Series LLC:

1. Simplicity

  • Reduced Administration

Although each series must be administered separately, series LLCs have the potential to save time and administration costs.

2. Reduced Costs

  • One Registration

Each of the individual series is formed and governed by the master LLC’s operating agreement.  In most states—Wyoming and Utah, included—only the master LLC must be registered with the state, which means reduced fees.

  • Potential Sales Tax Savings

Some states may not require sales tax to be paid on rent that one series pays to another series.

3. Asset Protection

  • Mixed Signals

Under most series LLC statutes, each series is protected from judgments against assets in other series under the master LLC.  But it’s not clear that this protection will be respected in bankruptcy proceedings or in states that don’t recognize series LLCs.

Potential Downsides of the Series LLC:

1.  Some Additional Costs

  • Registered Agent

Many states require a separate registered agent for each series in the series LLC, which may mean additional expenses.

  • Formation Cost

The up-front registration fee for a series LLC may be higher than the registration fee of a regular LLC.  In some states, it may be less expensive to register multiple single-member LLCs rather than a series LLC with multiple series. This is generally not the case in Wyoming and Utah.

2. Governance Issues

  • Overlap Jeopardy

The operations may not be as streamlined as anticipated. The records of each series must be maintained separately, and each series must have its own separate bank accounts.  Can administrative functions among the series overlap without jeopardizing the limited liability? Can the ownership or management overlap? Does inadequate capitalization of one series impact the other series in the series LLC? At this point, these types of questions remain unanswered.

3. Liability Questions

  • Bankruptcy Issues

Federal bankruptcy laws do not yet address series LLC issues.  Can an

individual series within a series LLC file for bankruptcy? Are the assets of the non-filing series and the master LLC protected from the filing series?  At this time, there are no clear answers to these and other bankruptcy-related questions.

  • Choice-of-Law Issues

If a series LLC gets sued by a third party in a state that doesn’t authorize series LLCs, the assets of each series and the master LLC may be at risk. For LLCs that operate in states with and without series LLC statutes, this may make a series LLCs much less attractive.

The series LLC is potentially a star on the rise and is definitely worth watching.  If your business is particularly well suited to this compartmentalized approach—real estate investing, for example—and you live in one of the states[1] that currently authorizes series LLCs, you may want to this novel entity.


[1] As of November 2019, Alabama, Delaware, DC, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah Wisconsin, Wyoming, and Puerto Rico provide for series LLCs in their statutues.

Transferring LLC Membership Interests Part 3—Involuntary Transfers

An involuntary transfer of an LLC membership interest is just that—a transfer prompted by a creditor action or the occurrence of a triggering event outside of the member’s control. An individual or entity obtaining a membership interest as a result of an involuntary transfer usually cannot fully step into the shoes of the transferring member.

This statutory protection—often called a pick your partner provision—acts as a safeguard that provides LLC members with a certain amount of personal asset protection. For example, whereas the creditor of a corporate shareholder could reach and exercise shareholder rights to their full extent, the creditor of an LLC member can reach and exercise only the economic rights associated with membership interests—not the voting or management rights. The recipient of this type of membership interest is called an assignee.

Statutory Provisions – Creditor Action

If an LLC does not specify any transfer provisions, creditor actions are subject to state LLC laws. Each state, in its LLC statute, has provisions limiting what actions a creditor can take against an LLC member for personal debt. Depending on the state, the statutory remedies available to an LLC member’s personal creditors may include:

  • A charging order, which is a court order requiring the LLC to pay all the distributions due to the member-debtor from the LLC to the creditor.
  • A foreclosure on the member-debtor’s LLC ownership interest.
  • A court order to dissolve the LLC.

These remedies protect the other LLC members from the risk of having the creditor of a debtor-member step into the debtor-member’s place and share in the control of the LLC. To a varying degree, they also address the creditor’s right to satisfaction of the debt.

Transfer Provisions – Other Triggering Events

Transfer provisions are typically specified in the LLC’s operating agreement or in a separate buy-sell agreement. There may be some overlap with creditor actions, as these are often included as triggering events in the transfer provisions.

Examples of triggering events that can be specified in an LLC’s transfer provisions include the following:

  • A deceased member’s membership interest passes to a prohibited individual or entity
  • A member’s bankruptcy or other involuntary transfer of a membership interest to the member’s creditors
  • A member’s separation or divorce, or the transfer to a member’s spouse under property division or under a divorce or separation decree
  • A member’s membership interest becomes subject to a valid court order, levy, or other transfer that the LLC is required by law to recognize
  • A member’s breach of the LLC’s confidentiality
  • A member’s failure to comply with any mandatory provision of the operating agreement
  • A member’s failure to maintain a license or other qualification that disqualifies the member from engaging in the LLC’s primary business

If a triggering event occurs, the transfer provisions may prompt a mandatory redemption of the member’s membership interest or a right of first refusal to the LLC or to the other members. If an involuntary transfer does occur, the recipient of the membership interest—the assignee—typically receives only an economic interest in the LLC with no management or voting rights.

Transferring LLC Membership Interests Part 2—Voluntary Transfers

An LLC affords its members a certain amount of personal asset protection. Part of this protection hinges on the restricted transferability of LLC membership interests.  Restricted transferability protects the non-transferring members from creditors and unwelcome new members, which upholds the integrity and value of the non-transferring members’ membership interests.

  • Most (but not all) LLCs impose requirements or restrictions on the transfer of a member’s interest.
  • If the LLC’s operating agreement is silent on the transferability of interests, you must look to state law to be sure there are no default provisions restricting transferability.

This article, part 2 in a 3-part series, focuses on voluntary membership interest transfers done with the intent to grant full membership rights to the recipient.

Step 1 – Determine the Transfer Process

The LLC’s operating agreement should specify the process for transferring a membership interest. If the LLC has a buy-sell agreement in place, that must also be consulted.

  • Find the provisions that detail allowable transfers, the steps to complete them, and the method for calculating the value of the membership interest, if any.
  • The membership interests may be freely transferable but are likely subject to restrictions set forth in the operating agreement, the buy-sell agreement, or by state law.
  • Some transfers may be permitted without prior approval of the other members, such as transfers to a member’s immediate family or to a trust for the benefit of a member or a member’s immediate family.
  • The LLC or the other members may have a right of first refusal before a transfer can be made.

If the operating agreement or buy-sell agreement doesn’t specify the process for transferring a membership interest, you will have to look to state law. Once you determine the authority governing the transfer process—the operating agreement and buy-sell agreement or state law—be sure to note all requirements and restrictions.

Step 2 – Determine the Value

Calculate the value of your membership interest. If the operating agreement or a separate buy-sell agreement doesn’t address this, you will have to work with the other LLC members to determine and agree upon the value of the membership interest.

Step 3 – Follow Transfer Process

Complete the LLC transfer process as determined in Step 1. Make sure you follow all requirements. For example, if the operating agreement requires the unanimous written consent of all LLC members (a common requirement), meet with all of the LLC members to obtain their written consent.

Step 4 – Obtain or Draft the Transfer Document

If the LLC does not have a standard transfer document, you will need to draft a transfer document.

  • Check the operating agreement or state law to determine what the transfer document must include.
  • Typically, it must include the transferor’s name, the LLC’s name, the recipient’s name, and the percentage of the membership interest being transferred.
  • If a form is not provided by the LLC, note that the form of the transfer document is usually subject to the LLC’s approval; make sure to obtain this approval if necessary.

Step 5 – Execute the Transfer Document; Other Documents

Sign and date the transfer document. Make a copy for your records, for the recipient, and for the LLC.

  • The recipient typically receives the original transfer document.
  • The LLC may have additional documents that the recipient must sign in order to be admitted as a member.
  • State law may require the operating agreement and certificate of formation to be updated with the new member information.
  • The LLC may pass the costs associated with the transfer to the new member.

Conclusion

Making a proper transfer of membership interests requires the transferor to jump through a lot of hoops. The first step in the process is determining which hoops are required. Taking the time to properly transfer membership interests ensures that the recipient obtains full membership rights and protection.

We offer proactive business planning strategies. We help businesses draft thorough operating agreements that provide clear directions to the LLC members—to exercise membership interest transfers and other important member rights. We also assist existing LLC members who want to properly transfer their membership interests in the absence of a thorough operating agreement.  Contact us today to learn more about our business services.

Transferring LLC Membership Interests Part 1—An Overview

Say you are a member of an LLC. You own membership interests in the LLC. But what if you want to leave the LLC? What if you get a divorce? What if you have creditors seeking immediate repayment? What can you do with your membership interests? The answer depends on how transferable those membership interests are.

A transfer of LLC membership interests can mean selling, donating, assigning, or gifting—basically one LLC member turning over his or her membership interests to another individual or entity. The transfer can be voluntary or involuntary.

  • Examples of voluntary transfers include selling membership interests to a third party or to the remaining members, donating membership interests to a charity, or leaving membership interests to a trust upon death.
  • Examples of involuntary transfers include those prompted by divorce, bankruptcy, and termination of employment.

The transferability of LLC membership interests is subject to competing interests.  On the one hand, freely transferable membership interests can be more attractive to members because they are easier to dispose of or cash out of—in other words, the membership interests are more liquid and marketable.

On the other hand, LLC members usually want to maintain the right to “pick their partners.” If membership interests are freely transferable, the remaining members have no control over who comes in as a business partner when a member decides to transfer membership interests. Restricted transferability places limits on transfers and the status of the recipient.

Are Membership Interests Freely Transferable or Restricted?

The members decide. The good news about forming an LLC is how flexible the structure is. At the outset, the founding members can adopt transferability provisions— either in the operating agreement or in a separate buy-sell agreement.

  • If neither document addresses transferability, the default provisions of state law prevail.

In other words, if the founding members fail to address transferability in the operating agreement or in a buy-sell agreement, they’ve relinquished control and subjected the members and the LLC to the state law default provisions.

  • Although planning for a member’s departure from the LLC when you’re just forming it may be difficult, thinking through all the possible exit scenarios—and planning for them—is essential.

If your LLC is already up and running and you don’t have transferability provisions in place, the members can amend the operating agreement or adopt a buy-sell agreement. Look to the operating agreement for directions on how to amend the LLC’s terms.

How are Membership Interest Transfers Restricted?

While membership interests are freely transferable in the sense that any member generally can transfer his or her economic rights in the LLC (subject to the operating agreement, a stand-alone buy-sell agreement, and state law), the management or voting rights in the LLC are usually what are restricted—otherwise, other members would be forced to become “partners” with someone not of their choosing.  Typically, a recipient of restricted membership interests can receive economic and management rights—a full membership interest—only with unanimous member consent.

In the next two articles in this series, we’ll look at voluntary and involuntary transfers of LLC interests.

Limited Liability Companies in the News (I wrote)

So I haven’t been writing on my blog a lot lately. But I have been writing. Here are just three examples:

  1. The October 2018 issue of The LLC & Partnership Reporter, a publication of the ABA’s Business Law Section, sports an article I wrote titled, “Wyoming’s Series Limited Liability Company Act: (Virtually) All in the Operating Agreement.” You can find it on page 31. The piece makes clear that Wyoming’s new series act is straightforward and allows an LLC’s operating agreement to do most of the heavy lifting regarding how a particular LLC is managed and how members relate with one another and with third parties.
  2. Another article I wrote appears in the same issue, this one titled, “Utah’s ‘Benefit Limited Liability Company Act”: A Bridge Too Far?” My answer is Yes, the bridge isn’t even needed. You’ll have to read the piece to understand why. You can find it on page 42.
  3. My most recent article appears in the February 2019 issue of Wyoming Lawyer, a publication of the Wyoming Bar. Titled “2018 Case Law Review,” the story discusses a number of recent cases from around the country. I’m particularly interested in whether other states, including Wyoming and Utah, will follow the Fourth Circuit Court of Appeals’ holding in Sky Cable, LLC v. DIRECTV and recognize the creditor’s remedy of reverse veil piercing. What’s reverse veil piercing, you ask? Read my article in Wyoming Lawyer!

We’re (Wyoming’s) Number 3!

According to WealthManagement.com, that is:

Because Wyoming has no additional estate or income taxes, it’s an ideal place to set up a trust. There are more than 28 trusts per 1,000 households, the eighth most in the study. On average, these trusts have an income of $145,651. Trusts in Wyoming are also able to deduct a large amount of taxes. The average trust in Wyoming has deductions worth $73,100, the fifth-highest amount in our study.

According to Wyoming attorney Amy M. Staehr, Wyoming is actually number 1. A look at the table of contents to her article The Discovered Country: Wyoming’s Primacy as a Trust Situs Jurisdiction, will give you an idea of why she makes that claim (page numbers omitted):

I. INTRODUCTION
II. FROM 2011 TO THE PRESENT—UPDATES, ADDITIONS, AND
MODIFICATIONS TO WYOMING TRUST LEGISLATION
A. Background
B. Ultra Tax Friendly
C. Enhanced Trust Privacy
               1. Court Privacy
               2. Narrower Definitions of Certain Interested Parties
                          a. “Qualified Beneficiary” 
                          b. “Interested Person”
D. Modern Trust Laws 
               1. Statutory Trust Decanting
               2. Trustee’s Insurable Interest 
               3. Tenancy by the Entirety Protection 
                4. Perpetual Noncharitable Purpose Trusts
                5. Premortem Trust Contests
E. Private Family Trust Companies
F. Asset Protection
               1. Wyoming Qualified Spendthrift Trusts 
               2. Discretionary Asset Protection Trusts
               3. Wyoming Limited Liability Companies
                             a. Privacy
                             b. Veil Piercing
III. CONCLUSION 

So go (set your trust up in) Wyoming!

ATF Says No to Bump Stocks

The ATF released its final rule on Bump Stocks today:

The final rule clarifies that the definition of “machinegun” in the Gun Control Act (GCA) and National Firearms Act (NFA) includes bump-stock-type devices, i.e., devices that allow a semiautomatic firearm to shoot more than one shot with a single pull of the trigger by harnessing the recoil energy of the semiautomatic firearm to which it is affixed so that the trigger resets and continues firing without additional physical manipulation of the trigger by the shooter.

The rule will go into effect 90 days from the date of publication in the Federal Register.

As [name your favorite reporter of talking head] might say, it remains to be seen whether the rule will withstand Supreme Court scrutiny. The argument is that regulations can outrun the underlying statute. In this case, many argue that the ATF (aka The Trump Administration) has done just that. 

Sean Davis at The Federalist does a pretty good job of fleshing out the argument. In summary, he writes,

The new bump stock ban ignores the current statutory definition of a machine gun, creates a new regulatory definition contrary to the existing statutory definition (and contrary to how the U.S. Constitution requires new laws to be passed and enacted), and falsely characterizes how bump stocks work in order to implement a nationwide gun control ban and confiscation regime.

Next, the courts will have their say. Stay tuned.

By the way, I won’t be disappointed when bump stocks are no more (though I think their danger is overstated). However, I am disappointed that the making of the new rule violated the rules of law making. The Trump Administration should be ashamed, the general public should be worried, and Congress should wake up. A few more regulatory moves by this or any other president, and Congress will be a nullity. And that’s bad. 

I hope the courts step in and shout Stop It!

Seminar this Wednesday: Estate Planning for Blended Families

I’ll be presenting a seminar at the Orem Public Library on Estate Planning for Blended Families.
When                 Wed, April 5, 7pm – 8pm
Where                Orem Public Library, Media Auditorium (map)
Description       Couples with blended families face special challenges when it comes to making sure that stocks, bonds, real estate, and other property and family heirlooms go to the right persons at the right time when a spouse dies. This seminar will address such issues and discuss ways to solve them, using wills, trusts, and other estate planning documents.
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Hope to see you there.
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