Posts under: Retirement Planning

What You Should Know about Administering a Family Member’s Estate

May 23, 2017 Estate Planning, Law, Retirement Planning Comments Off on What You Should Know about Administering a Family Member’s Estate

Most of us will, at some point in our lives, be called upon to administer the estate of a departed family member or loved one. While it may seem like an honor to have been entrusted with this responsibility, the reality is often it is a thankless, time consuming job, and even more so if there are disagreements and disputes among the heirs or beneficiaries of the deceased.

Being asked to shoulder the responsibility of administering a decedent’s affairs while still mourning their loss can be challenging. The precise rules and procedures that apply will depend on whether the decedent had a trust that was fully funded, whether probate will be necessary because the either decedent did not have a trust or did not fully transfer all relevant assets into the trust.

It will also depend on which state laws apply as well as the value of the estate. Keep in mind that it is impossible to provide an all-encompassing checklist that applies to each family situation and the procedures may vary greatly depending on if the decedent had a will or a trust. However, here are some general guidelines to keep in mind, some of which may or may not apply depending on the situation:

  1. Seek Professional Advice.   This is something you may only do once in your lifetime and Google is not going to give you all the answers you need.  Also, keep in mind you do not have to go at this alone. Depending on the value of the estate and its complexity, you may want to employ the services of professionals such as attorneys, CPAs, appraisers, etc. to assist in navigating your responsibilities. Typically this would entail an estate attorney, a CPA knowledgeable in estate and income taxes, and a financial advisor, although additional professionals may be needed depending on the situation. Usually, these fees would be paid from the decedent’s estate and so there should be no financial disincentive to seek help if needed. There may be certain actions, decisions, procedures or deadlines that need to be met in a timely manner, which could impact the ability of heirs or creditors to make claims or challenges to the estate. Most people are not aware of these rules and deadlines and so getting the right advice from the start may be good protection for both you and the estate.
  2. Inventory and Secure the Decedent’s Assets & Important Documents. A trustee or administrator of an estate is charged with the duty to assemble, inventory and safeguard the decedent’s assets and important documents. In the immediate aftermath of a death, it could be a chaotic situation with visitors and relatives coming and going and, as the representative of the estate or trust, it is incumbent on you to safeguard the important assets and documents. You will need to determine whether the decedent had a will or trust, and assemble all important documents, contracts, bank accounts, financial accounts, safe deposit boxes, investment accounts, unpaid wages or other income sources, mortgages, insurance policies, retirement accounts, social security or other government benefits, pensions, real estate, businesses, prior tax returns, digital assets (email, social media accounts), etc. of the decedent. It may take some investigation into the files of decedent or interviewing the family members to uncover all potential assets and liabilities, and don’t assume decedent told you everything there was to know. A separate bank account will likely need to be set up for the estate or trust, and never comingle your personal finances with the estate/trust finances. You will need to obtain several certified copies of the death certificate in order to establish control over certain accounts held by third party custodians/banks. Some assets such as real estate may need to be appraised to determine the fair market value for purposes of estate taxes, reporting, or for distribution.
  3. Gather and Assemble a List of Decedent’s Creditors. This does not necessarily mean that you will immediately pay every bill as soon as it arrives. Rather, there could be other expenses that take priority such as funeral expenses or federal and state taxes. As a trustee or administrator of the estate, you could get into trouble by paying expenses that then leaves the estate unable to meet its tax or other priority obligations.   It is important to try and get a broad picture of the Decedent’s overall financial situation, including factoring in potential tax liabilities, in order to establish a game plan for administering the estate or trust and paying creditors. Of course, some debts such as mortgages or car payments need to be timely made to prevent the account from going to default, but have a concerted strategy for handling Decedent’s creditors. If it appears that the estate may not have sufficient assets to cover all liabilities, then professional assistance or assistance from the courts may be needed to determine how to prioritize payments.
  4. Notify Decedent’s Heirs and Beneficiaries. Some states have time requirements on when heirs and beneficiaries should be notified and whether they are entitled to receive a copy of Decedent’s will or trust. Their ability to bring challenges to the trust or estate may depend on when they were first notified and so seek help to determine the requirements in your situation and document your communications with heirs and beneficiaries.
  5. Manage the Assets of the Estate Prudently and Obtain the Consent of Heirs or Beneficiaries for any Major Actions. As the trustee or administrator, you are a fiduciary and must act in the best interests of the beneficiaries or heirs. You generally have a duty to manage and invest the assets as a reasonably prudent investor would and can be held personally responsible for failing to do so. Therefore, seek the advice of legal and/or financial counsel regarding any issues with managing or investing the assets of the estate, and if a decision needs to be made regarding an important asset (such as selling the asset, making significant improvements to real estate, etc.), consider obtaining the written consent of all beneficiaries before authorizing such action.
  6. Distribute the Assets to the Heirs/Beneficiaries. Once all the creditors and taxes have been paid and the estate is in a position to be distributed to the beneficiaries, an accounting may need to be performed and approved by the heirs/beneficiaries, and then the assets of the estate/trust may be distributed and estate or trust closed.

Again, keep in mind these are only general guidelines for administering trusts and estates and there may be specific state or federal requirements and deadlines that will apply to your situation. If you have a particularly large estate that may implicate state or federal estate taxes, there are likely additional requirements and deadlines and so it is recommended that you check with appropriate professionals as soon as possible for large estates.

For smaller estates or assets with lower value that are not held in trust, there may be other options for distributing those assets without the need for probate.   The rules and procedures can be rather complex depending on the state and the situation and so make sure you consult with appropriate professionals to ensure you are complying with your responsibilities as a fiduciary for the estate/trust.

Starting Your Solo 401k By Year-End

October 17, 2016 Business planning, Retirement Planning, Tax Planning Comments Off on Starting Your Solo 401k By Year-End

The end of the year is approaching fast and many small business owners and real estate investors are looking for end of year tax savings!  One of the typical year-end tax strategies is to make a tax deductible retirement account contribution. If you’re self-employed with no other full-time employees, you have some choices, but typically a SEP IRA or a solo 401k are the most popular options.  With that said, the 401k strategy is by far the best in the long-run.

A SEP IRA is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRA’s. However, a solo 401k can have both a traditional and a Roth account but your business cannot have full-time employees other than you and certain family members.

Both SEP IRA’s and 401k’s can be good for the small business owner, but it depends on your situation.  Both are easy to setup and operate with low administrative costs.  However, in terms of the amount of business income that is required to max out an annual contribution, a solo 401k typically provides much greater tax efficiency with contribution amounts than the SEP IRA.  Also, options such as Roth and the 401k loan are available with a Solo 401k, but not a SEP IRA.

To help our clients make this move to the 401k, every year in the month of November we provide a consultation with a lawyer and complete set-up of a 401k (that YOU can self-direct) and do it all at a significant discount.

     Check out a video and more information about our 2016 Special HERE.

Here are five of the most common reasons to setup a solo 401k:

  1. You need to make a year-end tax deductible contribution. If you need a tax deduction for the current tax year then you need to setup your solo 401k before the end of the year.  Don’t wait until the last month of the year to set it up.  Get it set up now so you’re not stressing during the final month to set it up.  Also, make the contribution as soon as possible.  Talk to your accountant because by November you and your accountant should have a pretty good idea where you’re at in terms of annual business income.  If you need to wait until after the New Year to actually make the contribution that is allowed because you may need to see how your other deductions are affecting your taxable income before you can determine the appropriate contribution amount.  However, keep in mind that if your business is an s-corp and you get a W2, you’ll need to know your contribution amount by the end of January which is when W2’s are required to be filed.  Also, if you miss the December 31 deadline to setup a solo 401k, you can setup a SEP IRA up until the date of your business tax return deadline, including extensions and still make a contribution for 2016.   Follow this link for more information on account setup and contribution deadlines.
  1. You want to rollover existing retirement funds and make self-directed investments into real estate, etc. This reason doesn’t involve making a tax deductible contribution for tax year 2016 and so there isn’t as much pressure to get the 401k setup before the end of the year but you may still want to set it up before the end of year deadline so you have the option to make a tax deductible contribution for 2016.
  1. You want to rollover existing retirement funds and take out a 401k loan. We can help you be strategic with the 401k loan and make sure you stay compliant with the IRS to pay it back in accordance with their requirements.  This reason doesn’t involve making a tax deductible contribution for tax year 2016 and so there isn’t as much pressure to get the 401k setup before the end of the year but you may still want to set it up before the end of year deadline so you have the option to make a tax deductible contribution for 2016.
  1. You want to grow your retirement through generous contribution limits. The solo 401k (and all 401k’s) offers some of the most generous contribution limits of any retirement account.  The amount of your business income will be the true contribution limit but the solo 401k allows contribution limits of up to $53,000 for 2016 ($59,000 if you’re age 50+) whereas the IRA allows contribution limits of up to $5,500 for 2016 ($6,500 if you’re age 50+).  The SEP IRA is capped at $53,000 (no catch up contributions and no employee contributions are allowed).    Follow this link for more information on contribution limits.

  1. You want to make Roth contributions. If you’re a married couple filing jointly and your modified adjusted gross income is greater than $194,000, you cannot contribute to a Roth IRA.  A Roth 401k has no such income limitations.  A Roth 401k is a great way to grow a Roth account through contributions but remember Roth contributions are not tax deductible.

The end of the year will be here soon, so don’t delay!  I invite you to contact our office to discuss the timing of what type of account to setup, when to set it up, and how and when to make your contributions.

Estate Planning: Recent Questions from our Clients

October 1, 2016 Estate Planning, Real Estate, Retirement Planning Comments Off on Estate Planning: Recent Questions from our Clients

In my experience, estate planning is one of the most important, and simultaneously least understood, areas of the law. Perhaps this is because none of us ever see how our own estate plan (or lack thereof) plays out after we are gone. Maybe it’s because there’s just a certain amount of mystery associated with death. Or it might be because people just don’t want to deal with death or the consequences thereof. Whatever it is, there just seem to be a lot of myths and half-truths circulating around this area of the law, and when clients actually get started with their estate plans, they tend to have a lot of questions.

At KKOS, the first line of defense on many of those questions is our fantastic estate planning paralegal, Julie Deck. Julie and I came up with a list of some of the most frequently asked estate planning questions, and I will answer them below:

Do I need a will if I have a trust?

The answer to this is a pretty emphatic YES! In a comprehensive estate plan, the trust is definitely going to be the star player. The trust is where you name beneficiaries as divide up assets owned by the trust. If you have done your estate plan correctly, you have “funded” the trust with the vast majority of your assets – things like real estate, interests in LLC’s and corporations, bank and brokerage accounts, and beneficiary designations for retirement accounts and life insurance policies.

However, the trust only deals with assets it owns. If for some reason you fail to “fund” the trust with the correct assets, then your will kicks in to deal with these assets. When you have a trust, your will will essentially say “distribute my assets as my trust directs,” but having the will in place is crucial to make sure the decisions you make in your trust are honored. If you have a trust, but no will, and you die with assets titled in your own name, then those assets may end up being distributed according to your state’s intestacy laws – instead of how your trust directs.

The will is also where you designate a guardian for your minor children and/or adult children with special needs. This makes sense because the trust only deals with assets it owns – and it doesn’t own your kids! Making this guardian designation is an absolutely crucial step for parents. Without a will, the question of who will be your children’s guardian is left to the courts, and I have personally seen the bitterness that can ensue when in-laws fight over who is supposed to watch after the children left behind when parents die.

Can a beneficiary of my trust also be my Successor Trustee when I die?

Absolutely, although it certainly isn’t required. This is actually usually what people choose to do. They typically name all their children as equal trust beneficiaries, and then designate one or more of those children as the Successor Trustee(s). However, this can open up the Successor Trustee to claims of bias or conflict of interest – especially in highly emotional situations or situations where the beneficiaries don’t necessarily get along. To avoid claims of bias, someone who is both a beneficiary and a trustee may want to take measures to safeguard his position. Such steps include: choosing an estate planning attorney to mediate or oversee the process, using fair methods for dividing unassigned personal property with emotional value, and involving an impartial appraiser if real property is involved. If an individual feels he cannot impartially act in both positions, an independent third-party can always be appointed to serve as trustee.

How do my assets actually get into my trust?

This is a very important question, because as I mentioned above, your trust only deals with assets it owns. If the trust doesn’t own any assets, then it’s really nothing more than a very expensive paperweight. Some people seem to think that assets magically get poured into the trust upon execution. Obviously, that isn’t the case. Different assets are transferred into a trust in different ways. Here is how the most common trust assets make their way into a trust:

  • Real Estate – must be deeded into the name of the trust by executing and recording a deed.
  • Corporation, LLC, and Partnership Interests – a formal stock, membership interest, or partnership interest agreement is executed and kept in the corporate book of the company involved.
  • Bank and Brokerage Accounts – you can speak with the financial institution(s) where you hold your accounts and they will help you execute documents to change ownership of those accounts into the name of the trust.
  • Retirement Accounts – the trust doesn’t actually become the owner of any retirement account during your lifetime. However, it can be named as a death beneficiary of any such accounts. You can make the necessary changes by requesting a beneficiary designation form from your account administrator.
  • Life Insurance Policies – you can name the trust as a beneficiary on life insurance policies as well.

How do I know the trustee I select isn’t just going to do whatever they want with my assets after I die?

You don’t know for sure! This is why it is very important to select responsible and trustworthy people to serve as trustees. It can also be a reason to select co-trustees who are required to act together. This ensures there are always two sets of eyes on every transaction. Another option is to name a third-party trust company, attorney, or accountant to serve as trustee (of course, these people will also charge for their time in acting as a trustee). Additionally, trustees are bound by a fiduciary duty to execute the trust as you direct. If they fail to do so, they can be sued by the beneficiaries, and the penalties can be steep.

In summary, these are just a few of the most common questions we get when helping clients with their estate plans. There are many others, and you may have specific questions that may not pertain to anyone else’s situation. That is why it is so important to get a knowledgeable estate planning attorney involved when you are making these important decisions.

Go for the Gold…and Keep It – What to Do If You Receive a Financial Windfall

August 9, 2016 Business planning, Estate Planning, Retirement Planning, Tax Planning Comments Off on Go for the Gold…and Keep It – What to Do If You Receive a Financial Windfall

I don’t know about you, but right now, every evening, I find myself riveted to the screen, breathlessly taking in action in synchronized diving, archery, water polo, and even rhythmic gymnastics!  This can only mean one thing (because I would never otherwise watch any of these sports) – it must be time for the Summer Olympics!

Every four years, the world gathers for this ultimate showcase of athletic talent, and almost without fail, each Olympics produces a singular performance from an individual who wins at least one gold medal and becomes a superstar practically overnight.  For these lucky few (I’m thinking of people like Mary Lou Retton and Michael Phelps), an Olympic gold medal truly does change their life.

They come home to millions in endorsement deals and other sources of income.  Their gold medal basically becomes a winning lottery ticket, and they’re not the only ones.  Most countries actually hand out bonuses for Olympic triumphs.  American competitors who bring home the gold will also bring home $25,000 in cash for each first place finish.  While that’s certainly nothing to sneeze at, Vladimir Putin is a little more generous, dishing out roughly $61,000 for each Russian gold medal.

However, according to Forbes, the real big money comes from a few countries that are a bit more starved for Olympic glory.  Azerbaijan is handing out $255,000 for each Olympic gold. Indonesia will shell out $383,000.  And the gold medal for gold medal payments goes to Singapore, which will make its athletes $753,000 richer for striding to the top of the medal stand to the strains of Majulah Singapura – the Singaporean National Anthem.

Both the American Olympic-made superstars, and any Singaporean or Indonesian who wins gold, will return home to a world filled with very different financial realities than the one they left on their way to Rio.  The same can be said for everyday folks who come into a financial windfall.  Whether the money comes from winning the lottery, winning or settling a lawsuit, an inheritance, or an investment paying off in a huge way, there are several important steps you should take to make sure you are able to keep (and perhaps even grow) what has come your way.Put Together

  1. Your Own Financial “Dream Team”. This is especially important if you’re unaccustomed to dealing with large sums of money.  You will be well-served to bring on board an experienced and honest financial planner/advisor, as well as a CPA, an attorney, and an insurance professional to help you deal with the tax and legal issues that will (not may) come up.
  2. Take Your Time. Be wary of those who will almost certainly come out of the woodwork with investment opportunities that are a “can’t miss” but that require you to “strike while the iron is hot.”  Your windfall should afford you the time to sit down with your advisors and family members about what your priorities are for the money.  Is paying off your mortgage the most important thing?  Maybe it’s paying for your children’s college education.  These are decisions that need to be made before making any particular investments.
  3. Review and (If Necessary) Revise Your Estate Plan. That will you had drawn up when you first got married and had no kids may be woefully inadequate (not to mention inaccurate) now that you have children and have experienced a financial windfall.  The extra assets may significantly increase the complexity of your estate.  If it’s large enough, the windfall may also put you in a situation where you need to start thinking about, and planning to negate, the effects of estate taxes.  If you are in this situation, please go talk to your estate planning attorney (or hire one) as soon as possible.
  4. Think Twice Before You Quit Your Day Job. You may be tempted to quit your job, but quitting may actually be a really bad idea. What if your tax burden is higher than you anticipated?  In addition to the obvious loss of wages, you might also miss many of the workplace benefits, such as tax-advantaged retirement accounts, health insurance, or even the sense of purpose and well-being that comes from going to work.  If you do quit your day job, think about replacing it with something entrepreneurial in nature.  Being self-employed can give you that sense of purpose, and can provide you ways (such as a Solo 401k) to continue to receive benefits similar to those of being someone else’s employee.
  5. Don’t Forget About Taxes. It is vitally important to ascertain as quickly as possible what the net after-tax value of your windfall will be, keeping in mind that you will need to keep enough cash on hand to actually pay those taxes. In making this determination, you’ll likely need to take into account income, gift, and estate taxes, on both the federal and state levels.  There are also legitimate strategies that may help you put a dent in your tax bill.  However, be very cautious of anyone who says they have a strategy to eliminate taxes completely – especially if that strategy involves going off-shore.  A good CPA will help you make sure you are paying Uncle Sam everything he is owed, and not a penny more, without the risk of going to jail.

If fortune smiles upon you and a financial windfall comes your way (whether by inheritance or by winning a gold medal for Singapore), please take the necessary steps to avoid losing it, and to avoid losing things that are even more important – like your family and friends.  It seems crazy, but statistics show that 44% of lottery winners are broke within five years of winning their jackpot.  Studies also show that lottery winners frequently become estranged from family and friends, and incur a greater incidence of depression, drug and alcohol abuse, divorce, and suicide than the average American.  While not a guarantee of anything, taking the steps laid out above can help you avoid becoming a part of those sad statistics.

Roth 401k versus Roth IRA: A Battle for the Ages (kind of)

May 3, 2016 Business planning, Retirement Planning, Small Business, Tax Planning Comments Off on Roth 401k versus Roth IRA: A Battle for the Ages (kind of)

Not that long ago, a Roth retirement account did not exist.  However, for many individuals today, a Roth account is the preferred retirement investment vehicle, particularly for self-directed retirement account owners.

The reason why a ROTH tends to gain favor is because we all anticipate a considerable return on our investments (at least we hope so) and would rather pay tax on the “seed money”, i.e., use after-tax dollars to make their investment, rather than pay tax on the “harvest”.  With a ROTH when they retire and take their money out of their retirement account, the distribution is typically tax-free.

But the question is often asked, is it better to make such an investment out of a Roth 401k or a Roth IRA?  The answer is that (a) it depends and (b) it is sort of a trick question (keep reading). Here are four ways in which the rules that govern Roth IRA’s and Roth 401k’s are different:

  1. Rollover Restriction. Under current rules, you cannot rollover a Roth IRA to a Roth 401k.  There is no good reason why that is the rule, but it is.  However, you can rollover a Roth 401k to a Roth IRA.  Therefore, if you prefer the flexibility of knowing you can rollover a Roth 401k to a Roth IRA, then the advantage goes to the Roth 401k.
  1. Contributions. With a Roth IRA, if your income is over a certain amount, you cannot make a Roth IRA contribution. For example, in 2016, if your tax status is married filing jointly and your modified adjusted gross income is equal to or greater than $194,000, you cannot make a Roth IRA contribution.   It is this rule that has created an approach known as a backdoor Roth contribution, whereby you make a traditional IRA contribution and then convert it to the Roth IRA (after paying the applicable tax).  However, with a Roth 401k, there is no such income restriction, and hence, no two-step process necessary.  Therefore, the advantage goes to the Roth 401k.
  1. Re-characterization.  With a Roth IRA, you can un-do a Roth conversion so long as you timely follow the IRS requirements.  This is known as a re-characterization.  It can be a helpful safety net if you convert traditional IRA dollars to Roth but then change your mind.  This might happen if you do not have the liquidity to pay the tax bill on the converted amount, or if the investment opportunity is not as great as you anticipated.  See Mat Sorensen’s March 8, 2016 article for a more extensive discussion about Roth IRA re-characterizations here: . However, with a Roth 401k, you cannot un-do a Roth conversion, i.e., re-characterization is not allowed.  Again, there is no good reason why that is the rule, but it is.  Therefore, because the ability to re-characterize converted amounts provides flexibility that a Roth 401k cannot provide, the advantage here goes to the Roth IRA.  Here’s another take on this particular benefit and strategy in a video from our Partner in KKOS Lawyers, Mark Kohler:

  1. Required Minimum Distributions (“RMD’s”). For most retirement accounts, by age 70 ½, you must begin taking distributions from your retirement account.  This allows the IRS to recoup the tax that was previously deferred.  However, with a Roth IRA, since each RMD would be tax-free, there is no tax revenue to the IRS and unsurprisingly, there is no requirement for RMD’s to be taken out of a Roth IRA.  But with a Roth 401k, there are RMD’s.  Again, there is no good reason why that is the rule, it just is.  This does not suggest that RMD’s from a Roth 401k are taxed, it simply that you have to start taking distributions from your Roth 401k by age 70 ½, unless you are still working and not a 5% owner.  Therefore, the advantage goes to the Roth IRA.

Keep in mind that many of the rules that apply to a traditional IRA also apply to a Roth IRA.  Likewise, many of the rules that apply to a traditional 401k, also apply to a Roth 401k.  For example, two significant differences between an IRA generally and 401k, Roth or otherwise, are the larger contribution limits and a loan option which a 401k provides that an IRA does not.

So which is better?  The answer does not have to be a mutually exclusive decision; in fact, if possible, the best approach might be to have both a Roth IRA and a Roth 401k.   If you would like to discuss these matters in greater detail, please contact our office at 602-761-9798.

Two More Reasons to Consider an IRA LLC (and Critical Mistakes to Avoid)

March 22, 2016 Asset Protection, Business planning, Law, Retirement Planning, Small Business Comments Off on Two More Reasons to Consider an IRA LLC (and Critical Mistakes to Avoid)

Typically, the most common reason why a self-directed IRA owner considers forming an IRA LLC is for convenience in terms of directing and maintaining the IRA’s investments. This convenience arises from the IRA owner serving as the LLC manager. Although this is an important reason to consider forming an IRA LLC, there are at least two other reasons to consider forming an IRA LLC. Ironically, outside of the self-directed IRA context, these are most common reasons to form an LLC, but for some reason, they take a “back seat” in the self-directed IRA context.

An IRA LLC Can Provide Limited Liability Protection.

Aside from convenience, another reason to consider forming an IRA LLC is to provide limitation of liability for the LLC owner/member. This might be the most important reason to form an IRA LLC, particularly if your self-directed IRA investment consists of investing directly into real estate. Often times, an IRA owner is aware that generally, an IRA is exempt from creditors. There are many caveats to this statement, including what state the IRA owner resides in and under what circumstances the IRA owner is the debtor, e.g., bankruptcy versus non-bankruptcy proceedings. Regardless of those factors, the general statement that an IRA is exempt from creditors is referring to personal creditors. If a self-directed IRA takes title to a rental property and a liability or lawsuit arises from the rental property, the IRA will not protect the other assets of the IRA or the personal assets of the IRA owner. The reason for this outcome is because an IRA is not an entity that provides limited liability protection to the IRA owner. In this sense, a self-directed IRA that owns a rental property would be treated in the same manner as a family revocable living trust that owns a rental property, which is that the family revocable living trust would not protect the other assets of the family trust or the personal assets of the family trust owners/grantors from a lawsuit or liability arising from the rental property.

An IRA LLC Can Provide a Measure of Privacy.

Another reason to consider forming an IRA LLC is for privacy. Outside of the self-directed IRA context, this is a common reason to form an LLC. To the extent that privacy is a priority to an IRA owner, taking title to real estate or other asset as: “ABC Custodian FBO [IRA Owner Name] IRA”, is less than ideal. By having the LLC as the party, whether it is a purchase contract, rental agreement, private placement, etc., this can provide a certain amount of privacy. Even though the IRA owner would presumably sign the contract as the LLC manager, a measure of privacy is still provided by having the LLC take title to the investment rather than the self-directed IRA. However, as is the situation with any LLC, depending on the state, the owner/member and/or manager of the IRA LLC would be listed on the business records of the state, so to the extent that privacy is one of the main reasons for setting up an IRA LLC, the IRA owner might want to form it in a state that does not list that information on the state’s business records.

Although there are other less common reasons to consider forming an IRA LLC, a typical analysis of whether an IRA LLC is appropriate should not be limited to solely whether the situation requires convenience. To recap, this article provides three common reasons to consider forming an IRA LLC:

  • Limited Liability Protection
  • Convenience
  • Privacy

Although an IRA LLC is not always necessary, to the extent that any or all of these factors are important to the IRA owner as it concerns the self-directed IRA investment(s), an IRA LLC can help to accomplish these objectives.

Making Sure the IRA LLC is Properly Formed and Administered (Critical Mistakes to Avoid)

The IRA LLC has been recognized by the Courts and is a legitimate and legal structure. But an IRA owner can make critical mistakes if they do not form the IRA LLC correctly or if they improperly administer the IRA LLC. It is for these reasons that we discourage setting up an IRA LLC from a website or doing it on your own. Issues with the formation or administration of the IRA LLC can arise in a number of different ways, including:

  1. If the operating agreement is not properly drafted.
  2. If the IRS EIN is not properly obtained.
  3. If the LLC manager allows the IRA LLC to enter into a prohibited transaction with a disqualified party.
  4. If the LLC manager or other disqualified person improperly benefits from a transaction made by the IRA LLC.
  5. If the 1099 or K-1 that results from the investment is not properly completed.
  6. If funds within the IRA LLC bank account are mishandled.

These are just a few of the critical mistakes that can arise if the IRA LLC is not properly formed or administered. Our office can advise you on how to avoid these and other critical mistakes.

In sum, an IRA LLC provides limited liability protection, convenience, and privacy. If properly formed and administered, an IRA LLC is an effective way to make self-directed IRA investments. If you have a self-directed IRA or are considering setting up a self-directed IRA, please contact our office to discuss whether an IRA LLC is necessary to accomplish your intended objectives.

Kevin Kennedy is an associate attorney with Kyler Kohler Ostermiller, and Sorensen, LLP (“KKOS Lawyers”) in its Phoenix, Arizona office and has extensive experience in helping client register their trademark and protecting their brand identity. He can be reached at or by phone at (888) 801-0010.

It’s 11:00 p.m. – Do You Know Who Your Account Beneficiaries Are?

March 15, 2016 Asset Protection, Estate Planning, Law, Retirement Planning Comments Off on It’s 11:00 p.m. – Do You Know Who Your Account Beneficiaries Are?

As an attorney who practices in the area of Trusts and Estates, one of the most important pieces of advice I give to clients is to establish a revocable living trust to own real estate, small business interests, and other assets in order to effectuate the transfer of these assets without their heirs being required to file a probate action (or possibly multiple probate actions) upon their deaths. However, while real estate and small business ownership are certainly the most common triggers for probate, it is not the only way folks can get caught in that trap.

Most of us have life insurance policies, 401(k)’s, IRA’s or other accounts that require us to designate at least one beneficiary to receive the proceeds of those accounts when we pass away. Failing to keep these beneficiary designations updated is another easy way to unintentionally force your heirs into the time, cost and headache of probate at your death.

I am actually dealing with this for a client. Changing the names to protect the innocent, let’s call my client Jeff. Jeff’s and his wife are the parents of three children and Jeff’s wife named him as the sole beneficiary of her life insurance policy when the policy was issued in 2001. In 2004, Jeff and his wife divorced. However, the beneficiary designation on the life insurance policy was never changed. Jeff’s wife remarried in 2006, but she still didn’t change the beneficiary designation forms. She had another child with her new husband (her fourth child) in 2008, but no changes were made to the beneficiary forms for the life insurance policy.

Last year, Jeff’s ex-wife died suddenly at the age of 43. When her new husband went to collect the life insurance proceeds, he was told that Jeff, not him, was named as the beneficiary. When he told the insurance company that Jeff is the deceased’s ex-husband, they replied that he needed to file a probate action to get the life insurance proceeds delivered where they were supposed to go. This is because Utah (and most other states) have laws that automatically revoke the beneficiary designation of a spouse when a divorce occurs. However, Utah law (and the laws of most other states) don’t automatically substitute someone else in as a beneficiary for the divorced spouse. The beneficiary becomes the person who is named as the residuary beneficiary of the estate under the deceased person’s will, or who is designated as the beneficiary under the intestacy laws of the state where the deceased person resided at the time of his or her death.

In Jeff’s case, his ex-wife left no will, which means that under Utah’s intestacy laws, her new husband and his three children are supposed to share in the proceeds of the life insurance policy in varying percentages. However, Jeff (on behalf of his three children) and his ex-wife’s new husband have been required to pay an attorney (yours truly) to file a court case and walk through the formalities of the probate process in order to effectuate what Jeff’s ex-wife could have accomplished by changing her beneficiary designations in a timely manner.

Ok, so when should you at least think about whether you need to change your beneficiary designations? Well, it sort of reads like a list of the biggest days of your life (both good and bad):

  1. You get married.
  2. You get divorced.
  3. You have a child.
  4. Your spouse passes away.
  5. Your child gets married, divorced or has a child.
  6. Your child passes away.

Keeping your beneficiary designations current will keep your heirs out of probate, and more importantly, will make sure that the assets in your life insurance policies, retirement accounts, and other accounts go where you actually want them to go. Keep in mind that the strategy of naming your spouse as a primary beneficiary and your revocable living trust as the secondary beneficiary is a great way to keep on top of this. That way, you only need to change your beneficiary forms if you get a divorce. Any other changes can be dealt with directly in the trust.

Jarom Bergeson is an associate attorney with Kyler Kohler Ostermiller, and Sorensen, LLP (“KKOS Lawyers”) in its Cedar City, Utah office and has extensive experience in helping client register their trademark and protecting their brand identity. He can be reached at or by phone at (888) 801-0010.

Solo 401(k) Contributions for Sole Propietorship Owners and LLC Owners

December 22, 2015 Business planning, Retirement Planning, Tax Planning Comments Off on Solo 401(k) Contributions for Sole Propietorship Owners and LLC Owners

We recently published an article about Solo 401(k) contribution rules and deadlines for S-Corporation Owners. That article can be found here. But what about a situation where the business that adopts the solo 401(k) is not taxed as an s-corporation?  What if the business is taxed as a sole proprietorship (e.g., a single-member LLC) or a partnership, as is the case with most LLC’s?  Does that change anything?  According to the IRS, the answer is yes.


In our prior article written by KKOS Partner Mat Sorensen there was an illustration of a business owner named Sally who owns an s-corporation and that article outlined what solo 401 contributions would look like for her based on net income of $120,000.  For purposes of this article, we’ll call her “S-Corp Sally”.  In order to highlight the differences in solo 401(k) contributions between an s-corporation versus a partnership or sole proprietorship, here’s an example of what solo 401(k) contributions would look like for a partnership or sole proprietorship using the same net income figures as Mat’s example with the s-corporation.


Susan, age 46, is a technology consultant who owns an LLC that has adopted a solo 401(k) in December 2015.  She is the only owner/member of the LLC and since she has not elected to have her LLC taxed as an s-corporation, by default her business is taxed as a sole proprietorship.  We’ll call her “Sole Prop Susan”.   She has $120,000 in net income for the year, just like S-Corp Sally.  All of Sole Prop Susan’s net income will be reported on Schedule C of her personal tax form 1040, i.e., no wage income / no W-2.  If she decided to take the maximum allowable contribution based on her net income, it would look like this.

  1. Employee Contributions (Elective Deferral) – The 2015 maximum employee contribution for Sole Prop Susan is $18,000. Since she has net income in excess of $18,000, she can contribute the maximum employee contribution of $18,000.  This employee contribution amount will be combined with her employer contribution and reported on line 28 of her tax form 1040.
  1. Employer Contributions – Calculating the maximum employer contribution for Sole Prop Susan is not as simple as with S-Corp Sally. S-Corp Sally’s employer contribution was computed by taking 25% of her wage/salary to arrive at the amount of her employer contribution.  With Sole Prop Susan, there is a more involved computation to arrive at her employer contribution.  A step-by-step calculation can be found in IRS Publication 560.  In short, the IRS reduces net income by the deductible portion of her self-employment tax and also reduces the maximum percentage from 25% to 20%.   There are about 20 additional steps or calculations that must be performed according to the worksheet provided in Publication 560 but basically, if Sole Prop Susan elected to make an employee contribution of $18,000 then her employer contribution would be limited to $22,200 because her overall contribution from both employer and employee contributions would be $40,200.
  1. In the end, Sole Prop Susan would have contributed and saved $40,200 for retirement and reported it on line 28 of her tax form 1040. This is an above the line tax deduction.  Not bad.  If she were in a 20% tax bracket and a 5% bracket for state taxes that saves her approximately $10,000 in federal and state taxes.

Note: If Susan were in an entity taxed as a partnership rather than a sole proprietorship, and the net income allocable to her from the partnership on Schedule K-1 was $120,000 then the contribution amounts above would remain the same and she would still end up with a maximum contribution limit of $40,200.


You may notice that Sole Prop Susan was able to make a larger solo 401(k) contribution than S-Corp Sally even though their net income was exactly the same.  S-Corp Sally’s maximum contribution amount was $30,500.  The difference was that S-Corp Sally took a wage/salary that was less than her net income, e.g. $70,000.  Sole Prop Susan had to pay self-employment taxes on all $120,000 whereas S-Corp Sally did not.  As an s-corporation owner, there are competing interests to pay the least amount self-employment tax as possible with making the maximum 401(k) contribution – by taking the smallest salary/wage possible (so long as it is reasonable), this reduces your self-employment tax liability but it also limits your solo 401(k) contribution, as was the case with S-Corp Sally.  The IRS gets you coming or going.


Everything else about the solo 401(k) that is adopted by an s-corporation is the same as a solo 401(k) that is adopted by a sole proprietorship/partnership.  First, the deadline to adopt the solo 401(k) and have contributions count towards 2015 is still December 31, 2015 regardless of how your business is taxed.  Second, the total overall annual contribution limit is $53,000 in 2015 or $59,000 if you are age 50 or older.  Finally, both employee and employer contributions can be made up to the company’s tax return deadline INCLUDING extensions.   The only difference is that with a “sole proprietorship/partnership Solo 401(k)”, you don’t have the W-2 deadline.

In sum, when it comes to solo 401(k) contributions, all else being equal, how your company is taxed may affect the maximum 401(k) contribution you can make.  Either way, the solo 401(k) contribution limits are very robust, especially compared to an IRA.  Contact our office to find out more about setting up a solo 401(k) plan for your business.

Kevin Kennedy is an associate attorney with Kyler Kohler Ostermiller, and Sorensen, LLP (“KKOS Lawyers”) in its Phoenix, Arizona office and has extensive experience in helping client register their trademark and protecting their brand identity. He can be reached at or by phone at (888) 801-0010.

Is a 401K Loan a Viable Option to Fund Your Business?

November 24, 2015 Business planning, Retirement Planning Comments Off on Is a 401K Loan a Viable Option to Fund Your Business?

One of the greatest aspects of the American Dream is starting your own business.  Maybe you are a part-time entrepreneur that has the security of a “9 to 5” career while you transition into full-time self-employment.  Or maybe you are close to retiring and want to start a business that gives your more freedom and control in your gold years.  You might be a full-time entrepreneur.  Regardless of your situation, if you’re like many business owners, raising capital for your business can be challenging.  It can be difficult to get a business loan from your bank.  If you bring on other business partners who may have cash to infuse your business, that can come with a price.   You may decide to enter into the arena of private offerings as a way to raise capital for your business, but that too comes with a price.

If you’re like most Americans, your retirement account is your largest asset and your largest source of capital.  It’s a somewhat unconventional approach to business funding, but I have talked with many business owners who would love to use their retirement account to provide operating capital for their business.  Whether this is a good financial decision is something for you to decide.  You know more than anyone that running a business can be risky and using retirement funds towards your business could drain your retirement account, leaving you without the necessary funds when you retire.  The problem is that many small business owners in America have so much going on that they can only worry about today, much less when they retire.   If you’ve wondered if you can use your retirement account to infuse cash into your business, then keep reading.

One option is to take a distribution from your retirement account and use the distributed amount towards your business.  However, if you’re in a high personal income tax bracket, and depending on your age, the taxes and penalties could be expensive since the amount you take as a distribution is included in your personal gross income.  But if you are over 59 ½ or otherwise qualify to avoid the early withdrawal penalties, and you are in a lower personal income tax bracket, this may be a reasonable option.  Keep in mind that the distributed amount could push you into a higher income tax bracket.  It’s a good idea to run the numbers to be sure.

Don’t worry, I didn’t write an article to tell you to take a distribution from your retirement account.   However, if you don’t take a distribution from your retirement account to fund your business, but you want to nevertheless use retirement funds in this way, one problem you’ll encounter is that your business is a disqualified party to your retirement account, which means the general rule is that you cannot use your retirement account to provide working capital for your business.  However, one notable exception to this rule is the 401k loan.  You can use the 401k loan proceeds for virtually any purpose, including towards your business without triggering a prohibited transaction.

The 401k loan can be a great option for someone whose business is running low on capital.  But before you run out and get a 401k loan, here are 5 things to know before taking out a 401k loan to fund or continue operations of your business:


  1. Check your 401k plan documents to make sure your plan allows the 401k loan option. If you have your 401k with an employer, it is quite probable that the plan documents will have limitations on what the 401k loan can be used for.  Therefore, the best vehicle for using the 401k loan in your business is typically going to be the self-directed solo 401k.


  1. The maximum amount of the 401k loan is $50,000 or 50% of the 401k account balance, whichever is less. The maximum amount of the 401k loan is $50,000 or 50% of the 401k account balance, whichever is less. For example, if your 401k account balance is $25,000, the most you can take as a 401k loan is $12,500.  If your 401k account balance, is $1,200,000, the most you can take as a 401k loan is $50,000.


  1. It must be paid back within 5 years with interest – Payments must be made at least quarterly. Yes, you must pay it back.  Per IRS regulations, the interest rate should be 2% above the prime rate.  Payments must be made at least quarterly and the payments must be in accordance with an amortization schedule where each payment consists of principal and interest, i.e., no interest-only payments with a balloon payment at the end.  We’d all prefer to pay interest to our 401k than to a bank.


  1. 401k Loans Are Usually Only Available to Current Employees. In most situations, 401(k)s will require you to be an existing employee of the company in order to take or maintain a 401(k) loan. So, for example, if you have an old employer’s 401(k) then you will typically not be able to take a 401(k) loan from that plan as you are not longer employed there. Also, if you are working for an existing employer and you plan to take a loan and then leave that employer, most 401(k) plans will require re-payment immediately upon termination from employment. Because of both of these situations, a new business owner should rollover their current 401(k) funds a  new solo 401(k) in the new business. They would then take the 401(k) loan from the new self directed solo 401(k) created by the new company.


  1. Any amount of your 401k loans that is unpaid when due becomes distributed and taxable to you. If you don’t pay back the 401k loan when it’s due, the outstanding principal amount is distributed and must be included in your personal gross income for that year.

For example, here’s Johnny.  He works full-time for a Fortune 1000 company but he also has a business he started last year.    He needs more capital for his business but his business hasn’t built up corporate credit to get a business loan, even with personal guarantees or personal financing.  He has a 401k from a former employer that he rolled over to an IRA last year.  He decides to set up a self-directed solo 401k that would be adopted by his business and he rolls over his IRA to this solo 401k, which has about $175,000.  He then takes out a 401k loan of $50,000, which he uses for marketing, and to outsource other business operations that he doesn’t have time for right now.  He is hopeful that this will get his business in a better situation and put him one step closer to transitioning out of his full-time corporate job.  As long as Johhny makes his quarterly payments of principal and interest and pays back the $50,000 within five years, he won’t pay any taxes, and who else to pay interest than to his own 401k.  Johnny is one step closer to living the American Dream thanks to the 401k loan.

Remember, the 401k loan option is not for everyone.  But it is one of many benefits and options that come with setting up a self-directed solo 401k.  Our firm can help with setting up a self-directed 401k plan.  Our fees are reasonable, and in fact, we are running a promotion on our solo 401k until November 25th.  If you want to setup a solo 401k and make tax deductible contributions for the 2015 tax year, you’ll have until December 31th to form and adopt your solo 401k.  For more in depth articles on 401k deadlines, contribution limits, etc., please check out our law firm blog as well as,,  and

Did you complete Your IRA Beneficiary Form Properly? IRA Beneficiary Planning 101

September 28, 2015 Estate Planning, Retirement Planning Comments Off on Did you complete Your IRA Beneficiary Form Properly? IRA Beneficiary Planning 101

Two of the main benefits of setting up an IRA or other retirement account are its tax-preferred treatment and its protection from creditors.  There are exceptions to this and depending on the type of retirement account and where you live, there will be varying levels of creditor protection and tax benefits, but these are two of the main reasons why someone would spend years saving and building their retirement account.  The question then becomes what happens to these benefits when you die?  In other words, how will your retirement account be taxed in the hands of your loved ones and will these funds be protected from their creditors?

These are very important questions and the answers will depend in large part on how you fill out your retirement account beneficiary designation form.  This form will typically allow you to name a primary beneficiary which is your first choice to receive the funds upon your death and a secondary beneficiary which would be the backup in the event your primary beneficiary dies before you.

There are many options for whom to name as primary beneficiary and secondary beneficiary, but the common method is to name your spouse if you are married as the primary beneficiary, and then either name a trust if you have one, or your children if you have children as the secondary beneficiary.  While this may be a good general rule to follow, there are many factors which should be considered before deciding who to name as primary and secondary beneficiary. Once all of the appropriate factors have been considered, then you can decide how to fill out your beneficiary designation form.  Much of it will come down to deciding whether to name individuals or trusts, or a combination of both.  With that, here are some items to consider when naming an individual or trust as a beneficiary on your beneficiary designation form:

If you name an individual on your beneficiary designation form:

  1. Taxes: In terms of how your retirement account will be taxed in the hands of your loved ones after you die, depends  on who receives your account. That’s one of the problems with naming an individual is that they get to make the decision.  If they’re in a tough situation financially, they may cash out your retirement account immediately without regard for the hefty taxes that can result.  On the other hand, even if your loved one does not need the funds immediately and wants to save on taxes, unfortunately, the time will come when required minimum distributions (RMD’s) must be taken out.   Given that reality, typically the goal is to minimize the taxes due by having the RMD’s paid out over the longest period of time allowable under the Tax Code.  This option is sometimes referred to as the Stretch Option.  This option is generally available to both a spouse or non-spouse.  Mat Sorensen has written an excellent article on the options available to a spouse or non-spouse beneficiary, which you can read here.  Basically, a spouse who wants to stretch out the taxes due can rollover these amounts to their own retirement account or setup an inherited IRA, but a non-spouse who wants to stretch out the taxes due can only setup an inherited IRA. One of the ways to “force” your loved ones to take advantage of the Stretch Option is to name a trust as the beneficiary on your beneficiary designation form.  Then upon your death, the retirement account funds would go to the trust so that eventually the funds would be passed to your loved ones, but only upon the terms and conditions of the trust.   However, one of the risks of naming a trust on your beneficiary designation form is if it doesn’t meet all of the necessary requirements, you will forfeit the Stretch Option and the retirement funds will be distributed within 5 years. We’ll discuss the trust requirements later in this article.
  1. Creditor Protection. If you name your spouse on the beneficiary designation form, and they elect to rollover your retirement account to their own IRA, that amount will continue to receive creditor protection.  But if your spouse or other loved one decides to cash out your IRA, that amount will have lost all of its creditor protection.  Significantly, even if your loved one elects not to cash out your retirement account but instead decides to have your retirement funds rolled over into an inherited IRA, such an account is more vulnerable to creditors than a non-inherited IRA, i.e., the retirement account during the retirement account owner’s lifetime.
  1. Other Considerations. If you are currently married and this is not your first marriage and you have children from a prior marriage or relationship, be careful to name your spouse because this means that if you die, and your spouse rolls over your retirement account to their own IRA, for example, they are under no obligation to name your children from a prior marriage as beneficiaries on your spouse’s beneficiary designation form.  In order to prevent that, you may need to figure out another option, including but not limited to naming a trust as the beneficiary on your beneficiary designation form.  However, one of the risks of naming a trust on your beneficiary designation form is if it doesn’t meet all of the necessary requirements, you will forfeit the Stretch Option and the retirement funds will be distributed within 5 years.

If you name a trust on your beneficiary designation form:

  1. The risk of naming a trust on your beneficiary form is if it doesn’t meet certain requirements you and your loved ones will forfeit the Stretch Option.  The consolation prize is that your loved ones will have 5 years to have your retirement account fully distributed, but depending on the size of your retirement account, and the income tax bracket of your loved ones, this can nevertheless result in a significant tax bill.  The requirements that your trust must comply with in order to not forfeit the Stretch Option can be found here.  Basically, the trust must be considered what is sometimes referred to as a “see through” trust.  The reason for this nickname is because in order to take advantage of the Stretch Option, there must be an individual or individuals whose life expectancy can be used to determine the amount of the RMD’s to be paid over time.   In other words, the IRS must be able to “see through” the trust and identify the beneficiary or beneficiaries of the trust.  These requirements beg the question, what kind of trust needs to be setup in order to meet these requirements?  The two most common types of trusts that are discussed in this situation is the IRA Trust and the Family Trust or Revocable Living Trust.  An excellent article written by Mat Sorensen on myths and facts about the IRA Trust can be found here.   If properly drafted, both the IRA Trust and a Family Trust/Revocable Living Trust can satisfy these requirements.  However, there are many reasons why it would be preferable to name an IRA Trust and not a Family Trust/Revocable Living Trust, and vice versa.  In short, if your IRA has over $500K of value and if you want any restrictions on the use of the IRA funds upon your passing, a separate IRA Trust would be a benefit. Such a topic will be the subject for another blog, but regardless, you will absolutely want to have your trust reviewed by a competent professional before naming it on your beneficiary designation form to make sure you don’t unintentionally forfeit the Stretch Option.
  1. Creditor Protection. One of the main benefits of naming an IRA Trust as beneficiary on your retirement account beneficiary form is that when you die your retirement account funds will be protected from the creditors of your loved ones.  Depending on the circumstances and how the Family Trust/Revocable Living Trust is drafted, the same may also be true.
  1. Other Considerations. One of the benefits of a properly drafted trust that meets the requirements of the Stretch Option is that instead of having the age of the oldest beneficiary used to calculate the RMD’s under the Stretch Option, each beneficiary can use their own age and thus allow the younger beneficiary’s to further maximize the Stretch Option.  This is accomplished by having the trust properly drafted to create sub-trusts for each beneficiary. Therefore, it may be advisable to prepare a customized beneficiary designation form and provide it to your retirement account administrator to sufficiently address these sub-trusts and their respective beneficiaries.

Naming beneficiaries on your beneficiary designation form can be one of the most important decisions you make in your estate plan and part of that is to understand the tax treatment and creditor protection of your retirement account after you die.  Please consult with a competent attorney or tax professional to make sure it gets filled out to properly reflect your objectives and to determine whether it’s preferable to setup an IRA Trust, a Revocable Living Trust/Family Trust, or both and how to properly incorporate them into your IRA beneficiary planning.

Kevin is an attorney with Kyler Kohler Ostermiller & Sorensen, LLP (“KKOS Lawyers”) in its Phoenix, AZ, office and has extensive experience helping hundreds of clients with IRA and estate planning needs. He can be reached at or by phone at (602) 761-9798.