The Ultimate IRA has both an asset protection and a tax component. This is a cost-effective plan designed for those with larger IRAs (over $200,000) who want to:
- Fully protect the assets in the IRA from creditors, including government taxing authorities.
- Minimize the tax impact of the “built-in” ordinary income tax in IRAs
- Maximize the flexibility of investments and withdrawals from IRAs (such as investing an IRA in your own home mortgage).
- Integrate your IRA into your estate plan
First, we will discuss asset protection issues, and then move onto financial issues.
IRAs May Not Be Protected Against Creditors
Individuals who retire or change jobs frequently roll their retirement assets into an Individual Retirement Account (IRA). These IRAs can become quite large – many reach into the millions of dollars. While most non-IRA retirement plans provide protection from creditors (through ERISA), IRAs are not protected against creditors and bankruptcy in at least 25 states.
The states that DO NOT fully protect IRAs are:
Arkansas, California, Connecticut, Delaware, D.C., Hawaii, Iowa, Louisiana, Maine, Massachusetts, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, Wyoming
Even if your state is not on this list, you can still obtain additional asset protection from The Ultimate IRA.
Furthermore, even in states that protect IRAs, judges may “stretch” the law to award damages to a sympathetic plaintiff. Also, changes to the bankruptcy law may grant creditors a right to your IRA above a specified exemption amount. All of this means that the IRA account that took you 20 or more years to build may be entirely at risk from a baseless lawsuit.
Currently, if a creditor obtains a judgment, the creditor takes the judgment to IRA custodian who will make the creditor the owner of the IRA. The creditor can then instruct the custodian to liquidate investments and distribute the funds to satisfy the judgment. This, of course, triggers a taxable event (maybe penalties also) for the IRA owner without money to pay the tax. To the IRA owner, this is a disastrous result.
What is “The Ultimate IRA”?
With many families having concentrated wealth inside IRAs, it becomes paramount to protect IRA assets. The Ultimate IRA is a cost-effective way to make your IRA virtually impenetrable to any creditor, and also obtain additional tax benefits.
Four Lines of Defense
First line of defense. A self-directed IRA is opened, and existing retirement savings are transferred to this IRA. This IRA invests its assets in a specially-designed Offshore LLC that is owned by the IRA, with a custodian arranged by our retirement planning experts. A management company (in a second offshore jurisdiction) is appointed as the manager of the LLC, leaving the IRA as a passive member of the LLC. Thus, a creditor must first obtain a judgement against this Offshore LLC, forcing the creditor to fight you in another country.
Second line of defense. Under the law of the offshore jurisdiction, a “charging order” (which does not allow access to the assets) is the successful creditor’s sole remedy. Since the LLC is managed by a foreign corporation (and not the owner), distributions cannot be compelled by U.S. courts.
Third and fourth lines of defense. The LLC manager (after consultation with the client), can hold the assets in offshore brokerage accounts, which are outside the jurisdiction of U.S. courts. Fourth, the IRA can invest in special creditor-protected foreign investments or other foreign securities.
Using the Ultimate IRA, neither the assets nor the manager of the LLC is subject to U.S. courts, and the creditor will have to pursue its claims offshore. This means that the IRA is protected against all creditors, including the client’s spouse and government tax collectors. Even for a determined creditor, pursuing these claims is complicated and costly. If successful, the creditor only has a charging order against a foreign brokerage account – and this charging order is virtually worthless. Such a creditor will be required to pay income tax on the LLC’s earnings but will not have cash to do so! Few creditors are willing to place themselves in this precarious position.
Tax Benefits
The Ultimate IRA may allow the IRA owner to (a) remove assets on a tax-favored basis (i.e., capital gains instead of ordinary income), (b) remove assets from the IRA prior to age 59 ½ without penalties, and (c) in some circumstances, even allow the client to use the IRA to invest in real estate or a home mortgage.
Opinion Letter
Each Ultimate IRA comes with a legal opinion letter that reviews the tax and design features of the plan. This letter provides legal authority and assurance that the Ultimate IRA design meets applicable legal requirements.
To learn more about protecting your large IRA (minimum size: $200,000), please Contact Us.
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