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Recent Decisions Highlight the Importance of Proper Planning with Self-Directed IRAs

By Anthony P. Daddino on June 17, 2015

Recent Decisions Highlight the Importance of Proper Planning with Self-Directed IRAs

Using a self-directed IRA to operate a business or acquire real estate requires meticulous planning and careful execution. The failure to abide by these rules can cause ruinous results, as demonstrated by two recent decisions.  In Ellis, the Eight Circuit Court affirmed an earlier Tax Court decision holding that an IRA-owned business’ payment of a small salary to the business manager, an IRA beneficiary, was a prohibited transaction with a disqualified person.  This caused a fully taxable distribution of all of the IRA assets to the taxpayer-beneficiary with an early distribution penalty and other tax penalties also being imposed.   In the matter of In Re Kellerman, an Arkansas bankruptcy court held that the debtor’s self-directed IRA was not an exempt asset out of the reach of creditors.  The court held that the IRA had lost its exemption eight years earlier when it engaged in a prohibited transaction.  Specifically, the IRA invested in a real estate deal that benefited contiguous property owned by the IRA beneficiary through a separate partnership.   

These decisions are cautionary tales for taxpayers using self-directed IRAs to invest in non-traditional assets.  They stress the importance of careful planning and proper advice to insure that the tax advantages and asset protections afforded by IRAs are never put in jeopardy.

To review the Eighth Circuit Court’s June 5, 2015 decision in Ellis, follow this link:  http://media.ca8.uscourts.gov/opndir/15/06/141310P.pdf

To review the Arkansas bankruptcy court’s May 26, 2015 decision in In Re Kellerman, follow this link:  http://www.arb.uscourts.gov/orders-rules-opinions/opinions/taylor/Kellerman.pdf

If you have any questions or would like assistance with regard to any of these topics, please do not hesitate to contact me.