the PROBLEM with Inheriting a Self-Directed IRA

September 6, 2016  --  Episode #226

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Summary

Bob died recently, and left a self-directed IRA worth $2 million to his 3 adult children.  Fortunately for Bob, he never saw the huge problem he caused, which threatens to tear his family apart.  Today, I’ll tell you what Bob did wrong, because odds are, you’re doing exactly the same thing and don’t even know it.  I’m Bryan Ellis.  This is episode #226.

 

Transcript

Hello Self Directed Investor Nation!  Welcome to the podcast of record for SAVVY self-directed investors like you, where each day we help you find, understand and PROFIT from exceptional investment opportunities.

Ok folks, the serious matter at hand today:  Let’s consider Bob, who as I mentioned to you a moment ago, recently passed away.  Bob invested through his IRA and blew it up to being worth $2 million.  A great thing, for sure!  But Bob passed away, and now his 3 adult children own it, each with an equal share.

Now if Bob’s portfolio was in stocks, mutual funds or other highly liquid assets, there’d really be no problem at all.  Each child would be able to have an inherited IRA with 1/3 of the assets of Bob’s account.  Any of Bob’s kid that doesn’t want to keep the stocks or mutual funds could sell them.  Any kid that wants to hold the assets could hold them.  Easy peasy.

But in Bob’s case, he made his fortune through real estate investing.  In fact, the entire value of Bob’s account is attributable to a single piece of real estate he bought way back in the day that appreciated massively.

And now, Bob’s 3 kids are going to own that piece of real estate… somehow.

But how?  As it turns out, Kid #1 wants to keep the real estate.  Kids 2 & 3 want the money from selling the real estate.  And Bob… for all his kindness in bequeathing this incredibly valuable account to his kids, did them no favors at all, because all he did was to stipulate that each child received 1/3 of the account.  He didn’t specify how those assets should be divided, nor did he use any strategies to make real estate – which is inherently difficult to divide – easier for his children to deal with.

And now, Bob’s kids are fighting with each other.  There’s a civil war going on in Bob’s family, and frankly, Bob’s wonderful act of generosity, coupled with his incredible lack of foresight, is clearly the cause.

What could Bob have done differently?

The most simplistic answer would be that Bob could have sold off his property and converted the account to cash before he passed on.  Cash is much easier to divide than real estate.  But even if that had been convenient for him to do, it wasn’t what he WANTED to do, because Bob believed there was a lot of upside potential to the property.

Another option is that the kids could – will probably have to, in fact – hire a lawyer to divide the property among them by re-conveying a portion of the property to each one of their inherited IRA’s.  That can work and will work if they go through this legal division process, but because there’s tension among the kids, there may well be litigation costs involved as well… certainly not what Bob wanted, or what you want for your beneficiaries.

Another option could be that maybe Bob should have titled the real estate in an LLC or trust, and have his IRA be the owner of that LLC or trust.  That way, what the kids would be inheriting would be shares of an LLC or trust… which, like cash, is much easier to divide than real estate.  In fact, Bob could have specified in the LLC or trust documents exactly how the real estate was to be managed and distributed when he was gone, to remove even more uncertainty.  That would have been wise.

Another option of great potential is this:  There’s nothing prohibiting you from explicitly dividing your account among your beneficiaries by some means OTHER than simple percentages.  For example, you could allocate Asset A to Kid 1, Asset B to Kid 2 and Asset C to Kid 3.  Obviously there are some risks here too, but this is particularly relevant and worth considering for those of you who, like me, think that involving the family in your financial decision making is a great way to help them learn from your experience.

Bottom line?  Bob failed in two ways, not just one.

The first one is obvious – he didn’t clarify how his assets were to be divided, even though he knew that real estate is difficult to divide.

The other one is less obvious – he didn’t prepare his children for what they were about to receive… they just had no real connection to or understanding of this wonderful asset Bob was leaving for them.  In so doing, Bob’s wonderful gift to them turned into something of a curse.

My friends, don’t let that happen to you or your family.  It’s actually quite simple to avoid this sort of fate, but since self-directed IRA’s are such a new phenomenon, nobody is talking about this.  But as your THOUGHT LEADER in the self-directed IRA world, I of course consider it my job to think the thoughts you should think, but aren’t yet thinking!  Hehehehe.

And in all fairness, I learned a WHOLE LOT about this topic very recently from IRA attorney extraordinaire, Mr. Tim Berry.  That guy is like a mad scientist, only he’s an IRA lawyer, and he’s REALLY, REALLY good.  If today’s episode stoked any concerns you might have about leaving assets that could cause a problem for your family, Tim is the guy you should reach out to.

You can get his contact info on today’s show notes page at SelfDirected.org/226.

That’s also where you should go to comment on this episode.  I’d love to hear what you have to say… if you’re investing in real estate or ANY illiquid type of asset, this issue is important for YOU!   So stop by at SelfDirected.org/226 and tell me if you’ve done any estate planning within your self-directed IRA… I’d love to hear from you!

My friends… invest wisely today, and live well forever!

 

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Bryan Ellis

I am host of Self Directed Investor Talk, which I’m told is America’s #1 podcast and for affluent self-directed investors. I’m also something of an expert in self-directed IRA’s, solo 401k’s and 1031 exchanges. You can find more of my writing in some cool places like TheStreet.com, Entrepreneur.com, ThinkRealty and even Forbes (that was always one of my goals!). I live in metro Atlanta, Georgia with my wife and business partner Carole Ellis(she’s a real business partner… not just because she’s my wife… I’d want to work with her if I wasn’t married to her… and I’d want to marry her, too). I also have 4 children ranging in age from 2 to 20 (yes, you read that correctly).

It’s my goal to be the name everybody thinks of when they think of Self-Directed IRA’s and Solo 401(k)’s.