Offshore IRA LLC Tax Analysis

Offshore IRA LLC Tax Analysis

09/24/2014 - 11:21 AM
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Foreign Assets

Moving your retirement account in to an offshore self directed IRA LLC is the best (and really, the only) way to diversify out of the U.S., protect your assets from future creditors, and boost returns by investing in more dynamic markets.

I write quite a bit on why and how to move your account into an offshore self directed IRA LLC.  This article is for those who want to get in to the nitty gritty of how it works from the IRS’s perspective.  This post on the self directed IRA will include all relevant U.S. Internal Revenue Tax Code (IRC) and ERISA sections.

The first step in taking your IRA offshore and moving it in to a self directed IRA LLC is to open an account with a self directed custodian that allows for this type of structure.  Note that you are required to use a U.S. custodian, but this custodian has no control over your assets or investments once they reach the IRA LLC.

We work with a number of self directed custodians/administrators, and will be happy to setup the account for you.  If you prefer to do your own research, please Google Midland IRA and Entrust… these are the most efficient and specialize in offshore transactions.  There are others found on domestic structures (IRA Services, for example).

Once your account is established, your administrator will give you an account number that will look something like: Midland IRA FBO Christian Reeves #55555-00.  This is your self directed IRA account name and the “owner” of the offshore IRA LLC that we will form for you.

More specifically, this account will acquire a 100% of the “beneficial interest” of the offshore IRA LLC and hold 100% of the “membership interest” in your offshore company.  According to IRC § 4875(e)(2)(G) and the ERISA Regs at 2510.3-101(b)(1), the beneficial interest in an LLC is the equity interest in the assets of the entity, as well as the beneficial owner of the entity.

So, all of that is to say that your IRA account is the equity holder and legal owner of the assets and the offshore IRA LLC we form for you.  The custodian’s job is to manage IRS reporting and make the investment of your retirement account in to your offshore IRA LLC… that’s it.  From there, the owner of the offshore IRA LLC is your self directed IRA.

Your control over the offshore self directed IRA LLC is defined in the operating agreement of the LLC which we provide.  This document has been reviewed and approved by various banks and the custodians with which we work.  It ensures all parties the proper levels of protection and your rights to control the investments and open bank and brokerage accounts in the name of the offshore LLC.

The operating agreement and its importance to the structure is defined in what we call the “plan asset rule” under ERISA Reg. 2510-3-101(a)(2).  This regulation allows you (the beneficial owner of the IRA account) to act as the manager and exercise control over the offshore IRA LLC and its investments.  As such, it requires you to manage the assets for the benefit of the retirement account, just as a professional fiduciary would.  This means you must do your due diligence in all investment decisions and not use the assets for your personal benefit.  You are to manage the offshore self directed IRA LLC as if it where someone else’s money.

This operating agreement also sets out the rights and duties of the owner of the LLC (your account).  These terms are always very broad, giving it the authority to open accounts, modify the documents or the LLC, and appoint the manager (you).  Most importantly, the document allows the account to transfer these authorities to the manager… so, you can take control over the LLC.

Note that the operating agreement is signed by your custodian on behalf of the IRA, you as the beneficial owner of the IRA, and then you again as the manager of the LLC.

The operating agreement also transfers all authority and control over the offshore self directed IRA LLC to you, and away from the administrator/custodian.  You are thus the only one authorized to make investments, open accounts, and operate the offshore LLC.  The custodian is relegated to filing annual reports with the IRS.

That is to say, the custodian makes only one investment:  your IRA account in to the LLC.  From there, you are authorized to:

  • Make all investment decisions,
  • use funds for the upkeep and improvement of your investments (such as for improvements in real estate), and
  • control the sale/disposition of assets.* A corporation can be used as a UBIT blocker, but not as the primary (parent) entity.  We are working on a new structure for investments in Panama, which doesn’t have an LLC statute, but their Foundation laws can be used to create a trust/LLC hybrid.So, because the offshore IRA LLC we have designed is a disregarded entity (has only one member and is a limited liability company), it is an eligible entity under Treasury Regulation 301.7701-3(a) and (b).  As such, it is not required to file either federal or state income tax returns.  Also, no State Franchise Tax or other reporting will be required.There is an exception to the default rule that your offshore IRA LLC will have no filing obligations… and that the U.S. administrator/custodian will handle any reporting obligations other than those described here.  If you generate Unrelated Business Income in your IRA, or use a UBIT blocker corporation, you’ll need to file IRS Form 3520 and may have other reporting obligations.When your IRA invests in an active business, or uses borrowed funds (such as a mortgage or leverage in a brokerage account), then you will generate UBI and will be required to pay Unrelated Business Income Tax.  Because your structure is offshore, you may use a UBIT blocker corporation to eliminate this 35% tax.  This allows all profits to flow tax free (ROTH) or tax deferred (traditional) in to your IRA LLC, and thus in to your IRA.  This is one of the major benefits of moving your IRA in to an offshore self directed IRA LLC.  UBIT blocker structures are not available in the United States.
  • So, if you employ a UBIT blocker, or generate active income in your IRA LLC, then you will need to file additional forms.
  • There are a number of UBI and UBIT blocker corporation articles on this site, so I will just describe it briefly here.
  • Also, none of the international forms are required for a typical offshore IRA LLC structure.  The big one is the Foreign Bank Account Report, which is required for bank or brokerage accounts outside of the United States that hold more than $10,000.  This form is specifically excluded for offshore self directed IRA LLCs (search FBAR at IRS.gov for additional information).
  • Your objective in an offshore self directed IRA LLC structure is to eliminate all U.S. tax filing and paying obligations.  Therefore, your offshore company must be a “disregarded entity” under the IRS “check the box” rules.  This is achieved by 1) using an LLC rather than a corporation and 2) that LLC having only one member.  A single member LLC is a disregarded entity, while a multi-member LLC is considered a partnership.  (For more information, see:  Treas. Reg. § 301.7701-2(b), (c)(1) and (c)(2).)
  • The tax classification of an offshore IRA LLC is quite different than an offshore corporation, and an LLC is generally the required entity – not a corporation.  Because very few offshore jurisdictions (those that won’t tax your returns) offer compatible limited liability companies, we usually form IRA structures in Belize and Nevis.

I hope this article on the taxation of an offshore self directed IRA LLC has been helpful.  If you have any questions, please give us a call or send an email to info@premieroffshore.com.  We will be happy to work with you to move your retirement account outside of the U.S. and ensure it remains in compliance with all applicable U.S. tax laws.

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