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The US Government Accountability Office (GAO) is researching "non-traditional" investments within self-directed (again). Reason for concern or optimism?
For those of you who have followed my past articles and/or my blog posts on the topic of self-directed IRA investing (i.e., retirement accounts that invest into "non-traditional" assets, like real estate, lending, privately-held companies, etc.), you will know that the US Government Accountability Office (GAO) published a report on November 19, 2014 on "large balance" retirement accounts (for example, IRAs that have invested into hedge funds or start-up companies and grown to $5, $10, $20 million, or much more). The title of this 2014 report was " IRS Could Bolster Enforcement on Multimillion Dollar Accounts, but More Direction from Congress is Needed" (quite eloquent, I know!). I was interviewed for this report in February of 2014 and I later wrote a brief summary of the GAO's findings (click here).
On October 8, 2015, I was contacted again by a GAO officer regarding a new report being developed by the GAO (which, as always, was at the request of Congress). This project appears to be much broader than the first one, because it will focus on all "self-directed" accounts, not just accounts will "large balances". The GAO's initial email to me provides a nice overview of the forthcoming report. In part, the email said:
"Senator Ron Wyden has asked GAO to study 'self-directed' IRAs and other nontraditional retirement savings arrangements, such as 'self-directed' 401(k) plans and Rollovers as Business Startups. The team that solicited input from you in 2014 regarding IRAs with large account balances recommended we contact you as a key expert on this topic.
We have just begun this work. We are tentatively planning to look at the prevalence of these nontraditional arrangements, assets they are invested in, providers’ administration of these arrangements (including who are they, how many are there, what are their roles and responsibilities, and what types of services do they offer?), challenges providers face in complying with regulations, if any, and challenges account holders face when using these arrangements, if any (fraud risks, compliance or implementation challenges, etc.)."
On November 19, 2015, I met with three GAO officers (from Seattle, Chicago, and Washington D.C.) at my office and an additional four GAO officers listened in over conference call [note: I mention these numbers not to brag - after all, who in their right mind would study this stuff enough to be asked about it by seven employees of an obscure government organization(!) :) - but rather to emphasis the apparent importance of this report]. I was told that this second report will probably not be published for 6-9 months.
Below are just a few (of many) "takeaway points" from this meeting:
(1) Talking with the GAO officers was actually very similar to speaking with a new self-directed IRA client - i.e., they are very intelligent people, who generally understand accounting and business entity concepts, but at the same time lack expertise on the unique legal and tax rules that govern self-directed IRAs. In this way, the federal government appears to be just trying to get their heads around what is going on in the non-traditional retirement account investment space.
(2) As was the case with the "large balance" accounts report, the GAO (and Congress) seem concerned with the most extreme situations. For example, there have been cases reported in the news where self-directed IRA accountholders lost ever penny in their IRA because they invested into a fraudulent scheme. Although these IRAs can be abused by "bad actors", I emphasized to the GAO that these problems are not unique to retirement accounts - rather, fraudulent investment schemes exist in many other marketplaces.
Overall, I believe that it is a good thing for the federal government to be looking into self-directed IRAs and similar retirement account investment vehicles. For many years, the self-directed IRA marketplace has operated without enough "guidance" (e.g., tax laws, court cases, regulations, IRS rulings, etc.), which resulted in far too much "gray area". Assuming that Congress and/or the IRS does not take any sort of extreme action (e.g., "only publicly-traded assets can be purchased in a retirement account"), then I believe the GAO's second report will be a positive step.
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| Warren’s entire practice is focused on one-on-one tax consulting and clear document drafting. Warren is a regular presenter and writer on several of the most cutting-edge tax law topics in the nation. |
Fairview Law Group is dedicated to providing innovative and high-quality legal solutions that are tailored to the goals of our clients. Our tax attorneys work in the areas of: self-directed IRA consulting, estate planning, probate, and general business counseling.
Fairview Law Group, PS
500 Yale Avenue N., Suite 384
Seattle, WA 98109 |
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Case Report: Substance-over-form doctrine used to nix growth within Roth IRAs (Summa Holdings).
If you are interested in reading another example of what NOT to do with a self-directed IRA, please take a look at my summary of the Tax Court case Summa Holdings (T.C. Memo. 2015-199), which I am honored to say was published in the Journal of Accountancy in their October 2015 issue - see here. In short, a rather complex and sophisticated plan was developed that resulted in income from a large privately-held business being shifted into the Roth IRAs of the business's largest shareholder's children. This is another example of how the IRS is particularly sensitive about Roth IRAs, especially Roth IRAs that have grown rapidly in size and hold non-traditional assets (in the Summa Holdings case, the two Roth IRAs went from a value of several thousand to several million within an 7-8 year span).
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2016 Estate Tax Update.
Below is a summary of items to consider going into 2016 with regards to federal estate tax exemptions. Also, because we are based in Washington, I have included Washington state exemption figures as well.
Federal Estate Tax, Gift Tax, and Generation-Skipping Tax (GST) Exemptions
For 2016, the federal estate and gift tax exemption is $5,450,000 million per individual. This is an increase over the 2015 exemption, which was $5,430,000 per person. This means an individual can shield up to $5.45 million from federal estate and gift tax and a married couple will be able to shield $10.9 million. Estates and lifetime gifts in excess of this amount are subject to a 40% tax.
Washington State Estate Tax Exemption
The 2015 Washington state estate tax exemption is $2,054,000 per person. Washington has yet to officially release the exemption amount for 2016. Stay tuned. Washington estates in excess of the exemption amount are subject to a 10-20% Washington State Estate Tax (depending on the size of the estate over the exemption amount). Washington doesn’t currently impose a gift tax, which makes lifetime gifting particularly important for Washington clients.
Even though the state estate tax exemption has been incrementally increased over the years to $2,054,000, the filing threshold for the Washington State Estate and Transfer Tax Return remains at $2,000,000. Each estate over $2,000,000 is required to file a Washington State Estate and Transfer Tax Return.
Federal Gift Tax Annual Exclusion
The annual exclusion against federal gift tax remains at $14,000 for 2016.
Federal and State Tax Summary
This chart outlines the federal and Washington state exemptions and tax rates for 2011 through 2016.
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Please note our new address:
500 Yale Avenue N., Suite 384
Seattle, WA 98109
For more information about our new location, see my blog post here. We look forward to showing you around our unique and very exciting new space! :)
HAPPY NEW YEAR!!
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