Foreign Pension Limited Liability Companies
By Michael Chatzky
Chatzky & Associates
A Law Corporation
Editor's Note: We have received questions of late from many of you regarding Foreign Pension Limited Liability Corporations... specifically, as they pertain to Individual Retirement Accounts (IRAs). As a result, we asked our go-to guy on the subject, attorney Michael Chatzky, to comment.
Michael has been featured in our alerts many times in the past, and we know you are familiar with his thoroughness and competency.
What you may not know is attorney Heidi Scholz has worked closely with Michael for many years, first as an employee of Michael's law firm, and then as his colleague in assisting clients in a wide variety of situations in the taxation and wealth protection areas.
Heidi will provide ASI readers with an interesting and invaluable article in the near future. Be on the lookout for her article early in the New Year!
An Individual Retirement Account (IRA) can be an invaluable mechanism to provide for your retirement needs in a tax-favored manner. Full compliance with the many rules and regulations governing these accounts is mandatory to avoid the imposition of very serious and expensive penalties – including the complete disqualification of the IRA in extreme situations.
IRAs generally contain favorable asset protection features; however these features vary depending on the law of the State in which you reside.
The use of a foreign limited liability company as a mechanism to enable your IRA to invest in permissible foreign and domestic investments can be very beneficial. In addition, a foreign limited liability company that is established in a jurisdiction such as Nevis or the Cook Islands can provide strong asset protection to both the assets in the IRA and to the IRA itself!
An IRA owned by a Foreign Limited Liability Company generally works as follows: Assets in your IRA would be exchanged for a Membership (ownership) interest in the Foreign Limited Liability Company.
Thus, your IRA would be investing in the Foreign Limited Liability Company, which in turn would be investing in the assets that were owned by your IRA.
The tax attributes and benefits attributable to your Individual Retirement Account would remain intact if Operating Agreement of the Foreign Limited Liability Company were to contain specific provisions and features that did not disqualify the use of the foreign limited liability company from the tax features applicable to your IRA.
It is imperative that the use of the Foreign Limited Liability Company does not disqualify the beneficial tax attributes of the IRA! This requires fastidious drafting by competent legal counsel.
In addition, to best accomplish this beneficial tax result, the Foreign Limited Liability Company needs to obtain a Taxpayer Identification Number from the Internal Revenue Service and file a timely Entity Classification Election (Internal Revenue Service Form 8832) with the Internal Revenue Service to be taxed as a "Foreign Disregarded Entity." Thus, this structure should preserve the beneficial tax attributes of your Individual Retirement Account provided the Foreign Limited Liability Company operates consistently with its Operating Agreement and the rules governing IRAs.
The primary asset protection advantage of using a Foreign Limited Liability Company in conjunction with your IRA is that in the event a creditor of yours were able to obtain a judgment against you and be entitled to attach your interest in (or the assets of) your IRA, the creditor would generally be limited to obtaining a charging order over the interest of your IRA in the Foreign Limited Liability Company.
This generally does not permit the creditor to reach the assets of the IRA or to obtain management rights and powers over the IRA. Instead, it merely provides the creditor with the ability to attach a distribution from the Foreign Limited Liability Company to your IRA.
However, it is likely that you personally would be the Manager of the Foreign Limited Liability Company, and would thus likely refrain from making any such distribution until the creditor issue is resolved. As the charging order remedy is a very poor remedy for the creditor, this issue would likely be more favorably and quickly resolved than would be the case if this structure were not used!
Please note the asset protection features of an IRA depend on the laws of the State in which you reside. In the event of a bankruptcy, Federal Bankruptcy law governs with additional rules.
For example, in California, California Code of Civil Procedure §704.115(a)(3) provides a limited degree of protection from creditor attachments to the extent the amounts held in the IRA do not exceed the maximum amount exempt from federal income taxation under the Internal Revenue Code provision governing the IRA.
However, California Code of Civil Procedure §704.115(e) significantly limits this protection by in pertinent part reciting that "the amounts described in paragraph (3) of subdivision (a) are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires."
Consequently, as this example illustrates, the asset protection features of an IRA can be severely limited under State law - but these limitations can be overcome by interjecting a Foreign Limited Liability Company which possesses a much stronger additional layer of protection from creditor claims in addition to enhancing access to international investments! In a given situation, this can mean the difference between retaining your retirement assets - or completely losing them to an adverse party!
INTERNAL REVENUE SERVICE CIRCULAR 230 NOTICE
NOTHING CONTAINED IN THIS ARTICLE IS INTENDED OR WRITTEN TO BE USED OR CAN BE USED BY ANY TAXPAYER, OR MAY BE RELIED UPON OR USED BY ANY TAXPAYER, FOR THE PURPOSE OF AVOIDING ANY PENALTY THAT MAY BE IMPOSED ON THE TAXPAYER UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
Be sure to call ASI at 877-340-0790 or send an email to find out more about your IRA. If you have a need for legal counsel, they can make a proper introduction to me on your behalf.