A recent case in the U.S. District Court for the Western District of Arkansas
underlined that IRA prohibited transactions rules will be enforced against
taxpayers who attempt to thwart them.
Generally speaking, IRAs can have strong creditor protection both at the
state and federal level. One protection is the bankruptcy exemption.
However, that protection can be compromised when a client enters into a
In the case of Kellerman v. Rice the debtor sought to exempt his IRA from
the bankruptcy trustee as a protected asset. However, the debtor and his
wife owned an LLC which entered into a partnership agreement with the
IRA to purchase real estate. Under the agreement the IRA would contribute
to the partnership the real estate as well as some cash, while the LLC
promised to contribute cash in the future. The IRA funded the entire
purchase and the land was added as an asset to the self‐directed IRA and
the LLC, each holding a half interest.
Sometime later the LLC filed bankruptcy and listed the IRA as an exempt
asset. The court called foul on the exemption, because they saw a
prohibited transaction in the arrangement between the IRA and the LLC.
The LLC was considered a “disqualified person”. A disqualified person
includes your family, your businesses (if you own 50% or more), and capital
interests in partnerships, among other interests. A prohibited transaction
occurs when your IRA ‘does business’ with any of these disqualified
In the end, the IRA lost its exempt status as a result of the transactions and
was not protected from the creditors of the LLC.
What’s the use of making tons of money when its not protected? Are you the “it will never happen to me” guy? If not, lets lock it up….
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