Question: I have recently started a registered Investment Advisory firm, a fee-based advisor, no commissions. I’m trying to determine if I can manage the IRA’s of my parents, spouse, grandparents, etc, in my business, but not charge them a fee. So I would receive no compensation for managing their IRA’s. From what I’ve read, this should be okay, as long as I receive no form of compensation. Is that correct?
Second question, I also have set up a LP in which I will raise money from investors for. The LP would make business acquisition loans to one of my companies, in order to finance the purchase of a business. And the LP would receive a good interest rate on the investment. I’m trying to figure out for sure if it would be a prohibited transaction for my parents IRA that I am managing, to invest in the LP. I think that would be a prohibited transaction, is that correct?
Answer: You ask a couple of good questions. With respect to your first question, it is certain that you would not be permitted to take any compensation if you performed those services for your family’s IRAs. However, I would be somewhat cautious in using your firm to manage their IRAs, because you are, as you know, a disqualified person as to each IRA that you listed. The potential problem you run into is Internal Revenue Code (IRC) Section 4975(c)(1)(C), which defines a prohibited transaction to include the direct or indirect “furnishing of goods, services, or facilities between a plan and a disqualified person.” Another potential argument is that such a transaction might fall within IRC 4975(c)(1)(D), in which a prohibited transaction is defined to include the “transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan.” Admittedly, I take a fairly conservative approach to such issues. I am not aware of any case which actually was decided solely on the basis of the provision of “services” by a disqualified person to an IRA, but I think it’s fair to say that the conservative approach would be to not manage your family’s IRA assets at your firm, unless you are aware of a class prohibited transaction exemption or a specific ruling allowing you to do so. If you are aware of such a ruling, I would love to hear about it. I am smart enough to know how dumb I am, and I am always looking for more knowledge.
You are correct in your assumption that the second scenario would definitely be a prohibited transaction, for several reasons. Depending on your ownership percentage, the LP may or may not be a disqualified person to your parents’ IRAs. Even if the LP was not a disqualified person, you personally are a disqualified person and would likely benefit either directly or indirectly from your parents’ IRA investments (see Rollins v. Commissioner, in which case loans were made from Mr. Rollins 401(k) plan to non-disqualified entities of which Mr. Rollins was the largest (although a minority) shareholder and of which he was an officer – in that case the court held that Mr. Rollins had the burden of proving that he didn’t receive a direct or indirect benefit, which he failed to do). Depending on the circumstances even if the LP is not a disqualified person the plan asset regulations of 29 C.F.R. § 2510.3-101 may come into play, in which case the LP would be ignored for purposes of the prohibited transaction rules of IRC 4975, and it would be like the IRAs made the loan directly to your company, which would be prohibited. Even if you could somehow get around the plan asset regulations, if your parents made the IRA investment with the understanding that the LP would turn around and enter into a transaction with your company this would be considered a prohibited arrangement (see Advisory Opinion Letter 2006-01A, for example, and the regulations contained in 29 C.F.R. § 2509.75-2). The bottom line on this question is no, you cannot do it in the manner you describe it.
The problem with answering something complicated in a quick email is that it may raise more questions than it gives answers. This can be a complex area of the law, and before undertaking any of the acts you had questions about I would definitely suggest that you sit down with a lawyer who is very familiar with the prohibited transaction rules to discuss the situation in detail and get some actual advice. I cannot give you tax, legal or investment advice in this case, but I hope I at least gave you some information to review with your legal counsel. Good luck, and have a great day!