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Checkbook Control Revisited (Checkbook Control Series - Part 1)

            When I use the term “checkbook control”, I’m referring to a situation in the self-directed IRA investing world in which an accountholder has set up an IRA-owned entity, typically an LLC or Trust, and they have checkbook direction over the funds in their IRA.  This will be the first in a series of articles about a recent Tax Court case known as “McNulty”.  Since late November/early December 2021, I have been discussing this case with knowledgeable, educated individuals in the field, and I want to share with you what I believe are the current best practices involving checkbook control and some things that may need to be adjusted in your existing IRA-owned entity to better comply with how the IRS is interpreting the rules.

            Let me give you an overview of the facts in the McNulty case.  Mr. & Mrs. McNulty formed separate IRA-owned LLCs and then used those LLCs to make various investments.  The Tax Court case focused on investments made by Mrs. McNulty, specifically ones in which her IRA purchased a safe and then gold coins to be stored in the safe.  The safe containing the coins was kept in the McNulty’s primary residence.  The IRS determined that the way in which they handled the money and did these transactions was a violation of the rules governing IRAs and that each time Mrs. McNulty spent money from the IRA to buy coins which she physically took possession of, it constituted a distribution as of January 1st of that year.  Essentially, Mrs. McNulty destroyed her entire IRA.

            The key language used by the Court was that Mrs. McNulty had “unfettered access and control” over the assets in the IRA.  This is where I want you to stop and think.  Unfettered access and control is really what most people want when they are asking for checkbook control.  They want to make the day-to-day decisions, and they want to be able to sign the check and have control so they can immediately pounce on a deal.  In articles to come, I will explain why that is not a good idea and give you practical steps to implement to make sure you aren’t the next “McNulty”.

            You can CLICK HERE to read the decision in the McNulty case for yourself.  I am going to talk about that case and some of the others cited in it to get a better understanding of where the law is and where it is going.  There are some really good takeaways from this case, and if you have been following the advice coming from my good friend Quincy Long, the founder of Quest Trust Company, you will have steered clear of this whole mess and will be in great shape.

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