IRAs invests in LLC investment pool

[Oh so SIMPLE]

Two or more high net worth clients (who are unrelated) with large IRAs form LLC capitalized 99% non-voting and 1% voting. The purpose of the LLC is to provide enhanced investment opportunity and long-term growth. IRAs contribute assets to LLC and take back pro rata ownership of LLC units. No owner has voting control (alternatively an unrelated independent third party owns voting interest – either economic or non-economic). LLC would have typical restrictions on transferability, distributions, liquidation, etc. (except each member would have the right/obligation to distribute NV units from his/her IRA to meet RMDs and comply with applicable law and IRS rules). Clients do Roth conversion in 2010 or 2011. Qualified appraiser values the LLC units, which should be eligible for marketability and minority interest discounts (which also depend on type of assets/investments in LLC, as determined by independent voting member/manager).

Would there be a UBTI issue? If so, is there a work around?

[Guest Rajeev]

Oh --- With the information that you have provided there is no worries about UBTI, as there is no Income (UBTI = Unrelated Business Taxable Income). When there is Income and if there is net income of greater than $1000.00 after distribution to the each IRA there would be a requirement for UBTI... keep in mind that if there is a loss, then the losses can be captured by filing 990-T for the IRA's and carried forward appropriately and applied to the years that there are profits.

There are exceptions based on the types of business: (1) Real Estate Holding Company and (2) Venture Capital Company.... which have a different UBTI calculation (based mostly on leverage/debt) than an operating company.

Recommend that you work with someone knowledgeable of this space...