Problems With and Solutions for Self-Directed IRAs · • In a nutshell, a related party is the owner of the IRA, an ancestor, spouse, descendant, spouse of any of the above, and

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Problems With and Solutions for

Self-Directed IRAsCopyright 2006

Roccy DeFrancesco, JD, CWPP™, CAPP™The Wealth Preservation Institute

378 River Run Dr.St. Joseph, MI 49085

269-408-1841www.thewpi.org

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408(a) ''individual retirement account'' means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:

IRA = Trust

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• Buy Real Estate?

• Invest in leveraged hedge funds?

• Invest in private businesses?

• Purchase Accounts Receivables?

• Engage in leasing programs?

• Make Mortgage Loans?

• Borrow Money?

Investments

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Anything except

Life Insurance Contracts

Collectibles

Investments

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Prohibited Transactions

• There are a number of restrictions on the type of transactions in which an IRA can engage with a related party to the IRA. These parties are considered disqualified persons.

• In a nutshell, a related party is the owner of the IRA, an ancestor, spouse, descendant, spouse of any of the above, and any business entity owned 50% or more by one of the above.

• Interestingly enough left out of the definition of related party are brothers, sisters, “step”relations, nieces, and nephews.

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Prohibited action with a disqualified person

• (A) sale or exchange, or leasing, of any property between a plan and a disqualified person;

• (B) lending of money or other extension of credit;• (C) furnishing of goods, services, or facilities;• (D) transfer to, or use by or for the benefit of, a

disqualified person of the income or assets of a plan;• (E) act by a disqualified person who is a fiduciary

whereby he deals with the income or assets of a plan in his own interests or for his own account; or

• (F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

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Estate Planning with IRAs and LLCs

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Can an IRA own an LLC?

• Sure. So long as the client does not own 50% or more of the business.

• In what we are discussing today, the IRA will form an LLC from scratch and be the sole owner.

• There are no issues with this transaction.

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• What if you leave part or all of the IRA to your kids or grandkids?

• Will they have unfettered access? Will their spouses?

• Will they keep the assets in the IRA? Will their spouses?

• What happens if they distribute the IRA?

Concerns

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• 1) Client leaves his IRA to his 18 year old daughter, Paris.

• Paris decides she would rather have a fancy car than money in the bank.

• 2) Degenerate John, 48, no kids, can’t hold a job.• Likes to gamble on party poker and always

wanted to play in the world series of poker. • He decides to go to Vegas with the IRA money

and become a poker star.

Examples

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• Client, during his life, moves his IRA assets into a Limited Partnership

• A friend/trusted advisor is the General Partner of the LP

• If Paris liquidates the IRA, all she gets is LP units

Solution

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The General Partner(s):

Provide Investment Experience (Level Head)

Follow client’s wishes on distributions

IRA Assets

LP owned by the IRA

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Questions?

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Asset Protection and IRAsThe “Maximizer”

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Concerns

• The what if concern.• What if the market does what it did from 1999-

2001?• How many of our clients lost 50% of the IRA net

worth during that time frame at a time in their lives when they could least afford it.

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Protection

• Clients can protect themselves by moving their money from stocks and mutual funds to:– CDs– Bonds– EIAs

• The problem with CDs and bonds are that the returns will be low.

• The problem many clients see with EIAs is that the returns while better than fixed investments still have a cap.

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The Maximizer

• Would your clients like principally protect 90% of their money while at the same time nearly doubling the returns of the S&P 500 in up years?

• The answer will be yes.• The Maximizer can do this for them.• The Maximizer plays to the greed of your clients

and to their desire to protect their money from downturns in the stock market.

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Mutual Funds Provide No Downside Protection

Merrill Lynch Mid-Cap Growth Fund – <36.6%>Merrill Lynch Premier Growth Fund – <52.6%>Merrill Lynch Focused Twenty Fund – <70.1%>Merrill Lynch Fundamental Growth Fund – <19.4%>Merrill Lynch Global Growth Fund – <26.3%>

2001 Results*

*source – Morningstar.com

-17.6%

S&P 500

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Problems with many actively managed mutual funds-

No Downside Protection Underperform the MarketVery Expensive – Right or WrongLack of Consistent Results

“The sad truth of the matter is, that over time the vast majority– approximately 80% - of mutual funds underperform the overall stock market.”

The Motley Fool

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Actively Managed Mutual Funds Can Be Very Expensive

Sales Charges12b-1 FeesManagement FeesFund ExpensesTransaction Costs

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No Consistent Results…the First Become the Worst!

This is the consequence of trying to find the hot funds.

The S&P 500 index averaged over 12% per year. The average fund annually averaged under 10%, but because of switching to so-called “hot funds,” the individual fund investor managed an annual return of just 2.7%. DALBAR Associates (“Law of Averages,” 2003).

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Walmart KmartOne of largest companies in the worldConsistent earnerPays dividends

Just emerging from bankruptcyBig marketing tie to Martha StewartNo anticipated dividends

Stock Price July 11, 2003*

Stock Price July 11, 2004*

$24.20

$76.80$51.76

$56.08

* Source: Yahoo! Finance

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Does anyone really know?

• Does anyone (client or broker) really know which way individual stocks or mutual funds will go (up or down) in any given year?

• NO. Not if they are honest. • Even brokers must admit that they can not

guarantee which way things will go. • Who can predict the next 9-11 or hurricane or the

big earthquake?• In our previous slide the broker said to buy

Walmart and if we were honest we would all agree that was the proper stock to purchase at the time.

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Many have switched to an index fund

Greater Diversification Reduced or Eliminate Management FeesMatch the Market (the client has unlimited

Potential for upside growth which they do not Have with the Maximizer.)

No Downside Protection

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Remember the Three “Rs” ??

ReadingWritingArithmetic

Risk Reward RecoveryLess More Quicker

How do clients reach for 15+% rates of return?

They MUST assume some kind of financial risk.

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Use two financial products in combination which produce the following results:

Reduce & Control Risk - 0-15% Maximum Loss

More Reward - Beat the S&P 500 Every Year*

* Subject to Maximums

Portfolio

EquityIndex

Annuity

OptionStrategy

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Equity Index Annuity

Annual Yield Linked to 100% of S&P 500 Index*

100% Principal Guarantee

No Management Fee

Annual Reset Feature*Subject to Cap

Taxes Deferred

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$100,000

(up 10%)

Annuity cap = 7.5%

$107,500

(down 5%)

$107,500

(up 8%)

$115,562 $115,562


(down 13%)

Annual Reset Feature

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Debit Call Spreads

You can do the same thing the insurance company does.

CallOptions

Buy Call Options Sell Call Options

Some of yourPrincipal

The strike prices at which you buy and sell the options will depend on how much you want to risk.

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Here’s an Example-

Assume:$100,000 portfolio10% Risk

CallOptions

Buy Call Options10% Below Current Price

Sell Call Options10% Above Current Price

$100,000


$90,000 $10,000

Result of Trade:Approximately 80% Participation Rate of IndexApproximately 8% Cap Rate (Maximum Return)

-With the Maximizer, the client can choose to risk any amount on the purchase of call options. Having a said that the typical amount is 5-15% each year.

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Let’s look at a numerical example.

Assume:$100,000 portfolioRisk 10% in optionsAnnuity Cap 7.50%

Market up 10%-Annuity Grows 7.50% or $6,750Option Grows 8.0% or 8,000Total Return 14,750Percent Return 14.75%


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Let’s look at a numerical example.

Assume:$100,000 portfolioRisk 10% in optionsAnnuity Cap 7.50%

Market down 5%-Annuity Stays Flat or $ 0Option Loses 6.0% or -6,000Total Loss -6,000Percent Return -6.00%


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Comparative ReturnsEnd of Projected S&P Maximizer Mutual FundYear Performance Approach Matching Index

1 10.00% 115,200 110,000 2 -4.00% 109,440 105,600 3 12.00% 126,075 118,272 4 7.00% 141,078 126,551 5 6.50% 156,667 134,777 6 -18.50% 141,000 109,843 7 8.50% 160,740 119,180 8 -22.50% 144,666 92,364 9 7.50% 163,111 99,292 10 12.00% 187,904 111,207

Avg Return 1.85%

A Few Examples…

Assumes 10% RiskMarket Conditions as of 8/1/04M/F Matches Index After FeesStart with $100,000

These are hypotheticalreturns for the S&P500 Index over a 10

year period.

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A Few Examples…



1 10.00% 115,200 110,000 2 -4.00% 109,440 105,600 3 12.00% 126,075 118,272 4 7.00% 141,078 126,551 5 6.50% 156,667 134,777 6 -18.50% 141,000 109,843 7 8.50% 160,740 119,180 8 -22.50% 144,666 92,364 9 7.50% 163,111 99,292 10 12.00% 187,904 111,207

Avg Return 1.85%

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1 -15.00% 90,000 85,000 2 -15.00% 81,000 72,250 3 -20.00% 72,900 57,800 4 9.00% 83,398 63,002 5 6.50% 92,613 67,097 6 -5.00% 87,056 63,742 7 8.50% 99,244 69,160 8 -18.00% 89,320 56,712 9 5.00% 96,912 59,547 10 11.00% 111,642 66,097

Avg Return -3.30%

A Few Examples…


Start off with threevery bad years

Market down 33%

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A Few Examples…



1 -15.00% 90,000 85,000 2 -15.00% 81,000 72,250 3 -20.00% 72,900 57,800 4 9.00% 83,398 63,002 5 6.50% 92,613 67,097 6 -5.00% 87,056 63,742 7 8.50% 99,244 69,160 8 -18.00% 89,320 56,712 9 5.00% 96,912 59,547 10 11.00% 111,642 66,097

Avg Return -3.30%

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1 9.00% 114,400 109,000 2 7.50% 128,986 117,175 3 -24.00% 116,087 89,053 4 8.00% 131,875 96,177 5 6.50% 146,448 102,429 6 12.00% 168,708 114,720 7 8.50% 192,327 124,471 8 6.50% 213,579 132,562 9 9.00% 244,334 144,493 10 11.00% 281,473 160,387

Avg Return 5.40%

A Few Examples…


Market averages5.4% a year.

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A Few Examples…



1 9.00% 114,400 109,000 2 7.50% 128,986 117,175 3 -24.00% 116,087 89,053 4 8.00% 131,875 96,177 5 6.50% 146,448 102,429 6 12.00% 168,708 114,720 7 8.50% 192,327 124,471 8 6.50% 213,579 132,562 9 9.00% 244,334 144,493 10 11.00% 281,473 160,387

Avg Return 5.40%

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A Few Examples…


Comparative ReturnsEnd of Projected S&P Risk Averse MutualYear Performance Approach Fund

1 20.00% 115,700 120,000 2 20.00% 133,865 144,000 3 20.00% 154,882 172,800 4 20.00% 179,198 207,360 5 20.00% 207,332 248,832 6 20.00% 239,883 298,598 7 20.00% 277,545 358,318 8 20.00% 321,120 429,982 9 20.00% 371,535 515,978

10 20.00% 429,866 619,174 Avg Return 20.00%

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The Crossover Point

• Where is the crossover point with the Maximizer where the returns in the stock market will out perform the returns of the Maximizer? The answer is slightly higher than 15%. See the following chart which uses a non-real world return of the same amount ever year (the Maximizer will significantly out perform the blow model if the client has a down year or two starting the ten year window).

• The following example assumes an initial amount invested of $100,000 (and does not take into account money management fees, capital gains taxes or dividend taxes).

15.00%Avg. Return

404,556411,64715.00%10

351,788357,33215.00%9

305,902310,18415.00%8

266,002269,25715.00%7

231,306233,73015.00%6

201,136202,89115.00%5

174,901176,12115.00%4

152,088152,88215.00%3

132,250132,71015.00%2

115,000115,20015.00%1

Matching IndexValuePerformanceYear

Mutual FundTotalProjected S&PEnd of

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How Fast Can You Recover From Down Years?

If the market falls Traditional equities must go up RAAM approach the market only need go up*

20%

30%

40%

50%

25%

43%

66%

100%

6.5%

* Assumes 10% risk factor

6.5%

6.5%

6.5%

Actual Comparison

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Summary-

Reduce and control risk

Increase Odds of Achieving Performance Goal

Recover more quickly from down years

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Overview for the Professional Designation:

CWPP™(Certified Wealth

Preservation Planner)

The Wealth Preservation Institute378 River Run Dr.

St. Joseph, MI 49085269-408-1841

www.thewpi.org

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What do Advisors want?

• To earn more money?• To have more knowledge than other advisors?• To provide better advice to clients on multiple

topics?• To be more credible than other advisors?• A team of advisors for support and back office

when dealing with “advanced” planning.• The ability to market to CPA, Attorneys and

physicians through continuing education credit.• Are these of interest to you?

– If so you are a candidate to become an CAPP™ or CWPP™

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The WPI and CWPP™/CAPP™

• What is the Wealth Preservation Institute (WPI)?– The only educational entity in the country devoted to

provide education on “advanced” planning (asset protection, tax and estate planning)

– The only entity in the country focusing on topics that apply mainly to the high income/net worth client.

– Certifying entity for the CWPP™ designation.• The CWPP™ course is a 24 hour certification

program which can be taken all online or in person.• The Certified Asset Protection Planner designation

is for those simply want to deal with AP (18 hours).

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Are you should learn “Asset Protection”

• Why learn asset protection?– 99% of your current and future clients are not asset

protected.– Most clients with wealth, once made aware of this fact,

will want help.– Once you learn the topic you can help.– You are not talking “product” with a client and

therefore will not be seen as pitching product.– Of all the topics you would deal with, asset protection

is best client gathering tool.

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Topics• What topics are covered in the CWPP™ course?• Asset protection (3 hours)

-Domestic-Offshore

• Deferred Compensation (4 hours)-WealthBuilder® Annuity; Traditional NQDC and the Leveraged Bonus Plan®-Qualified plans/412(i) plans (“carve-out” planning)-ESOPs-IRAs

• Business Planning (6 hours)-Account Receivables (A/R) Leveraging (done the right way)-VEBAs and 419A(f)(6) Plans -Section 79 Plans -Closely Held Insurance Companies -Corporate Structure

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Continued• Estate Planning (8 hours)

-Basic-“Advanced”-Private Annuities Trusts (capital gains deferral)- Life Insurance -Qualified Pension Insurance Partnership®

(Mitigating the 75% Tax Trap) -Charitable planning-Long Term Care Insurance

• Personal Finance (4 hours)-Annuities -Life Settlements -1% CFA Mortgages (Equity Harvesting the “right” way)-Reverse Mortgages -Private Annuity Trust

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Marketing

• The WPI helps is certified advisors market in several very unique ways.

• 1) The ability to become an instant author through a 340+ page “ghost book.”

• The WPI will allow CWPP™ advisors to give CPEcontinuing education courses on a local level to CPAs and accountants.

• Ability to give CME seminars to physicians.

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Continued

• The WPI has a number of articles that CWPP™ advisors can use to place in local medical, accounting, legal and other business journals.

• The WPI also has dozens of PowerPoint presentations CWPP™ or CAPP™ advisors can use to present topics to either client or other advisors. (what a time saver).

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Marketing continued

• Ghost Web-Site for those who want a web-site which tells your clients about your special knowledge.

• www.thewpi.org/template • E-newsletters The WPI creates for you to send out to

your clients.• E-newsletter blasting system so you can drip on

your client’s with Educational newsletters. – This system is setup to track who opens your newsletters and

how many times they open them.– Can you imagine calling a client and telling them that you

noticed they opened the last e-newsletter 5 times and you wondered if you could answer any questions for them.

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Should you become a CWPP™?• YES. IF you are looking to learn several

new topics which:– can help high income/net worth clients;– can help position you as the client’s trusted advisor and

team leader;– are very insurance and annuity friendly.

• If you are looking to become better educated on topics you currently deal with.

• If you would like keep updated on law changes, new concepts and have access to PowerPointpresentations, articles and the ability to have your own “Ghost” book and ghost web-site and e-mail blasting system.

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How to sign up.

• If you would like to sign up to become a CWPP™and/or CAPP™ advisor, you can do so by clicking on the appropriate tabs on the left front bottom part of the web-site under Product Categories

• You can take the course entirely online or in person.

• You can get started with a $500 deposit which will get you access to over 640 pages of CWPP™course material and the tests.

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Questions

Please contact The WPI at 269-408-1841 or e-mail at

[email protected]

Documents

Problems With and Solutions for Self-Directed IRAs · • In a nutshell, a related party is the owner of the IRA, an ancestor, spouse, descendant, spouse of any of the above, and