When the trust is sufficient
Notes secured by real property, business loans, vehicle notes, and most other private lending transactions can be originated, funded, and administered directly through the IRA Trust or Solo 401(k) trust. The trust is the lender, you sign as trustee, and all payments flow through the trust account. This is straightforward and covers the large majority of private lending activity.
The IRA Trust is specifically well suited for note investing. It carries lower setup costs than an IRA LLC, requires no state filing or annual reporting, and handles the full range of lending transactions cleanly.
When an LLC is worth considering
The primary reason to add an LLC layer for private lending is liability exposure. Most note investments are passive and carry no inherent liability risk. However, certain situations can expose a lender to claims.
If a borrower defaults and your plan forecloses, the plan may end up holding real property. At that point, the liability considerations of direct property ownership apply, and an LLC provides meaningful protection. If your lending strategy involves a realistic probability of taking title through foreclosure, forming an LLC before that outcome occurs is the cleaner approach.
For plans that will be frequent lenders, the administrative infrastructure of an LLC can be worthwhile. A dedicated lending LLC creates a clean operational boundary, and the added structure may simplify recordkeeping and note management as the portfolio grows.
Frequently Asked Questions
What if I start lending through a trust and end up needing to foreclose?
If your IRA Trust forecloses and takes title to real property, the right move is to transfer the property into an LLC once the foreclosure process is complete. That LLC can be held as a nested entity under the existing trust, or it can be formed as a separate LLC owned by the same IRA. Either approach insulates the rest of your plan assets from the liability exposure that comes with direct property ownership. Plan ahead so the LLC is ready before title transfers.
Does investing in distressed notes increase my liability risk?
Yes. Distressed notes carry a higher probability of foreclosure, which means a higher probability of your plan ending up as a property owner. If distressed note investing is part of your strategy, using an LLC from the outset is the wiser approach. The cost of forming an LLC upfront is modest compared to the complexity of restructuring after an unexpected foreclosure.