At Specialized Trust Company, we want our clients to be fully aware of all investment opportunities. We understand that different investments will be attractive to different people, which is why we provide information on a wide variety of different investments. Below, we have collected some information on some of the most popular investment options we utilize here at Specialized Trust Company.
Deeds of Trust & Mortgages (Secured and Unsecured Notes)
Secured and unsecured notes are used to extend credit from one or more individuals or entities to another individual or individual’s entity. There are two types of notes:
- Secured notes are backed by collateral, providing the lender increased assurance of return of the loan amount and interest, such as mortgages and deeds of trust.
- Unsecured notes are not backed by collateral. You might consider an unsecured note for perhaps a friend or a non-disqualified relative, but it is a higher risk—and sometimes reward—than a secured note.
To clear up confusion a trust deed, deeds of trust, and mortgage notes are largely the same investment, depending on the state that you reside in. A Self-Directed IRA may invest in trust deeds, mortgage notes, and deeds of trust and other interest-bearing notes. These notes may be either in first or subordinate positions and may be purchased from brokers or private parties. Usually, the documentation is recorded at county recorder’s offices, and title to the property is insured as instructed. You may also purchase or sell portions of mortgages. In such cases, your Self-Directed IRA can hold an undivided interest in that portion of the note and receive the proportionate amount of income due under its terms. You may also purchase discounted notes as well as real estate purchase options.
When title and/or escrow companies are involved, proper instructions are provided to them for all documents for your account. In the event that a local title or escrow company has additional requirements other than those provided additional costs may result.
In real estate in the United States, a trust deed or deed of trust is a deed wherein legal title in real property is transferred to a trustee, which holds it as security for a loan (debt) between a borrower and lender. The borrower is referred to as the trustor, while the lender is referred to as the beneficiary of the trust deed.
Transactions involving trust deeds are normally structured so that the lender gives the borrower/trustor the money to buy the property, the seller executes a grant deed giving the property to the trustor, and the borrower/trustor immediately executes a trust deed giving the property to the trustee to be held in trust for the lender/beneficiary. Trust deeds differ from mortgages in that trust deeds always involve at least three parties, where the third party holds the legal title, while in the context of mortgages, the mortgagor gives legal title directly to the mortgagee. In either case, equitable title remains with the borrower.
A trust deed is normally recorded with the recorder or county clerk for the county where the property is located as evidence of and security for the debt. The act of recording provides constructive notice to the world that the property has been encumbered. When the debt is fully paid, the beneficiary is required by law to promptly direct the trustee to transfer the property back to the trustor by re-conveyance, thus releasing the security for the debt.
A trust deed has a crucial advantage over a mortgage. If the borrower defaults on the loan, the trustee has the power to foreclose on the property on behalf of the beneficiary. In most U.S. states, a trust deed (but not a mortgage) can contain a special “power of sale” clause that permits the trustee to exercise these powers. Here is the standard conveyance clause from a Freddie Mac “uniform instrument”:
In the states that enforce “power of sale” clauses, the courts have uniformly held that by executing a deed of trust with a “power of sale” clause, the borrower has authorized the trustee to conduct a non-judicial foreclosure in the event of default. That is, unlike a mortgage, the lender need not sue the borrower in a state court; instead, the lender/beneficiary merely directs the trustee to mail (or serve, publish, or record) certain notices required by law, culminating in a “trustee’s sale” at which the trustee auctions the property to the highest bidder. The borrower’s equitable title normally terminates automatically by operation of law (under applicable statutes or case law) at the trustee’s sale. The trustee then issues a deed conveying the legal and equitable title to the property in fee simple to the highest bidder. In turn, the successful bidder records the deed and becomes the owner of record. Thus, the advantage of trust deeds is that the lender can recover the value of the collateral for the loan much more quickly, and without the expense and uncertainty of suing the borrower, which is why lenders overwhelmingly prefer such deeds to mortgages.
The time periods for the “trustee’s sale” or “power of sale” foreclosure process vary dramatically between jurisdictions. Some states have very short timelines. For example, in Virginia, it can be as short as two weeks. In California, a non-judicial foreclosure takes a minimum of approximately 112 days from start to finish. The process starts only when the lender or trustee records a “notice of default” no matter how long the loan payments have been unpaid. For certain home loans made between 2003 and 2007, because of current economic conditions, California law was amended to add a temporary additional 60 days to the process.
Trust deeds are the most common instrument used in the financing of real estate purchases in Alaska, Arizona, California, Colorado, the District of Columbia, Idaho, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina, Oregon, Tennessee, Texas, Utah, Virginia, Washington, and West Virginia, whereas most other states use mortgages. Besides purchases, deeds of trust can also be used for loans made for other kinds of purposes where real estate is merely offered as collateral, and are also used to secure performance of contracts other than loans.
Though a mortgage is technically an entirely different legal instrument, trust deeds are frequently called mortgages in the real estate loan business due to the functional similarity between trust deeds and mortgages.
Although a deed of trust usually states that the borrower is making an “irrevocable” transfer to the trustee, it is common in many jurisdictions for borrowers to obtain second and third mortgages or trust deeds that make similar transfers to additional trustees (that is, of a property they already conveyed to the trustee on their first deed of trust). As with mortgages, deeds of trust are subject to the rule “first in time, first in right,” meaning that the beneficiary of the first recorded deed of trust may foreclose and wipe out all junior deeds of trust recorded later in time. If this happens, the junior debt still exists, but becomes unsecured. If the debtor has sufficient senior secured claims upon his assets, the junior liens may be wiped out completely in bankruptcy.
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.
A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.
In many jurisdictions, though not all, it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed.
The word mortgage is a French Law term meaning “dead pledge,” apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.
Real estate purchased in a self-directed IRA can have a mortgage placed against the property, thus lowering the amount of total cash needed for a purchase. Business investments may include partnerships, joint ventures, and private stock. This can be a platform to fund a start-up business or other for-profit venture that is managed by someone other than the account owner of the IRA.
Real estate and/or real property includes non-traditional assets, such as single-family and multi-unit homes, apartment buildings, co-ops, condominiums, improved or unimproved land (leveraged or unleveraged), commercial property, and more. A Self-Directed IRA gives you the freedom to invest these types of properties. The purchase of real estate through a self-directed retirement plan is a popular investor choice.
If your IRA doesn’t have enough money to pay for the entire purchase, you can finance or leverage any income-producing property. The property is used as the collateral for the loan. Because the property belongs to your IRA, the debt must be repaid from assets within your IRA, whether it’s income from the property, permissible contributions, or other assets in the IRA. All real property is either purchased or sold for your benefit using your Qualified Plan and/or IRA funds.
Financing the Purchase – You may finance or leverage any property you purchase for your plan. The property is the collateral for the loan. As the property is an asset of the plan, repayment of the underlying debt must come from contributions to or income from the property or other assets in the plan. This type of loan is generally referred to as a non-recourse loan because the IRA holder cannot extend credit to an IRA.
Ensuring the Tax-Deferred Status of your Self-Directed IRA – Your entire purchase and/or sale must flow through the tax-free or tax-deferred retirement account. The escrow must be opened by the account, not in the name of the beneficial owner. Vesting is always in the name of the account, such as Specialized Trust Company fbo Your Name and Account Number. The funds in your IRA may be used as good faith deposits, down payments, or purchase money.
When real estate or real property is purchase through your Self-Directed IRA, these properties become assets of your account. In addition:
- You may not personally own property that you intend to purchase with plan funds and you must ensure that your intended purchase is not a prohibited transaction
- Neither you, your spouse, nor your family members (other than siblings) may have owned the property prior to its purchase by your plan.
- Neither you nor your family members (other than siblings) may live in or lease the property while it’s in your plan.
- Your business may not lease or be located in or on any part of the property while it’s in your plan.
- You may receive any property as a distribution from your plan as a retirement benefit. This may be considered a taxable event and Specialized Trust Company strongly suggests that you consult a tax advisor or legal counsel for this type of transaction.
Below are examples of self-dealings in regards to Real Estate purchased through your Self-Directed IRA:
- Having your IRA purchase real estate that you own or use.
- Having your IRA purchase real estate that is owned by a family member of lineal descent, such as your father.
- Issuing a mortgage on a relative’s new residence purchased by a family member who is a disqualified person.
- Granting a child a second mortgage for the down payment on his or her first home.
Tax Lien Certificates / Trust Deeds
A tax lien sale is the sale, conducted by a governmental agency, of tax liens for delinquent taxes on real estate. It is one of two methodologies used by governmental agencies to collect delinquent taxes owed on real estate, the other being the tax deed sale.
In a tax lien sale, the lien (for delinquent taxes, accrued interest, and costs associated with the sale) is offered to prospective investors at public auction. Traditionally, auctions were held in person; however, Internet-based auctions (especially within large counties having numerous liens) have grown in popularity as this method allows for bidders from outside the area to participate.
The investor must wait a specified period of time (referred to as the “redemption period”), during which time the lien (plus interest and any other fees) may be repaid. Usually the lien holder is not permitted during this period to contact the property owner (or anyone else having an interest in the property, such as the mortgage holder) to demand payment or threaten foreclosure, or else the certificate can be forfeit.
Once the redemption period is over, the lien holder may initiate foreclosure proceedings. The proceedings (the costs of which must be paid by the lien holder, though a redeeming property owner may be required to pay them as part of redemption) may result in either acquiring title to the property (normally this will be in the form of a quitclaim deed) or a tax deed sale of the property where the lien holder has the right of first bid (and may participate by making additional bids if s/he so chooses). In Illinois a “Tax Deed” delivers a clean title as the court removes all clouds on title in the order directing the issuance of the deed. During the period between the initiation of proceedings and actual foreclosure, the property owner still has the opportunity to repay the lien with interest plus the costs incurred to foreclose.
The maximum rate of return on a tax lien can be far higher than other investments. For example, Florida offers a maximum rate of 18% (1.5% per month, with a guaranteed 5% return regardless of time held), while Arizona offers a maximum rate of 16%. Iowa offers a guaranteed 2% per month (or 24% annual return).
FOREX / Futures
The foreign exchange market (forex, FX, or currency market) is a form of exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.
The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states especially Eurozone members and pay Euros, even though its income is in United States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change in interest rates in two currencies.
In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods System.
The foreign exchange market is unique because of:
- its huge trading volume representing the largest asset class in the world leading to high liquidity;
- its geographical dispersion;
- its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
- the variety of factors that affect exchange rates;
- the low margins of relative profit compared with other markets of fixed income; and
- the use of leverage to enhance profit and loss margins and with respect to account size.
As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.
The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998). Of this $3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in outright forwards, swaps and other derivatives.
Foreign exchange trading increased by 20% between April 2007 and April 2010 and has more than doubled since 2004. The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, the increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment. The growth of electronic execution and the diverse selection of execution venues has lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types. In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market. By 2010, retail trading is estimated to account for up to 10% of spot turnover, or $150 billion per day.
A precious metal is a rare, naturally occurring metallic chemical element of high economic value. Chemically, the precious metals are less reactive than most elements, have high luster, are softer or more ductile, and have higher melting points than other metals. Historically, precious metals were important as currency but are now regarded mainly as investment and industrial commodities. Gold, silver, platinum, and palladium each have an ISO 4217 currency code.
The best-known precious metals are the coinage metals gold and silver. While both have industrial uses, they are better known for their uses in art, jewelry and coinage. The demand for precious metals is driven not only by their practical use but also by their role as investments and a store of value. Historically, precious metals have commanded much higher prices than common industrial metals.
Gold and silver, and sometimes other precious metals, are often seen as hedges against both inflation and economic downturn. Silver coins have become popular with collectors due to their relative affordability, and, unlike most gold and platinum issues which are valued based upon the markets, silver issues are more often valued as collectables, far higher than their actual bullion value.
Partnership, LP, LLC, JV
A partnership is an arrangement where entities and/or individuals agree to cooperate to advance their interests. In the most frequent instance, a partnership is formed between one or more businesses in which partners (owners) co-labor to achieve and share profits or losses.
Partnerships are also frequent regardless of and among sectors. Non-profit organizations, for example, may partner together to increase the likelihood of each achieving their mission. Governments may partner with other governments to achieve their mutual goals, as might religious and political organizations. In education, accrediting agencies increasingly evaluate schools by the level and quality of their partnerships with other schools and across sectors. Partnerships also occur at personal levels, such as when two or more individuals agree to domicile together. Partnerships between governments, interest-based organizations, schools, businesses, and individuals, or some combination thereof, have always been and remain commonplace.
Partnerships have widely varying results and can present partners with special challenges. Levels of give-and-take, areas of responsibility, lines of authority, and overarching goals of the partnership must all be negotiated. While partnerships stand to amplify mutual interests and success, some are considered ethically problematic, or at least debatable. When a politician, for example, partners with a corporation to advance the corporation’s interest in exchange for some benefit, a conflict of interest may make the partnership problematic from the standpoint of the public good. Developed countries often strongly regulate certain partnerships via anti-trust laws, so as to inhibit monopolistic practices and foster free market competition.
Some general rules regarding self-directed partnership investments in a Self-Directed IRA:
- The partnership agreement must permit an individual retirement account or a qualified plan to be a partner.
- The partnership must comply with the appropriate state law, have a determinate life, and be assignable.
- The partnership subscription agreement must be signed by you as having been read and approved.
- Partnerships may be subject to unrelated business income tax (UBIT) and other taxes. It’s important to consult your tax advisor for proper direction.
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). It is a partnership in which only one partner is required to be a general partner.
The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i.e. they have management control, share the right to use partnership property, share the profits of the firm in predefined proportions, and have joint and several liabilities for the debts of the partnership.
As in a general partnership, the GPs have actual authority as agents of the firm to bind all the other partners in contracts with third parties that are in the ordinary course of the partnership’s business. As with a general partnership, “An act of a general partner which is not apparently for carrying on in the ordinary course the limited partnership’s activities or activities of the kind carried on by the limited partnership binds the limited partnership only if the act was actually authorized by all the other partners.”
Like shareholders in a corporation, LPs have limited liability, meaning they are only liable on debts incurred by the firm to the extent of their registered investment and have no management authority. The GPs pay the LPs a return on their investment (similar to a dividend), the nature and extent of which is usually defined in the partnership agreement. General Partners thus carry more liability, and in cases of financial misfortune, the GP becomes “the generous partner”.
Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.
A limited liability company (LLC) is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions. LLCs do not need to be organized for profit.
In an effort to reduce fees, paperwork, and processing delays, some self-directed IRA investors choose to employ a Limited Liability Company (LLC) IRA structure. In such a structure the account holder directs his IRA custodian to invest into a limited liability company that the account owner manages himself. The account owner can then execute transactions on the LLC level without the involvement of the IRA custodian, thus reducing fees and eliminating custodian transactional fees and delays. The profits of the LLC pass through to the IRA with nearly identical tax favorable treatment. Some claim that this IRA LLC strategy has been legitimized through a tax court case: Swanson v. Commissioner, 106 T.C. 76 (1996). Others disagree on the validity of the court case. Some refer to this structure as “checkbook control” because the IRA account holder often has sole signing authority for the LLC and its bank accounts.
Often incorrectly called a “limited liability corporation” (instead of company), it is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC, although a business entity, is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation and it is well-suited for companies with a single owner.
It is important to understand that limited liability does not imply that owners are always fully protected from personal liabilities. Courts can and sometimes will pierce the corporate veil of corporations (or LLCs) when some type of fraud or misrepresentation is involved.
A joint venture is a business agreement in which all parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They both exercise control over the enterprise and consequently share revenues, expenses and assets. There are other types of companies such as JV limited by guarantee, joint ventures limited by guarantee with partners holding shares.
On the other hand, when two or more persons come together to form a temporary partnership for the purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties are “co-venturers”.
The venture can be for one specific project only – when the JV is referred more correctly as a consortium (as the building of the Channel Tunnel) – or a continuing business relationship. The consortium JV (also known as a cooperative agreement) is formed where one party seeks technological expertise or technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, for ‘‘one-time’’ contracts. The JV is dissolved when that goal is reached.
“Private placement” is the term used in the securities world to define a non-public offering of an investment vehicle. Securities regulations allow exemption for selected types of private placements. The primary classifications for these exemptions are Rules 501-506 D. Smaller private offerings can be done where there are less than 35 investors and when the public is not solicited (e.g., friends and family rounds of financing). The most common types of private placements are those involving closely-held private companies. It is estimated that 75% of new businesses formed in the United States are funded through such private placements.
Private placement (or non-public offering) is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors. In the United States, although these placements are subject to the Securities Act of 1933, the securities offered do not have to be registered with the Securities and Exchange Commission if the issuance of the securities conforms to an exemption from registrations as set forth in the Securities Act of 1933 and SEC rules promulgated thereunder. Most private placements are offered under the Rules know as Regulation D. Private placements may typically consist of stocks, shares of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), and purchasers are often institutional investors such as banks, insurance companies or pension funds.
A privately held company or close corporation is a business company owned either by non-governmental organizations or by a relatively small number of shareholders or company members which does not offer or trade its company stock (shares) to the general public on the stock market exchanges, but rather the company’s stock is offered, owned and traded or exchanged privately. Less ambiguous terms for a privately held company are unquoted company and unlisted company.
Though less visible than their publicly traded counterparts, private companies have a major importance in the world’s economy. In 2008, the 441 largest private companies in the United States accounted for $1.8 trillion in revenues and employed 6.2 million people, according to Forbes. In 2005, using a substantially smaller pool size (22.7%) for comparison, the 339 companies on Forbes’ survey of closely held U.S. businesses sold a trillion dollars’ worth of goods and services (44%) and employed 4 million people. In 2004, the Forbes’ count of privately held U.S. businesses with at least $1 billion in revenue was 305.
Koch Industries, Bechtel, Cargill, Publix, Pilot Corp., one of the members of the Big Four accounting firms, Deloitte Touche Tohmatsu, Hearst Corporation, S. C. Johnson, and Mars are among the largest privately held companies in the United States. KPMG, the UK accounting firms, Ernst & Young and PricewaterhouseCoopers, IKEA, LEGO, Bosch, and Rolex are some examples of Europe’s largest privately held companies.