Overview
The speaker explains how to use a limited liability company (LLC) to protect a trading account, tax implications, and strategies to avoid costly mistakes, including preserving real-time trading data.
Rationale for Using an LLC for Brokerage Accounts
- Traders seek LLCs to protect their brokerage accounts from personal creditor claims.
- Placing a trading account in an LLC offers charging order protections, restricting creditor access.
- Setting up an LLC in a state with strong protections, such as Wyoming, is recommended.
- The LLC is solely for holding the brokerage account, not conducting active business in the trader’s state of residence.
Setting Up the LLC and Moving the Brokerage Account
- First, form the LLC, ideally in Wyoming for optimal charging order protections.
- Open a brokerage account in the LLC’s name at the same institution holding the personal account to enable transferring positions without selling them.
- Fill out the brokerage’s LLC account application, providing ownership and tax status details.
- For single owners, classify the LLC as a disregarded entity; for spouses, use partnership status.
- Direct the broker to transfer existing investment positions from the personal account to the LLC account.
Common Mistakes and Tax Consequences
- Avoid selling positions when transferring to the LLC, as this triggers taxable gains on appreciated assets.
- Transferring within the same brokerage allows positions to move without liquidation and associated taxes.
Real-Time Trading Data Issues and Solutions
- Some brokerages may deny real-time market feeds to LLC accounts or charge higher fees unless the balance exceeds $250,000.
- To retain real-time data access, keep a minimal personal account open for data while executing trades in the LLC account.
- Alternatively, use a personal property trust to hold the brokerage account and assign beneficial interest to the LLC, preserving real-time data access.
Structuring with a Personal Property Trust
- Set up a personal property trust naming yourself as beneficiary and trustee.
- Transfer account holdings into the trust, maintaining real-time feed benefits as for an individual account.
- Assign the trust’s beneficial interest to the LLC for asset protection.
- The income remains pass-through for tax purposes; no additional tax filing for the trust.
Flexibility and Additional Considerations
- Multiple brokerage accounts can be held within one LLC, regardless of the number or brokerage used.
- These strategies are primarily for asset protection, not creating a trading business entity.
Recommendations / Advice
- Set up the LLC in Wyoming (or another strong-protection state) for maximum creditor protection.
- Avoid closing out positions; transfer them within the same broker to prevent taxable events.
- Use a personal property trust, assigning its interest to the LLC, if real-time data is critical and not otherwise available for the LLC account.