In this episode of Coffee with Carl, attorney Carl Zoellner goes over some strategies for reducing the taxes on and protecting brokerage accounts.


Updated October 6, 2020

Many of my clients invest in the stock market in addition to other lines of investing, including real estate. One question I receive frequently in regards to brokerage accounts and trading stocks is: how do I protect my brokerage account and make sure I get the best tax advantages possible?

Avoid Holding Brokerage Accounts in Your Personal Name

There are a couple different routes you can take when working with a brokerage account. One of the most important concepts to understand first, however, is that you never want to hold your brokerage account in your individual name. To potential plaintiffs’ attorneys, your brokerage account looks the same as cash. So, the first step is to take the account out of your personal name.

Instead, your brokerage account should be held in the name of an LLC. This way, if you get into a car accident (for instance), your brokerage account will no longer be considered a personal asset that’s available for any judgments. Instead, it will be a business asset, held in a business structure. From a plaintiff’s attorney’s perspective, this makes it much more difficult to access.

Disregarded LLC vs. Partnership

Once your brokerage account is out of your individual name, you have some decisions to make. If your trading consists primarily of long-term holds or options, you can leave your brokerage account in an LLC that’s disregarded back to you for tax purposes. There’s no real benefit or detriment to you from this strategy in terms of taxes, but it does get the account out of your name to ensure it’s protected.

If you don’t want to go the disregarded route, the second option is to create a partnership between the LLC holding the brokerage account and a corporation. By linking in that corporation with a guaranteed payment to the corporate partner, you can then receive many of the same benefits as traders who qualify for trader status with the IRS. In short, these benefits mean that things not normally deductible to you as an individual in association with your trading business become deductible when you bring in that corporate partner.

Ultimately, the real questions are: 1. What kind of tax benefit are you trying to get out of your trading account or business? And 2. What kind of impact will that action have on your overall business structure? By this, I mean that some people (for instance, real estate investors) may already have a corporation providing significant benefits, making them reluctant to expose the trading account to the corporation’s activities. Another way to consider this question is: Is the juice worth the squeeze?

No One-Size-Fits-All Approach

Every single one of these decisions need to be made at the individual level. What works well and offers tremendous benefits for one investor may derail and hurt another investor with a different business structure and purpose. If considering the LLC-corporation partnership for holding brokerage accounts briefly discussed above, it’s important to make sure it’s worth it for your individual situation. When you have a partnership, there are additional compliance requirements to factor in, as well as an extra tax return. These are just some of the initial considerations, among many.

Overall, I encourage everyone to schedule an individual Strategy Session with a Senior Advisor before making any major changes or starting new strategies. There could be unforeseen but major repercussions to any one single business decision you may make. That’s why it’s critical to discuss these strategies with someone who’s experienced in implementing and designing these types of structures. Schedule a complimentary Strategy Session with a Senior Advisor today to get the expertise your business needs to win. You can schedule online or by calling 888.871.8535.

As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.

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Watch as Carl breaks down how to structure brokerage accounts for asset protection and tax savings.