Self-employed individuals tend to face a unique set of financial challenges—especially in today’s unpredictable economy.
According to Experian’s 2024 Housing Market in Review, affordability remains a serious concern across many U.S. cities, with high interest rates and tight inventory putting pressure on individuals and families alike. In this climate, self-employed workers may feel the squeeze even more. Without the predictability of employer-provided benefits or traditional income documentation, they often juggle volatile cash flow, personal financial planning, and long-term wealth preservation—all on their own.
Managing personal assets and business holdings generally requires forward-thinking strategies and careful organization. More and more, estate planning seems to move to the top of the priority list. Having a proper plan in place can help your heirs avoid unnecessary delays, fees, and even potential tax liabilities when settling your estate.
And if you own a Self-Directed IRA (SDIRA), mindful estate planning generally becomes even more important. The flexibility and alternative asset options can make these accounts attractive but also complex. However, by proactively organizing your holdings as part of your estate plan, you can safeguard your legacy and give your beneficiaries peace of mind.
How SDIRAs Add Opportunity to Estate Planning
Unlike standard retirement accounts, an SDIRA gives self-employed individuals and small business owners access to a significantly broader and more diverse range of investment opportunities. If you’re self-employed, you can choose to open a Self-Directed IRA as a Traditional IRA, Roth IRA, or even a SEP (Simplified Employee Pension) IRA, which is specifically designed for self-employed individuals.
In addition, this expanded menu of alternative assets can offer greater control and potential for portfolio growth, though it also introduces unique complexities when planning an estate. The following are some of the most common types of assets found in SDIRAs.
Real Estate
One of the most popular SDIRA investments, real estate can include rental properties, undeveloped land, commercial properties, and even farmland. Real estate offers the potential for long-term appreciation and relatively steady cash flow through rental income. However, these assets also require careful documentation, valuation, and adherence to SDIRA regulations to avoid prohibited transaction penalties.
Private Equity
SDIRAs can invest in private companies, startups, or venture capital opportunities. This opens the door to significant growth potential, especially for investors with experience and access to emerging companies. Estate planning for these investments may require a clear succession plan and thorough records of ownership stakes to provide a smooth transfer to heirs.
Promissory Notes
An SDIRA can serve as a private lender by issuing promissory notes to individuals or businesses in exchange for relatively regular interest payments. These notes offer a relatively predictable income stream and can be an attractive component of a diversified estate, but must be structured to meet all IRS compliance standards.
Private Businesses
An SDIRA may hold equity in private businesses, provided the business relationship does not violate self-dealing or disqualified person rules. These investments typically require detailed documentation and careful coordination with estate planning to avoid unintended tax consequences or legal complications during the transfer process.
Tax Liens
Some investors use an SDIRA to purchase tax lien certificates, which offer the potential for interest payments and even property ownership in the event of default.
These investments are often local and require due diligence, but can be part of a broader alternative investment. It’s important to check with your custodian if it’s administratively feasible to invest in tax liens with your SDIRA.
Cryptocurrency (In Certain Cases)
For investors comfortable with digital assets, some SDIRAs allow the purchase of cryptocurrency. While this asset class tends to be highly volatile and can carry regulatory uncertainty, it may offer diversification benefits. Estate planning for digital assets generally demands extra attention to account access, security protocols, and potential valuation issues for heirs.
The Potential Complications of SDIRA Estate Planning
While these assets offer opportunities for diversification and growth, they also bring unique estate planning complications. For example:
- Real estate must be properly titled and appraised upon your passing.
- Private equity and businesses require detailed valuation reports, often at the expense of the estate.
- Digital assets like cryptocurrency may present security and valuation challenges.
An SDIRA is still an IRA, which means its ownership structure must follow strict IRS regulations. Without careful documentation and planning, assets inside an SDIRA could face probate delays, unintended tax consequences, or even penalties for non-compliance.
What happens to your SDIRA when you pass away?
The assets transfer to a designated beneficiary (or beneficiaries), but this process may not be as straightforward with complex or illiquid assets. Estate planning demands foresight and expert consultation to ensure that your wishes are fulfilled.
Common Pitfalls to Avoid
The combination of IRS regulations and complex assets increases the likelihood of errors in estate planning. Some common mistakes include:
Failing To Name or Update Beneficiaries
Your SDIRA beneficiary designation overrides your will. It’s considered best practice to update your beneficiary forms when life changes such as marriage, divorce, or the birth of a child.
Misunderstanding IRS Rules for Inherited SDIRAs
The SECURE Act and subsequent updates have shifted how an inherited SDIRA is distributed. Most non-spouse beneficiaries must now withdraw the full account balance within 10 years of the account owner’s passing.
Not understanding these new timelines could expose your heirs to unexpected tax burdens.
Overlooking Asset Liquidity
Alternative investments often aren’t liquid. For example, a rental property inside an SDIRA typically cannot be easily converted to cash. Your heirs may struggle to cover estate taxes or administrative costs without sufficient liquid assets in the estate.
Improper Asset Titling
Assets owned by the SDIRA must be titled correctly. This is also important when an LLC is used within an SDIRA. Failure to follow the proper titling process may result in disqualification of the account or delays in settlement.
Simple Ways To Protect Your SDIRA Legacy
The good news is that proactive steps can prevent many of these common issues.
Keep Documentation Current
An up-to-date record of all alternative assets, appraisals, partnership agreements, and LLC documents will generally simplify the estate administration process.
Work With Experienced Professionals
Not all estate planners or financial advisors are familiar with the unique nature of an SDIRA. Consider working with a custodian and an estate planner who both understand the intersection of self-directed investing and estate law.
Communicate With Your Heirs
It may be beneficial to discuss your estate plan with your heirs and any business partners. Making your intentions clear can help minimize conflict or confusion later.
Balancing Business Ownership and SDIRAs
Many self-employed individuals also hold significant business assets separate from their SDIRA. When you combine business ownership with an SDIRA, estate planning tends to become even more critical. Some key considerations include:
- Succession Planning:
Outline what happens to your business when you pass on. Separately, if your SDIRA holds equity in a third-party private business, it’s considered best practice to clarify who will inherit ownership and what role they will play. - Avoiding Prohibited Transactions:
SDIRA rules strictly forbid self-dealing or improper personal benefit. Your business succession plan must avoid any conflicts with SDIRA compliance.
Professional guidance is strongly encouraged for anyone investing with an SDIRA or embarking on estate planning.
Getting Your SDIRA Estate Plan in Order In 2025
Estate planning for SDIRAs is not just about paperwork—it’s about protecting your family, your business, and your retirement assets. A well-organized plan can offer clarity and comfort to your heirs and reduce the possible risk of legal disputes, penalties, or probate delays.
Proactively addressing potential risks in 2025 allows you to:
- Gain peace of mind knowing your legacy is generally secure.
- Minimize the potential tax impact on your heirs.
- Streamline the transfer of alternative assets like real estate or private business holdings.
For self-employed individuals who have worked hard to build both their businesses and retirement portfolios, taking the next step with estate planning is an empowering decision.