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ESOP termination; rollover shares to SDIRA; company owner

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QUESTION: Is the following scenario a permissible IRA investment for a self-directed IRA (SDIRA) or a self-directed LLC IRA (SDIRALLC)?

My wife and I own (via a joint revocable trust – for estate planning purposes) 23.25% of a privately held bank holding company. We are the largest stockholders. Two other family members (brother and sister to my wife) own approximately 22% each. Thus, the family owns 2/3rds of the bank holding company. The only asset of the bank holding company is 100% ownership of the subsidiary community bank.

Additionally, I beneficially own part of an existing ESOP (that is part of a KSOP retirement plan). The ESOP has a 14%+ equity interest in the holding company. (I am the largest ESOP beneficiary at 25.4% of the ESOP, or about 3.7% of the holding company.) My ESOP account was acquired when I worked for the bank. My employment with the bank ended in 2007. I was, also until 2007, on the bank’s and holding company’s board of directors. Since 2007 I have not been employed by the bank or holding company nor on either’s board of directors. (My wife has never worked for the bank or holding company, nor has she ever served on the boards of directors of either.)

(Of note, I may go back on the board of directors of either or both the bank and holding company in 2017. There is also a remote possibly that I may once again be employed by the bank, or serve in some consulting capacity.)

My wife and I do have our main banking relationship with the bank. These are all in various deposits accounts (plus a safe deposit box). We have no loans at the bank.

The bank is likely to terminate the ESOP part of the KSOP in 2017. The 401(k) part of the KSOP would remain. The ESOP was established in the early 90s as an add-on to the existing 401(k). It was “active” for three or four years, “active” meaning the bank made contributions to the ESOP for the participants. There have been no ESOP contributions since these first few years. The only current activity is the dividends that are paid to the ESOP for the holding company shares owned by the ESOP trust [and subsequently moved to the respective ESOP beneficiaries’ 401(k)], and former employees who in rare times cash in their ESOP balances for a cash out distribution in which the ESOP is a market maker.

If the ESOP is terminated, I would like to roll my ESOP “shares” into a SDIRA (or SDIRALLC if this is required) rather than take the cash payout to a rollover IRA. This would be a trustee-to-trustee transfer as I am not purchasing any holding company stock with any cash ESOP/401(k) funds. I just want to keep what I have. It is my understanding that ownership by a SDIRA of privately held C Corp stock (which this bank holding company is) is a permissible IRA asset. However, there are numerous “self-dealing” prohibited transactions as it relates to owning privately held stock in situations such as I describe above. Thus, my ultimate question is whether or not I can make a rollover (trustee-to-trustee transfer) SDIRA contribution of my ESOP assets already owned (shares of stock in the bank holding company) should the ESOP be terminated, all based on the facts and circumstances as I outline to you above?

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I agree with Lou this is too complex to decide without proper legal advice. The cost of a prohibited transaction violation is too high to risk it

One thing to look at is taking the stock and not putting it into an IRA. You should look at the Net Unrealized Appreciation (NUA) rules. If this stock has been a C Corp the whole time your cost basis could be very low (it should be the price of the stock when the ESOP bought it way back when) and if you take a stock distribution you would only owe taxes on the cost basis. The appreciation isn't taxed until you sell and then it is a the capital gains rates. You lose that when you put the stock in an IRA and it all becomes ordinary income when you take it out of the IRA. So you may pay some taxes now but have a lower tax bill in the long run skipping the IRA.

If you never sell the stock you may never pay taxes on part of the distribution or at least income taxes it would still be part of an estate An IRA you would have to take RMDs at 70.5.

So besides a lawyer for your question it might be worth having a CPA help look at all the tax options.

Not trying to spend your money on professionals but this sounds like one of those cases were a little up front costs could be cheaper then the costs of getting this fixed afterwards or done wrong.

I admit I am assuming here a bit. You very well could have run the NUA numbers already. If that is so I guess ignore the above.

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Thanks ESOP Guy. I am aware of the NUA tax benefits. However, I rolled over the 401(k) part of the KSOP after I left the bank's employment not fully understanding that this counted as a partial distribution. I mistakenly thought the requirement for a lump sum, total distribution applied only to the ESOP part. Lesson learned here!!

As the bank holding company's largest stockholder, I want so much to keep the ESOP shares when/if we terminate the ESOP. However, those darn "beneficial interest" rules keep getting in the way. There may be some hope it i remain a non-employee; non-board member, but note sure. I know I most likely need a benefits expert attorney. I am an attorney by education (banker by profession), so I know better. Just trying to attempt to understand some of this very complex stuff beforehand.

Thanks for your input.

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  • 4 weeks later...

Pardon the obvious question - but if your family owns that much of the bank, why aren't you on the Board?

Also, does the ESOP allow for distributions in the form of stock (rather than cash)?  If so then I don't see why that wouldn't work - several specialized IRA custodians will accept non publicly traded stock.

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Marcus R. Piquet, CPA

American ESOP Advisors LLC
5995 Brockton Ave Fl 2, Riverside, CA 92506-1833
(951) 779-1124 (v) (951) 346-0896 (fax)


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Not sure about this, but if you were under age 59-1/2 when you terminated employment at the bank, would later reaching age 59-1/2 count as another "trigger event" that allows a lump sum distribution of the remaining balance in the account?

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Marcus - Was on the family bank's board for the almost 25 years I worked there.  Actually now president of another bank - not a competitor, but a correspondent bank only in which my family's back uses for correspondent service.  Yes, weird, I know.

The ESOP does allow distributions in stock.  I can't put my hand on the legalities right now, but I can't take advantage of this because the major ownership prohibits such.

Thanks for your thoughts.

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