Another inherited mess - Loans in an IRA account

[Guest RJM]

Through a recent acquistion, bank trust department inherited a custodial IRA containing a bunch of loans (none of which are party-in-interest). About 35 loans with outstanding principal on the books at approximate $300,000. Maturity dates range from 2000 to 2010. Under the former arrangement, IRA owner forwarded money & detailed payment information to previous custodian. No payments have been received on the loans for about 13 months, even after several communications with the IRA owner.

Custodial agreement allows trust department to resign after 60-day written notice, distributing assets to new custodian, or if IRA owner refuses to name another custodian, to distribute assets to the IRA owner.

Problem is the distribution value. Would loans be distributed at outstanding value or $1 each?

[Guest b2kates]

Are you certain none of the loans are Party in interest loans. Seems suspicious that IRA owner would not be screaming for payments on loans.

Are the loans being written off as uncollectible. Otherwise, it seems that a valuation for each loan would need to be done to properly issue 1099 with an amount.

[John G]

Did you say that the IRA owner was involved in the transactions and handled the money for loan repayment? It seems to me that this situation could allow fraudulent pumping of funds into the account that were not loan repayments at all. I also find it very strange that the IRA owner was not sending in the funds... sounds to me like the owner may have been receiving the funds and "using" them which would be analogous to taking a rollover beyond the 60 days. If the IRA owner was not actually getting paid on the loans, then I wonder why the IRA owner was not screaming and taking people to court.

Why would a custodian tolerate this type of arrangement? Payments on loans should have been made directly to the bank. Did anyone consider that the IRA owner may have died? In our society, it is a little hard to avoid "communications".

[mbozek]

I am assuming that the IRA owner was arranging loans from the IRA assets to third parties and the payments were to be made to the IRA but were being repaid to the IRA owner. Were these payment made to the owner as the fiduicary of the IRA or as an individual? Is this permissible under the custodial account between the bank and the IRA owner? If not why did the bank allow it. Generally the payments should have been made directly to the custodian or the IRA owner as the fiduciary of the IRA.

Second What does the custodial agreement say about the banks responsibility to recover payments due on outsanding loans? Is the bank a completely passive custodian acting only upon the instructions of the IRA owner? Is there any liability to the bank if closing out the account causes taxation to the IRA owner? Perhaps the Bank's counsel should review the IRA agreement to determine if the owner may have a claim against the bank for failure to perform duties of a trustee under applicable state laws.