Trust Deeds

[Lori Foresz]

Hi,

I need a basic lesson on how trust deeds are treated for purposes of the Form 5500. The way I understand it, a trust deed is a note that is secured by property. Is this treated as a loan (other than to participants) on the Form 5500? Is it treated as an asset that does not have a readily determinable market value? Is it considered a single debt that needs to be taken into account for the 20% question?

I'm thinking the answer is yes to all three, but if I could get some confirmation, I would feel better.

Many thanks!

[JohnCheek]

I agree-- yes to all three.

[Mike Preston]

I'll disagree with the middle one, but ever so gently. I think one generally thinks in terms of collectibles, limited partnerships, etc. when the phrase "does not have a readily determinable market value" is mentioned.

Determining the market value of a fixed income obligation does not, to me, seem to require that said obligation be traded on a recognized market. The Trustee or an advisor can put pen to paper and readily come up with something. Whether what they come up with rises to the level of a "market value" is subject to argument, of course. Further, there are some who hold that a fixed income obligation with a low risk of default and intended to be held to maturity should be valued at its amortized value.

Can something more sophisticated be developed? Sure. But I'm not sure it is required in most instances.

[Lori Foresz]

Thanks for the reply. I agree that a reasonable value can be determined for the loans, but if you read the question literally, the market value of the deeds are not readily determinable on an established market. I guess I think of an established market as the stock market but there may be another way to look at it.

It seems like we would be stuck checking yes and listing the fair value of the trust deed since it it's value was not set by an independent third party. We would then list the current outstanding principal balance as the fair value, presuming the participant could prepay in full at any time with no prepayment penalty. I hate to do it since it might risk an audit, so any other arguments would be welcomed.

Thanks in advance!

[Mike Preston]

Let's put this in the third person, shall we? (;-))

I know lots and lots of people that have filled out lots and lots of 5500's and it has never dawned on any of them that a participant loan or a trust deed is what is being targeted by the language "not having a readily determinable market value."

[WDIK]

I will chime in with Mike. It seems to me that one can readily determine the market value of a participant loan or trust deed.

[Lori Foresz]

And I will chime back that yes one can readily determine the value, but it is not readily determinable on an ESTABLISHED MARKET as the question literally asks.

I agree that alot of preparers (including me) have not reported trust deed and other non-participant loans when answering this question. But, there are probably those who think that they should. Thanks for the input.

[WDIK]

In the instructions for the Form 5500 it states:

Also you "[d]o not check "Yes"...if the plan is a a defined contribution plan and the only assets the plan holds, that do not have a readily determinable value on an established market, are: 1) participant loans not in default..."

So, at least in that case you do not check "yes." However, this statement would also seem to support the fact that the value of participant loans is not readily determinable on an established market.

The instructions further state that:

"Examples of assets that may not have a readily determinable value on an established market (e.g., NYSE, AMEX, over the counter, etc.)..."

I'm not sure what "over the counter, etc." might include. Now I'm waffling a bit.

[Guest johnmcm]

A great site with lots of info on how to Sell trust deeds is http://www.cdatm.com

They turned my trust deed into cash so I just declared it as cash income

Hope this helps.