Offloading Worthless RELP?

[Christine Roberts]

A 401(k) plan with self-directed accounts is switching from a corporate bank trustee to self-trusteeship, with a corporate custodian of assets. The custodian refuses to take on one of the participant's investment interest in a real estate limited partnership (RELP), due to the fact that the liability of the limited partners can exceed their contributions to the partnership.

The RELP is essentially defunct and the participant's interest has no value.

Can he roll the investment out of the plan to an IRA? He is not yet 59 1/2 but wouldn't the "tax" on the transfer be equal to 20% + 10% x zero?

Any comments welcome.

[TBob]

My humble opinion is if the investment is worthless, you should get the appropriate documentation that it is worthless, write the value down to zero and remove the asset from the account before attempting to transfer to custodian.

We did go down this road once before where the value of an asset was not technically worthless. It was a limited partnership and the partner had the potential to receive a small benefit from some pending litigation or sale or something or other (I can't remember exactly).

We went through the motions of having an independant company do a formal valuation of the LP and with their recommendation, wrote the value of the LP down to 1.00. Then, as I recall, we did an In-kind distribution of the asset. The withholding was moot.

You have to make sure that the participant is eligible to take a distribution under the provisions of the plan. Also check to make sure that there is no provision in the plan that prohibits in-kind distributions. My only other suggestion is to CYA! Document everything you do in triplicate!

[mbozek]

How can a LP have any liability in excess of the LPs contribution? Also who is the liable party? Isnt the Plan trustee the owner of the LP, the same as if the trustee owned RE which was found to violate environmental laws or for which a judgement was obtained for negligence?

[Christine Roberts]

Technically, the partnership agreement says that all costs, expenses, etc. of the partnership shall be paid from partnership income, then capital, then by individual limited partners.

[mbozek]

But in an LP the maximum amount of an LPs liability is the LP's contribution. If the LP can be required to pay for amts in excess of the LPs contribution then the LP is a general partner.

[Christine Roberts]

So we are dealing with a faultily - drafted limited partnership agreement?