IRA Prototype Language

[Guest StanJacobson]

On termination or resignation of the IRA Custodian, "Article VIII" of an IRA Prototype document provides, "...(if) Depositor or Sponsor, as the case may be, has not appointed a successor which has accepted such appointment, Termination of the Custodial Account shall be effected by distributing all assets thereof in a single sum in cash or kind to Depositor, ...."

QUESTION: Is this legal? It appears to be a very harsh provision and perhaps a breach of fiduciary duties. Does anyone have documentation defending or challenging the document language?

Thanks,

Stan Jacobson

[BPickerCPA]

Stan,

I am not a lawyer, but the way I read the provision is that if you terminate the custodian, i.e. close the IRA account, they will give you all the money, unless you've designated a successor to take the account (effected a trustee to trustee transfer).

Either you're reading too much into it, or I'm not reading enough into it.

[Guest StanJacobson]

Let me clarify. This is the Prototype IRA of a major Transfer Agency ("TA"). A particular mutual fund intends to use the prototype of this TA. Should the TA decide to stop acting as a custodian of IRAs and the mutual fund ("Plan Sponsor") not find timely a successor Custodian, the TA can distribute a single payment to the depositor. This is also the case if the TA is removed and a successor Custodian not found timely.

[John G]

Think of the general economic and market forces at work here. Lets assume you are talking about a significant player such as the Big V, F, S, TR, etc.

What would happen if they were to act unilaterally to terminate a large number of customer relationships and send out checks. The screaming would be worse then when Coke changed the soft drink formulae. I for one would terminate all relationships with an organization that acted like that. Wouldn't you? They would get trashed on every financial show, radio, TV, and internet. The goodwill lost would be crushing.

Rules may get changed. Fees may be imposed. But no major financial institution would cut their own throat my aggitating their customer. The IRA business is huge and constitutes very stable assets that are highly prized. Look at what has happended to annual fees. They have been slashed over the past decade, especially for large asset accounts. And, they are often waived in the interest of keeping a customer happy.

I think you are reading too much into the language. Transfers to another custodian will always be allowed. Consumer demand is more likely to be the controlling factor then the legal protections built into the custodial agreement.

[This message has been edited by John G (edited 06-29-99).]

[John Olsen]

As I read it, the language simply says that, if the existing Custodian is removed and no sucessor is appointed, the account value will be distributed. As IRA Custodial accounts MUST, by LAW, have a valid Custodian, why is this surprising? Would the law permit a Custodial account to "hang in there", absent a valid Custodian, while a Successor is being sought?

I doubt that.

I believe, with John G., that Market Forces will cause the Plan Sponsor, upon notice of resignation by the Custodian, to arrange for a Successor - or, better yet, have arranged for same in advance.

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

[Guest P A Weick]

I may be the only one with this experience, but we have had accounts where we were removed or resigned and no one was within a reasonable time appointed to take over the account. At some point we have to be able to end our liability for continuing to oversee the account from which we have been fired. The form provision you cite allows us to do so.

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[John G]

P A Weick, I am assuming that you are not refering to a major mutual fund or brokerage house?

[Guest J Singletary]

Like P A Weick, we have had some occasions where we want to resign and the IRA Grantor will not cooperate by naming a successor IRA Trustee/Custodian. In that case, we definitely want our document to allow us to resign and distribute the assets. As John Olsen points out, the only way we are going to be able to do that is to make an outright distribution to the IRA Grantor. Keep in mind that the IRA Grantor would have 60 days to find a successor and roll that assets into another IRA (assuming there had been no other rollovers in the last 12 months). So, this clause is not quite as harsh as it initially seems.

However, I must say that it seems inappropriate for the IRA Trustee/Custodian to have the ability to make an outright distribution to the IRA Grantor just because the Custodian has a falling out with the mutual fund company. It seems those issues should be addressed in the service contract between the Custodian and the mutual fund company.