Real Estate in a Profit Sharing Plan

[Guest ellah]

We are speaking with a prospective client about an issue that has come up regarding real estate in profit sharing plan. The plan had invested some money in a real estate venture through a default the property has reverted to our prospective clients plan. This property has the possibility to greatly increase in value do to the mineral rights. These issues lead us to a few questions that we thought we would run by the board to see if anyone has gone through this before. Our questions are:

1. How do you establish a value on this property with these speculative mineral rights. Our feeling would be for the company to hire a real estate appraiser with knowledge of mineral right valuation. Is this correct?

2. The owner is 68 so RMD isn't required yet but we know this is going to be an issue very soon. We are assuming we would use the appraised value of the real estate to calculate the RMD. Is this correct?

3. RMD leads to the question of liquidity...if there is not enough money in the plan how do we handle the RMD with the real estate.

4. Finally...is there a way to move the real estate out of the plan? Any ideas on how this could be replaced. Again it would appear to us that the real estate would have to be bought out of the plan to provide the cash asset. Any alternative ideas. ESOP/KSOP?

Any ideas would be great.

thanks

[WDIK]

1. Agree

2. Agree

3. Therein lies one of the inherent problems of having a large portion of the plan invested in illiquid assets. Please provide a little more information, perhaps estimating total asset value, real estate value, and percentage of assets attributable to the owner.

4. Other than selling the property to an unrelated third-party, ideas would also depend on the specific information noted in 3.

[J Simmons]

ERISA 103(b)(3)(A) requires the annual report to include "a statement of assets and liabilities of the plan aggregated by categories and valued at their current value ... ."

ERISA 3(26) defines current value as "fair market value where available and otherwise the fair value as determined in good faith by a trustee or a named fiduciary ... pursuant to the terms of the plan and in accordance with regulations of the Secretary, ... ." Don't know of any final reg that requires use of an appraiser.

Appraiser may be required for such a valuation, maybe not. Depends on your plan document.

In a recent letter from a DoL auditor on this point, it was stated: "In our opinion, a prudent fiduciary, acting in good faith, would apply sound business principles of evaluation, conduct an investigation of the circumstances prevailing at the time of the valuation, and document the process and results." Estimates of the value based on initial cost, and from that someone's 'best guess' of the potential selling price will be challenged by DoL.

[Peter Gulia]

For query 3, could some (after a portion that's at least enough to meet all tax withholding) of each minimum distribution be met not by paying money but instead by delivering property? Each year, the plan's trustee would deliver to the participant a deed for a fractional ownership of the property.

This assumes prudent-expert valuations that would satisfy ERISA, the Internal Revenue Code, and other tax-planning purposes. Also, the plan should use a special-purpose trustee who's independent of the distributee.

[Guest mjb]

While it is possible the participant would have to pay income taxes on the phantom distributions from other assets.