Pension Plan Investments

[Gary]

A one participant plan wants to invest in out of country real estate. Is this ok? I don't see why not at first blush. Actually owner wants to invest in a corporation (purchase stock) that invests in th is real estate.

[SoCalActuary]

A one participant plan wants to invest in out of country real estate. Is this ok? I don't see why not at first blush. Actually owner wants to invest in a corporation (purchase stock) that invests in th is real estate.

How will the assets be subject to US Court jurisdiction?

[Gary]

It sounds like it is prudent to not invest in foreign real estate.

Is there anything explicit that disallows this?

It's a one participant/owner plan.

Thanks

[Gary]

How is foreign real estate necessarily different from foreign stocks, which most portfolios consist of?

[SoCalActuary]

A one participant plan wants to invest in out of country real estate. Is this ok? I don't see why not at first blush. Actually owner wants to invest in a corporation (purchase stock) that invests in th is real estate.

How will the assets be subject to US Court jurisdiction?

You may have missed the point here. US Tax law needs to allow the IRS a remedy if a plan violates the law.

Foreign stock that is marketable on a US exchange has a reasonable chance of the IRS claiming jurisdiction.

How does foreign land allow this? I am not saying that these are bad investments, just that they need to follow US tax law.

[Gary]

So if the IRS audits the plan and sees a foreign real estate investment they may request it be liquidated at that time? As one analysis.

It's possible that the foreign real estate is part of a US corporation (private company I presume) that invests in such real estate and the plan would purchase stock of the US corporation investing in the foreign real estate. Not sure if that helps even if it is the situation.

Bottom line is it adds risk (if potentially nothing else) to the pension plan is that what you are saying?

Thanks.

[Ron Snyder]

Foreign securities can be withheld inside the US and be subject to the jurisdiction of the courts here. Real estate is fundamentally different. Subject matter jurisdiction will always be in the foreign court where the property is located. The only hope of having non-US real estate in a US court would be personal jurisdiction. And that would be correct if we were only concerned about the trustee. However, other parties who have no ties to the US may attempt to acquire title by adverse possession, filing of liens, fraudulent conveyances, or other real-estate related actions (such as quiet title) and the plan participants, whose interest was to be protected by ERISA) may never even become aware of the situation.

I cannot think of a way to guarantee that the participants property interest would be guaranteed enforceable by a US court with an individual piece of real estate located outside the US.

[Gary]

Thank you, vebaguru for your good explanation.

All makes sense.

Of course the plan sponsor I am referring to is the only plan participant and will always be the only plan participant, so I am not sure if the participant's rights are so applicable here in this I presume non ERISA one partiicpant plan.

Though I suppose the US courts and IRS would not like plan assets that they cannot have access too in the case the plan were disqualified.

[Guest L337pwner5]

But if the plan is investing in a US corporation, and it is the US corporation owns foreign real estate, shouldn't everything be hunky dory (sp?) because the plan is investing in a US corporation subject to US laws? As support for this, I might suggest that most publicly-traded US companies own some foreign real estate. Correct me if I'm wrong, but I think the only problem would be if the plan invested directly in foreign real estate.

[SoCalActuary]

But if the plan is investing in a US corporation, and it is the US corporation owns foreign real estate, shouldn't everything be hunky dory (sp?) because the plan is investing in a US corporation subject to US laws? As support for this, I might suggest that most publicly-traded US companies own some foreign real estate. Correct me if I'm wrong, but I think the only problem would be if the plan invested directly in foreign real estate.

I disagree. You still have all the prudence issues - including risks that the corporation will fold up, that there are party-in-interest problems, capitalization ratios, diversification of corporate assets.

[Ron Snyder]

L335pwner5: What a clever name; you are not likely to be confused with anyone else.

I have to agree with SoCal. Although I consider a US corporation (or a non-US entity that qualifies to do business within the US) that owns non-US assets to be adequate for other types of investments, I'm not so sure about individual parcels of real estate.

Gary: Remember that Congress put the investment restrictions (fiduciary liability and prohibited transaction rules) both into ERISA and into the Internal Revenue Code, creating parallel enforcement and separate duties with respect to each set of requirements.

[Gary]

So in trying to come up with an explanation to a client:

While there may be associated risks with a pension plan investment in foreign real estate, such as if plan gets disqualified and is subjeect to crediters, etc., is it accurate to say that it is a "prohibited transaction"? When I have read about PTs I don't recall if it explicitly denotes foreign real estate as a PT. If you know otherwise (especially the precise code section) let me know and I will revisit those rules.

Thanks.