Collectibles as investments

[jkharvey]

Have a client with oriental rugs and classic automobiles as plan assets. These assets have not, in my opinion, been properly appraised. The employer wants to move to segregated accounts for each participant. The HCE wants to take all of the rugs and cars into his account instead of liquidating them. I say he should liquidate these assets then create the segregated accounts. Any thoughts, comments or DOL/IRS cites would be appreciated.

What about real estate in a segregated account? Any problems? This ER has actually purchased property at tax auctions with the intent that the property owners will repay the real estate taxes and the Plan Sponsor will never actually take posession of the property. One piece of property is subject to $2M in liens. I'm really concerned here.

[Kirk Maldonado]

I think that you need to read IRC Section 408(m).

http://www4.law.cornell.edu/uscode/26/408.html

[Edited by Dave Baker on 07-12-2000 at 12:05 AM]

[Lynn Campbell]

Collectibles are not permitted in individually directed account Plans, so the client does not have the option of moving these into his own segregated account. Any collectible in an "earmarked" account would be treated as a taxable distribution.

[actuarysmith]

I am not sure that I agree with the last comment - I am not aware of an explicit prohibition against collectibles in individually directed plans.

However, it seems as though you clearly get into a discrimination problem under 1.401(a)4)-4.

Assigning all of the collectibles as an asset of one participant (presumably an HCE) would violate the effective availability of benefits, rights, and features. In other words, only one participant would have the effective availability of a certain investment option that no other participant would have.

The only way to structure this plan, would be to assign a proportionate share of the collectible asset to whichever participants wanted a share of it as part of the account.

The collectibles would be held as part of the trust, but outside of the other assets. The collectibles would have be appraised at least annually.

The fun will really begin when a participant terminates and wants to take a distribution - "let's see, I'll take the top portion off of the ming vase, the frame off of the picture, and the band off of the vintage antique wristwatch. Hmmmm, I still have $1,765.25 coming. What else should I take?". (HA HA)

We have only had a couple of plans with collectibles in them and they were both MAJOR headaches! I would suggest you get the plan sponsor to sell them to anyone willing to buy and be done with it.

P.S. one of the plans that had collectibles was audited. Once it was discovered that the collectibles were decorating an HCE's summer home, things got ugly real fast....... Need I say more?

[Earl]

Lynn and I must be having the same dreams if that is not true. I will see if i can find it, but i remeber it from somewhere.

[Lynn Campbell]

IRC 408(m)(1): "The acquisition by an individual retirement account or by an individually-directed account under a plan described in section 401(a) of any collectible shall be treated (for purposes of this section and section 402) as a distribution from such account in an amount equal to the cost to such account of such collectible."

[Kirk Maldonado]

That does not say that you can't do it; it just says that you get taxed if you do it. This is very different than, for example, lthe prohibited transaction rules.

[Bill Berke]

So, one can invest in collectibles in an individual account if one is willing to pay income tax currently and then do (pay for)the bookkeeping regarding tracking the basis for a future distribution. And the division can be a horror as described above. I have worked around this by (in summary) giving everyone a choice of collectible or cash (or some mix) coupled with a detailed explanation of the ramifications and results of electing to have the collectible in their account instead of 100% cash. Usually only the one(s) who want the collectible so elect but everyone has had the equal opportunity to select whatever so I have satisfied 401(a)(4)in operation.

Assuming your client is willing to pay the tax, the real issue is - in EVERY case I have seen - PTs and fiduciary breeches. PTs because, inevitably, one or another of the parties-in-interest gets personal use of the collectible and the fiduciary breech is allowing the PT to take place.