Plan assets invested in partnership

[eml691]

Long time lurker, first time poster  ?  

I work for a TPA.  We took over a profit sharing plan, where one of the former owners has assets invested in a partnership.  He has passed away.  How would the plan distribute his balance to his beneficiary?

Appreciate your insight.  I have very limited experience with plans with assets invested in partnership.  (Luckily he was the only one.  The other owners and participants investments are all in brokerage accounts.)

[Peter Gulia]

Do the documents governing the plan and its trust provide for, or at least not preclude, a delivery of property (rather than a payment of money)?

 

[Bird]

It's not easy.  One of the many reasons it is not recommended to hold illiquid assets in a plan.  I'm assuming these are self-directed accounts.

Best scenario is the trustee sells it, somehow, someway.  Or wait for it to liquidate (may take a while and there is a 10 year window for bene payouts).  Or find an IRA custodian that is willing to hold it (but assuming death was after 12/31/2019, you still have the 10 year payout requirement).  Or distribute the partnership interest.

And THAT's why...

[Luke Bailey]

em1691, you can roll to an IRA. You just need to find a custodian that does "self-directed IRAs," which is sort of a misnomer, but typically the way custodians that handle nontraded assets call themselves. There are plenty of them, and if you need to you can contact me and I can point you to a few.

Valuation and UBTI are typically issues, as are sometimes prohibited transactions, if this is not a third-party asset, e.g. relatives or controlled entities are involved.  PT issues  (which may have been ignored by plan if the trustee was not a financial institution) are often not amenable to solution.

Valuation is actually usually not a practical problem, although folks will complain about it.

UBTI is a potential cost and headache, if the partnership has UBTI and there is enough to exceed the $1,000 threshold. Note that if there is UBTI only because of leveraged real estate, the qualified plan will have potentially had an exemption under Section 514(c)(9) of the Code that will not be available to an IRA.

If the amount is small and potentially  has upside, consider not rolling over and getting capital gain down the line rather than turning the return into ordinary income through IRA. If it has incredible upside relative to current value, consider converting to Roth.

[JOH]

There's couple of ways to handle this:

Luke is correct that they can do a rollover into a self directed inherited IRA.  The beneficiaries would established the inherited IRA and then the custodian would make the efforts to retitle the ownership of the deceased to the Custodian FBO beneficiary's IRA.  Depending what the Partnership Agreement says, the change of ownership could be as easy as sending a notice and updating the books to reflect the updated ownership of the Partnership.

Or the PS Plan allows the beneficiaries to keep the partnership in the plan FBO the beneficiary, the plan can continue to own the partnership and recordkeep the asset.

Or if the partnership cannot be assigned to the beneficiaries, then the PS plan will continue to be the owner and will have to wait until the Partnership pays out and is terminated.  Which can take years (I've seen Partnership Agreements for 15 years).  The one problem I have always run into in this scenario is the required distributions for the beneficiaries.  I have argued to various Partnership and LLCs that they have to allow the assignment to beneficiaries b/c of the required distributions.  Good luck.