Profit Sharing Plan Real Estate Distribution Option

Profit Sharing Plan has pooled investments.  There are 2 real estate parcels - one valued at $1.4M and another at $750K.  The parcels are valued each year by an appraiser.  The remaining plan assets, $4.2M, are in a brokerage account.  The owner died - his balance is $1.5M.  There are 58 participants in this plan.  I've advised the client for years that having 1/3 of total plan assets in real estate is an issue and they should consult an ERISA attorney.  They haven't, and now here we are.  The beneficiary is his wife.  The 2 kids of the deceased owner now own the company.  Their first request was to allow the beneficiary to roll the real estate to an IRA and roll the remaining balance in cash.  Because this is a pooled account, each participant owns 1/58 of the real estate.  Allowing the beneficiary to roll the real estate to an IRA seems out of the question.  The new owners were talking to an investment banker friend who said he had a client with a similar situation.  The employer sent a form to each participant asking for their permission to forgo their ownership in the asset and allow the beneficiary to take the real estate.  This doesn't seem right.  Does anyone have any experience with this?    (The client contacted the ERISA attorney I referred them to.  It might take awhile for the attorney to weigh in on this so I thought I'd put this out there to the TPAs in the trenches.)

Thanks!

This is wallowing in prohibited transaction issues and I strongly advise you to wait on the ERISA attorney. 

5 minutes ago, Bill Presson said:

This is wallowing in prohibited transaction issues and I strongly advise you to wait on the ERISA attorney. 

I felt dirty just submitting the question. 😜

We worked with a client in a very similar situation and their ERISA legal counsel.  The assets of the plan were not participant-directed and there were no ties between the real estate and any of the plan fiduciaries.  The appreciation on the property was included each year in the allocation of trust income to all participants.  The facts including a current appraisal of the property were communicated to each participant to get their concurrence with allowing an in-kind distribution of the real estate.  We understood the participants essentially did not want their retirement accounts tied up with an illiquid investment and they signed off on the transaction.  This was all worked out with legal counsel guiding the process and drafting the related communications and agreements.  Definitely, do not try this without active involvement of legal counsel at every step.

Hold on here.  The real estate total about $2.1 million, but the (now deceased) participant has an account balance of $1.5 million.  The kids are trying to take all of the real estate.  Sounds like some version of theft.

Also, the retirement plan needs a fiduciary who is independent of the decedent, the decedent’s surviving spouse, the decedent’s children, and any anyone else who might be an heir, legatee, or beneficiary who might take from the decedent’s estate or trust.

My eyes were drawn to the idea that all 58 participants have an earmarked percentage of any specific investment in the pool.

12 hours ago, david rigby said:

Hold on here.  The real estate total about $2.1 million, but the (now deceased) participant has an account balance of $1.5 million.  The kids are trying to take all of the real estate.  Sounds like some version of theft.

I agree as presented the math doesn't seem to work. 

Another voice questioning how all participant's have an interest in the real estate if this is really a pooled plan.  If it is a pooled plan the participants  are beneficiaries in the trust and they have an interest in that on each asset.  

I have seen this kind of transaction done before also, but a good lawyer is simply a must.  

For this particular case, @david rigby is correct to point out that the total value of all of the real estate exceeds the total value of the deceased owner's account and we all agree that transferring all of the real estate as part of the distribution to the deceased owner is not appropriate.  It would be a step forward if the plan's participants, working with independent fiduciaries, could at least transfer one of the properties as part of the distribution.  This would require having an independent appraisal of the fair market value of the property.

The remaining property would remain in the trust until such time as the trustees and independent fiduciaries can arrange for the sale of the property to put the plan in the position of being fully liquid.  This likely should be done sooner than later in the event the death of the owner puts the company on a path that leads to the termination of the plan.  The key element for this piece to work is also to document that the sale of the real estate is an arms-length transaction price fair market value.  This can be a challenge when dealing with real estate, and is yet another reason to engage legal counsel.

It is worth noting that this scenario comes up with other non-traditional assets such as gold bullion, art work, certain private placements and limited partnerships, and other similar investments that can only be liquidated in a single transaction.

The last time I dealt with something like this the illiquid investment property in the profit sharing plan was the decedent's (the 100% owner of the plan sponsor's) beachfront weekend home ....    

Seems to me the cleanest solution is to sell real estate prior to making the distribution and adjust distribution accordingly, unless plan valuation procedures would have any loss relative to appraisal value inure to the detriment of remaining participants. Other than that not sure why this isn't being considered. If there's no or depressed market for the real estate then appraisal is bunk (although that becomes problem for decedent's wife, who may or may not welcome it, if either of the two properties can be successfully distributed in-kind).

On 2/24/2025 at 5:30 PM, david rigby said:

Hold on here.  The real estate total about $2.1 million, but the (now deceased) participant has an account balance of $1.5 million.  The kids are trying to take all of the real estate.  Sounds like some version of theft.

Nope, not all. I said there are 2 real estate parcels - one valued at $1.4M and another at $750K.  The decedent's balance is $1.5M.  The proposal was to roll one of the parcels to an IRA and the difference between the value of the real estate and the decedent's balance would be paid in cash. 

On 2/25/2025 at 6:08 AM, Bri said:

My eyes were drawn to the idea that all 58 participants have an earmarked percentage of any specific investment in the pool.

They don't in the literal sense but as ESOP Guy said, they have an interest in each asset.