Attorney-at-Law

THE CASE OF THE RELUCTANT TRUSTEE

In Uncategorized on 06/06/2014 at 00:30

If the trustee of your IRA account doesn’t want to do a deal, don’t get creative: just find another trustee. That’s the moral Judge Vasquez has for Guy M. Dabney and Ann V. Dabney in 2014 T. C. Memo. 108, filed 6/5/14.

Guy had an IRA, and he moved it to Charles Schwab, who advises its clients to “Talk to us anytime”. Guy did just that, when he spotted a land deal with a good chance for a big scoop.

At first Guy’s accountant thought that IRAs couldn’t invest in land, but Guy did the research (with which Judge Vasquez agrees), convinces his accountant, and tells Schwab to buy the land.

Schwab says no, Schwab doesn’t do investments in land, its trustee agreements say it does financial instruments only, and thereby hangs the tale.

Guy gets creative, orders a cash withdrawal from his IRA, and checks the Code 1 box on the withdrawal slip (“early withdrawal, no known exception”). This, of course, gets sent to the IRS’ fish-flopping-in-the-water department.

In the meantime, Guy has the cash wired to buy the land, and wants title in himself and Schwab as trustees, but of course the escrow company puts title in Guy himself.

Guy ultimately unloads the land at a 25% profit, but IRS unloads on Guy for substantial understatement and mucho tax plus the 10% early withdrawal chop.

Judge Vasquez goes off on the powers of a trustee, and ultimately the trust instrument itself governs. If the trustee won’t do something, and says so in writing, then game over. The trustee isn’t the trustee for that purpose, and even if title had been placed as Guy directed (or if the escrow company’s scrivener’s error affidavit was acceptable), it wouldn’t help.

As far as the law is concerned, Guy bought the land himself with the cash he took from his IRA. The IRA trustee had nothing to do with it.

Judge Vasquez himself says that if Guy had done a trustee-to-trustee out of Schwab and into a trustee that did agree to hold land, and that trustee bought the land (and, I suppose, even if the escrow company made a mistake but later corrected it), the deal would have been good.

Takeaway: read the trustee agreement; and don’t get creative.

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