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Trustees of IRA Trusts Face Greater Scrutiny in 2017

Posted on: September 28th, 2016
DOL rulesA few months ago our trust attorneys provided an overview of the Department of Labor’s (DOL’s) forthcoming new standards for fiduciaries of Individual Retirement Accounts (IRAs). The changes take effect on April 10, 2017. Speculation surfaced that the standards would apply inherently to trustees of IRA trusts.

Under existing law, trustee commissions must meet rules set forth by the Internal Revenue Service (IRS). According to Section 708 of the Uniform Trust Code, a court might decide to increase or decrease compensation if the trust has explicit terms identifying a compensation value. In trusts that do not include terms addressing fees, the “trustee is entitled to compensation that is reasonable under the circumstances.” These fees encompass all costs associated with the trustees’ management services. For example, if an accountant serves as trustee of an IRA trust and decides to share administration duties with a tax attorney, their combined fees must be ‘reasonable.’

Since the new language forthcoming in 2017 requires fiduciaries to act in the client’s best interest, excessive commissions might be scrutinized by the IRS. In order to avoid this potential scrutiny, trustees might choose to reduce their requested commission or, alternately, negotiate with the party to whom the trustee delegates their duties to collect a smaller fee. 

Trustees who share or delegate duties could create a situation that poses a potential conflict of interest. In regards to this issue, the DOL provides the Best Interest Contract Exemption (BICE). The BICE allows for the payment of compensation that may be involved as part of a conflict of interest as long as certain conditions are satisfied. To qualify for the exemption, in addition to fee disclosures, best interest contracts (BICs) must include:
  • Signatures of the investor, advisor, and every financial institution discussed for the investments
  • Terms that address the advisor and financial institution’s fiduciary duty to the IRA owner
  • Provisions of the advisor/financial institution’s plan for moderating possible conflicts
  • Warranty providing no misleading statements of transaction information from the advisor/financial institution
Qualifying for the exemption requires advance planning. According to the National Association of Insurance and Financial Advisors (NAIFA), the BIC must be signed before financial product advisement occurs. Alternatively, advisors could contact the DOL directly and request their opinion. This also requires advance planning as delivery of an opinion might take more than a year.

The new DOL language occurs during the peak of tax season next year. Take time now to review trust terms and iron out issues before the shuffle of tax season.
 
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