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George F. Bearup, J.D. Senior Legal Trust Advisor

15-Jul-20

Fiduciary Resignations

Take-Away: A trustee can resign either with notice to all trust beneficiaries and others interested in the trust, or with the approval of a probate court. Less commonly encountered is when a custodian resigns from sponsoring an IRA.

Trustee Resignations: A trustee can resign at any time and for any reason, subject to a couple of notice and timing conditions imposed by the Michigan Trust Code.

  • A trustee may resign in either of the following two situations: (i) upon giving at least 28 days’ notice to qualified trust beneficiaries, the holders of powers of appointment, and all co-trustees; or (ii) with the approval of the probate court. [MCL 700.7705 (1).]
  • If the probate court is asked to approve the resignation of the trustee, it can also issue orders and impose conditions that are reasonably necessary protect for the protection of trust property. [MCL 700.7705(2).]
  • Until the resigning trustee is replaced, that trustee will continue to have the duty and the powers necessary to protect trust property. [MCL 700.7707(1).]
  • A trustee that has resigned is expected to proceed expeditiously to deliver the trust property in the trustee’s possession to the successor trustee. [MCL 700.7707(2).]

Custodian Resignations: A bit more surprising is that the custodian of an IRA can also resign.

  • That right of resignation is normally buried in the boilerplate portion of the IRA custodial agreement. Usually these provisions give to the custodian the right to resign with a 30-day notice to the IRA account owner.
  • This notice often includes the reasons for custodian’s resignation along with directions to the IRA owner on how to move their IRA funds to another custodian without any tax consequences.
  • What happens when the resigning IRA custodian does not get a response from the IRA owner to its notice of resignation? That was the subject of a recent Private Letter Ruling.

In Private Letter Ruling 20203007 the IRA custodian’s resignation, even after sending its notice to the IRA owner, caused the IRA owner considerable headaches.

  • Facts: The taxpayer (for fun, let’s name him Ira) had established an IRA with a custodian. Ira invested his IRA in shares of a real estate investment trust (REIT.) Ira’s IRA custodian sent him a notice to his last known address informing him that it was resigning has his IRA custodian. [This PLR does not provide any details as to why the IRA custodian resigned, although it may be fair to speculate that it was a self-directed IRA which can often lead to aggressive investments, and dare I say, reckless behavior by the IRA owner.] Ira had changed his address but he had not informed the IRA custodian of that change in address. As such, the IRA custodian’s notice to Ira of its resignation was never received by Ira. Consequently, the custodian’s resignation resulted in the balance of Ira’s IRA account being distributed to him after 30 days. For whatever reason, Ira’s mail was not forwarded to his new address. In addition, when the retired IRA custodian mailed a 1099-R to Ira, that too, was not forwarded to his new address. Ira did not become aware of his custodian’s resignation and the automatic IRA distribution until he was contacted by the IRS because he had not reported his 1099-R distribution as part of his taxable income for the year of distribution. Once Ira learned of the problem he promptly rolled over the shares in the REIT to a new IRA custodian.
  • Relief Requested: Ira requested that the IRS waive the 60-day deadline for rollovers of distributions from IRAs, which would result in his rollover (albeit late) being valid and thus not part of Ira’s taxable income. Motivating Ira were the following aspects of an unexpected distribution from his IRA: (i) the distribution would be taxed to him as ordinary income; (ii) if Ira was under age 59 ½, the  distribution would be subject to the 10% excise tax for an early distribution; and (iii) if the IRS did not approve of the request for a waiver from the 60-day rollover rule, then Ira would have made an excess contribution to the ‘new’ IRA which would be subject to a 6% excise tax that would apply each year until the excess amount was removed from Ira’s ‘new’ IRA.
  • Law: The 60-day rollover deadline can be waived by the IRS under limited circumstances, such as under its Private Letter Ruling Program. Under the Program, the IRS may waive the 60-day rollover deadline “where the failure to waive such a requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.” [IRC 402 (c)(3.)]
  • IRS’ Determination: The IRS issued a favorable ruling to Ira in response to Ira’s request, contingent on the facts that all other conditions to the IRA rollover rules, e.g. one-rollover-per-year, were complied with by Ira. In the end, Ira won, in that he was permitted to roll his shares in the REIT to his ‘new’ IRA account and avoid income taxation and a couple of penalties. But did Ira really win, when you consider the flat $10,000 fee he paid to the IRS for the requested private letter ruling, not to mention the legal and accounting fees he incurred in making the request?

Conclusion: The moral of the PLR is to keep your IRA custodian informed if you change your address. The same could be said with regard to a trustee. Michigan’s statute provides the trustee an avenue to resign by simply giving 28 notice to trust beneficiaries of the trustee’s intent to resign.