I’m of the opinion that there is going to be a lot of litigation in the coming years with self directed IRAs. Investors jumped onto the self directed band wagon and made all sorts of flakey investments, but my guess is few of them had a clue about what they were doing. A recent court case, In re: ENDEAVOUR HIGHRISE, L.P pretty much confirms the fact.
Since I’m not sured you readers will be as excited about the 65 pages of 10 point courier font as I was, I am going to spare you most of the gory details and get to the heart of the matter.
A number of self directed IRAs “invested” in a condo project that went bankrupt. Now the bankruptcy trustee was suing the IRAs/IRA owners, trying to get some money, with a central question of the lawsuit being, “What is an IRA?”.
The judge pretty much decided that even though IRAs are not trusts, they should probably be treated as trusts in the case of lawsuits. A fascinating result of this conclusion that will have all sorts of ramifications down the road was the judge constantly making reference to the custodial agent (Entrust Retirement Services, Inc.) as being a fiduciary.
This is fascinating because the Entrust affiliates, like most self directed custodians, take great pains to disclaim they are fiduciaries. If a court makes a legal determination that the various custodians out there are in fact fiduciaries I think those “fiduciaries” are going to be in some deep doo doo.
Another interesting result was the judge’s determination that the IRA beneficiaries were proper parties to the lawsuit. Even though he recited the familiar line that “a trust itself may not sue or be sued directly.”, with the norm being the trustee of the trust being sued, he also said the beneficiaries could be named in the suit as well. I’m not sure the law is on the judge’s side on this one, rather I think the IRA owners really pissed the judge off and he twisted and turned the law to find a way to punish the IRA owners. The judge did make a good point in that if he followed the wishes of the IRA owners who stated IRAs are merely personal property and can’t be sued, then an IRA and or its owners would never have to answer for any damages it caused.
The end result is there is now case law saying self directed custodians are fiduciaries, and IRA owners can be named in litigation involving their IRAs.