Pub. 7 2017-2018 Issue 5

18 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S Offering Hard-to-Value Investments Requires Considerable Forethought BY TRISH REILLEY, COPYWRITER, ASCENSUS F inancial organizations often look for ways to gain a competitive edge within the IRA market, and offering alternative investment options may be one way to attract and retain clients with large balances. But financial organizations must balance their desire to remain competitive with their duty to maintain compliance. Organizations that do offer alternative investments may face challenges in accommodating their clients’ hard-to-value assets. Un- less all parties clearly understand what is involved with holding hard-to-value assets, confusion and conflict are likely to result. What Is a Hard-to-Value Asset? Determining what is considered a hard-to-value asset can be confusing. Investments in time deposits, bonds, government securities, mutual funds, and publically-traded stock (i.e., traded on the stock exchange) have readily available fair market values (FMVs). But other investments that do not have easily attainable FMVs, such as nonpublicly traded stock, limited partnerships, and real estate, find their way into self-di - rected IRAs. Nonpublicly Traded Stock For assets that are not publicly traded (e.g., stock from a privately held compa- ny not traded on a stock exchange), it can be difficult to determine the FMV. If a financial organization permits an IRA owner to select investments that are not publicly traded, it must make sure there is a way to determine a FMV each year. Limited Partnerships Many financial organizations expe - rience difficulty when determining the FMV of limited partnership interests. The Investment Partnership Association (IPA) issued a practice standard outlin- ing recommendations formembers deal- ing with valuation problems in limited partnerships. The IPA practice standard recommends that the general partners of a limited partnership value the partner- ship at a cost for the first three years of the partnership’s operations. After that, the general partners are advised to have the value appraised by an independent appraiser at least once every three to five years. In intervening years, the general partnersmust exercise a good faith effort to determine the FMV of the partner- ship. If, however, the partners are unable tomake a good faith determination, they should use an independent appraiser. Another option that some financial organizations use in valuating limited partnerships is to contact an indepen- dent broker who specializes in limited partnerships and who is able to deter- mine the probable market value. Real Estate Valuing real estate may not be as dif- ficult as some other investments. Often financial organizations will require that IRA real estate investments be valued annually by independent appraisers. If the value of the property is readily obtainable by another means, such as value used for property tax purposes, some financial organizations will not mandate an annual valuation by an independent appraiser. Because tax as- sessment values may lag behind market value, financial organizations should