What is an IRA Trust?
An IRA Trust can be an excellent estate planning tool in many situations. For instance, it can serve to protect minor beneficiaries against spendthrift tendencies, or offer more robust asset and creditor protection for beneficiaries who may have marital or financial challenges.
Assuming Amy were the sole beneficiary of your custodial IRA, she would need to withdraw all the funds within 10 years after your death; with a trust approach she could distribute them more equitably over her lifetime.
IRA Custodians
Custodians for Individual Retirement Accounts are financial institutions that manage and safeguard the assets held in your account for safekeeping. Furthermore, these custodians must adhere to all IRS and government regulations at all times.
Banks often serve as custodians of traditional investments like stocks, bonds and mutual funds for Individual Retirement Accounts (IRAs), while there are various companies specializing in self-directed IRAs which allow investors to invest in alternative assets like real estate, private placements and physical precious metals.
No matter the option you select, it’s crucial that you research thoroughly when selecting an IRA custodian. Finding the appropriate custodian could make all the difference when it comes to reaching your investment goals and meeting future management of retirement accounts. Some IRA custodians charge transaction fees while others operate under an asset-based fee model.
IRA Trustee
As its name implies, a trusteed IRA is controlled by an IRA owner’s signature on a trust document that directs how their account should be managed at opening time and held by a Financial Institution as its custodian – this may involve them helping design it at that time too!
Trust-style IRAs allow the account owner to designate a trust as beneficiary, and then have its trustee manage and distribute according to its terms. This may be particularly attractive to some heirs looking to limit how much goes into their spouse’s estate (by structuring it as a Bypass Trust) while also stretching required minimum distributions over their single life expectancy.
However, trusteed IRAs impose additional restrictions that may make an inherited IRA less appealing for some beneficiaries, including those who wish to retain its tax-deferred status, delegate investment management to third-party firms without issue and have access to a robust check-and-balance system (where they can independently remove managers who underperform). Furthermore, trusteed IRAs usually prevent beneficiaries from switching financial institutions.
IRA Beneficiary
Once an account owner passes away, their assets in their IRA pass to designated beneficiaries – usually family members such as children or grandchildren of the deceased account owner. According to family structure chosen by account owners when setting up their IRAs, assets can either be divided amongst beneficiaries (known as per stirpes distribution) or equally among beneficiaries ( known as equal shares distribution).
Trusts provide professional investment management while delaying beneficiary access to their inherited funds, helping mitigate concerns that they will misuse them; additionally, this approach addresses concerns surrounding divorce, remarriage and incapacity issues.
Inheritance rules dictate that beneficiaries take distributions over either their life expectancy or every 10 years – whichever comes first – in order to preserve tax-deferred growth of an IRA and prevent irrevocable decisions being made in cases of incapacity or divorce. This approach also helps preserve tax deferral.
IRA Rollover
If you wish to transfer a distribution from a tax-qualified account (such as a retirement plan or employer-sponsored pension ) into your IRA within 60 days, otherwise it will be viewed by the IRS as early withdrawal and taxes and penalties may apply.
Direct rollover is another option available to you that allows you to bypass the 60-day rule and may reduce or even eliminate custodial fees.
An IRA beneficiary trust offers more flexibility, allowing Amy’s trustee to use outside financial advisors and investments, while providing a better checks-and-balances system to make sure her IRA is managed appropriately. However, creating and maintaining this type of stand-in trust can be expensive; furthermore it might have certain restrictions regarding timing distributions to Amy under the 10-year stretch rule.
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