Who is the Trustee of an IRA?
Many individuals choose to name a trust as the beneficiary of their retirement accounts, in order to protect their beneficiaries from creditor claims and reduce taxes; however, this strategy could restrict their access to the assets in their IRA after death.
Traditional IRAs typically involve having your financial institution act as your trustee, taking instructions from you regarding how your assets should be distributed based on what is known as custodial IRA.
The Account Owner
As a general rule, individual retirement accounts (IRAs) are not covered by wills; instead, their beneficiaries are determined by beneficiary designation forms that must be completed periodically and revised as needed. Most IRA custodians also offer trusteed IRA accounts in addition to traditional ones – whereas for the latter option assets are managed directly by financial institution rather than through trust documentation.
Trusts as beneficiaries for an IRA do offer certain additional advantages. For instance, trusted beneficiaries are permitted to withdraw more than the required minimum distribution (RMD) in certain circumstances such as medical emergencies or home purchases; they may even make discretionary withdrawals at their discretion.
An IRA that is managed via trustee can only be administered in accordance with its trust document; family members cannot serve as Trustee or Co-Trustee of such an account.
The Custodian
Custodians can be defined as banks, credit unions, savings and loan associations, brokers or trust companies who adhere to specific federal regulations when it comes to individual retirement accounts (IRAs). As the entity responsible for holding title to your investments (excluding precious metals ) in your IRA account.
A good custodian will allow you to invest in any legal asset allowed within an IRA (excluding those listed as prohibited above), subject only to whether it fits within their operating systems and procedures as well as their ability to meet government reporting requirements.
Dependent upon the type of trust you establish, some custodians may impose restrictions that prevent future beneficiaries from switching financial institutions. This may present difficulties if beneficiaries become unhappy with future administrative or investment management services provided by their trusteed IRA provider. When using a self-directed IRA account instead, a custodian who is experienced with managing transactions for investments of your choice would be an ideal partner.
The Trustee
Trusted IRAs allow the IRA owner to name a beneficiary who will oversee their account and have control of it, such as their spouse or child or even an independent trust established specifically for this purpose.
At this type of trust, the trustee provides professional investment management while also determining distributions to beneficiaries according to their individual needs. For instance, Amy can use a conduit trust as her beneficiary so payments directly from an IRA can go straight into her account so she can use it for medical emergencies or purchase real estate without incurring tax at this level.
This option may be appealing for people who do not mind entering into a permanent trustee relationship with their IRA provider, and who can find one that works well with independent financial advisors or gives beneficiaries more direct input (i.e. allowing them to fire an underperforming manager).
The Beneficiary
IRAs are among the most essential retirement vehicles available today. Additionally, they can also serve as one of the more complex estate planning and wealth transfer tools – with investors often opting to name their trust as beneficiary to protect assets against creditors, divorce, and spendthrift beneficiaries.
An IRA trustee must adhere to the distribution rules stipulated by its trust instrument when making distribution decisions for beneficiaries, taking into account factors like age and tax bracket when making these decisions.
Example: An IRA trust may specify that Amy receives distributions whenever they deem fit for Amy’s health, education and support needs. If this rule is adhered to by Amy’s trustee, her RMDs will be distributed over her lifetime rather than have to be taken within 10 years – however this flexibility can come at the cost of tax savings!
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