Who Is the Trustee of an IRA?
Many IRA owners elect to name a Trust as beneficiary for their IRAs, which can bring several advantages (such as restricting future beneficiaries from accessing it or shielding it from creditors), yet also presents certain drawbacks.
Trusted IRAs may only be transferred between financial institutions if their new provider fulfills all the provisions set up initially in their trust agreement.
Fiduciary Responsibility
Fiduciary responsibility is an obligation that one party owes another when acting on their behalf and in their best interest, including when managing assets such as IRA accounts. This involves not charging excessive fees and keeping separate time records of trustee commissions and accounting services that are charged against an IRA trust account in order to ensure reasonable charges.
Custodial accounts limit the trustee role to holding and having custody of IRA assets, with legal control remaining fully with the owner of the account and their instructions being followed through (in case they become incapacitated, someone with Power of Attorney would need to provide instructions instead).
Trusted IRAs allow for greater independence from investment managers by having third-party custodian services as trustee. This provides better checks-and-balances mechanisms in case an investment manager doesn’t perform as promised.
Investment Management
While trustees of an IRA do not make investment decisions themselves, they do provide some investment management services ranging from managing diversified portfolios of investments to wealth transfer and legacy planning for larger individuals or institutions.
Trusted IRA providers have long touted trusteed IRAs as an effective way of guaranteeing that their IRA provider will retain control of an individual retirement account after its owner passes. This may especially hold true with trusts set up through independent financial advisors where beneficiaries have limited ability to switch providers later on.
CPAs acting as trustees of an IRA trust can present unique difficulties when complying with Department of Labor (DOL) fiduciary rules on advisory fees paid to account holders of an individual retirement account (IRA). This is particularly the case if their CPA firm offers wealth advisory services as part of its service offering.
Distributions to Beneficiaries
Once an account owner dies, their beneficiaries named in their IRA or other tax-deferred retirement account must receive assets. A see-through trust arrangement may help reduce tax before the assets are distributed.
This strategy can be particularly effective for heirs who do not yet qualify for minimum required distributions (RMDs). If an account owner names his children as beneficiaries, they must receive all of their balance within 10 years or face incurring an enormous income tax bill with high marginal rates.
Conversely, a properly structured trust can take advantage of the stretch option, providing payments over the life expectancy of its oldest beneficiary. This can help reduce income tax payments and maximize investments within an IRA; furthermore, trusteed IRAs protect inheritance assets from creditors.
Taxes
Assuming control of an IRA from someone else requires a trustee who must act as fiduciary and manage its assets according to Internal Revenue Code requirements. A trust may provide additional protection by isolating both trustee and custodian IRA provider (Financial Institution) from each other – for instance if your intended beneficiary might lose government benefits by owning outright, or the owner wants to limit future access by special-needs children or others who could cause creditor problems.
A trustee is in control of choosing which financial advisors and investment managers to entrust with managing assets in their account, creating a safeguard of sorts to safeguard those assets. Furthermore, they have the power to fire any manager who fails to perform.
Alternatively, the trustee may also utilize the IRA as an accumulation trust by permitting distributions to remain invested and accumulate until exercising their discretion to distribute to one or more beneficiaries at any point after 10 years of its original owner’s death. This way, any future estate-tax-related obligations can be avoided without incurring penalties for exceeding that period.
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