Who is the Trustee of an IRA?
Individual Retirement Accounts, or IRAs, can be an invaluable investment tool. Yet many opt to designate their accounts as trusts instead of assigning individual beneficiaries.
By keeping their assets under their own name, IRA owners can work around restrictions that would exist if an heir owned it directly and may also avoid incurring costly withdrawal penalties after death.
The Account Owner
Most Individual Retirement Accounts (IRAs) are administered by a custodian or financial institution that specializes in traditional investments; however, an IRA may also be structured as a self-directed IRA (SDIRA), giving account owners more freedom and control in making investments into alternative assets like real estate and private investments.
When an IRA account owner passes away, his retirement funds can be passed along to his chosen successor beneficiaries – usually spouse or children. Unfortunately, this gives immediate access to his IRA funds without providing for creditor protection.
Trusted IRAs provide an ideal solution to this dilemma by moving assets into a trust and creating specific provisions in its document governing asset distribution upon death. This can help solve various problems associated with second marriage situations or family structures where an owner wishes to take RMDs for their current spouse while leaving any remaining balance to children from previous relationships.
The Financial Institution
Trusted IRAs are controlled by a trust agreement signed and agreed upon when opening an account with a financial institution, who then act as custodian of said trust document. In contrast to this type of IRA account, where legal control over it remains with its owner even after their death.
IRAs can be invested in both traditional and non-traditional assets, including real estate, private mortgages, oil and gas limited partnerships and precious metals. Unfortunately, some IRA custodians restrict what can be held within their custody; as such some investors prefer self-directed IRA custodians which provide more flexibility and enable the use of alternative investments.
Trusted IRAs can be structured to include special provisions for inheriting their account, making this option particularly appealing if beneficiaries vary widely in age and have specific needs that must be met. For example, increased payments could be provided to beneficiaries needing extra support with medical or living expenses.
The Fiduciary
Custodial IRAs provide control of retirement assets to their designated beneficiary after death; this could include their spouse, non-spouse individual, charity or trust. A trusteed IRA differs in that post-death distributions can be restricted – perhaps only Required Minimum Distributions (RMDs) per year may be taken by beneficiaries and any further distributions beyond these may be limited based on percentage or schedules set forth.
An IRA trustee also has fiduciary responsibilities and must ensure investment decisions are made prudently and in the best interests of beneficiaries. This may require independently verifying information provided in self-directed IRA account statements, particularly regarding alternative investments that are hard to value – this may involve independent valuations, public records research and tax assessment records searches as well as performing due diligence to properly value them. Avoiding disqualified parties is key as a fiduciary must not put their personal financial interests above those of their beneficiaries.
The Beneficiary
Many individuals opt to name a trust as the beneficiary of their IRAs in order to retain some control over how their heirs use these assets after they pass. This tactic can provide flexibility and control.
By creating a trusteed IRA, its owner can ensure distributions will take place as specified in its trust document and prevent lump-sum withdrawals required due to age that can trigger tax consequences for beneficiaries.
Trusted IRAs offer flexibility for beneficiaries who wish to use the funds according to specific goals, such as funding education or starting a business. Furthermore, trusteed IRAs allow beneficiaries to increase payments if the original IRA owner becomes incapacitated; however, to be considered valid under IRS guidelines this must include very specific trust language.
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