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Retirement Perspectives

If you want to control payouts to your heirs and avoid the time expense of setting up a trust, consider this simpler option.

THE ROAD TO RETIREMENT with BRIAN DOBBIS 

When it comes to naming a beneficiary, IRA owners have a lot of discretion on how their nest egg is divided up when they’re gone. The beneficiary can be a person. It can be an estate, charity, or trust, or it can be a combination of those options.

Of course, the easiest and most common option is simply naming one or more loved ones on the IRA custodian’s beneficiary form. But what if you, as the IRA account owner, want to control payouts after death? Naming a trust as beneficiary or establishing a trusteed IRA will give you the desired control.

The Internal Revenue Code states an IRA can be set up as a trust or custodial account. However, trusteed IRAs as a third choice are gaining popularity, as retirement investors are looking for post-death control without the myriad of fees, hassle, and complexities of establishing a trust. Establishing a trusteed IRA is rather simple. In fact, there is no requirement to have estate planning attorneys. However, there are usually set-up and annual-maintenance fees.

What is a Trusteed IRA?
With a trusteed IRA, the financial firm holding the IRA adds trust language to its basic IRA agreement. Here the IRA itself becomes the trust with the financial organization serving as trustee. It should be noted only a corporate trustee can oversee a trusteed IRA that satisfies IRS requirements for IRAs.

The IRA, before and after the owner’s death, is administered according to the trust provisions. The trust provisions differ depending on the financial institution offering the trusteed IRA. Moreover, most trusteed IRAs contain language allowing for a successor beneficiary (different from contingent beneficiary). However, virtually all trusteed IRAs contain language that allows for beneficiaries to “stretch” payouts.

So if you’re concerned about beneficiaries like kids or grandkids squandering their inheritance, a trusteed IRA might resonate. After all, you would be assured that required minimum distributions are paid out annually to beneficiaries, as opposed to a lump sum that might be spent in short order.

Drawbacks
If you’re considering a trusteed IRA, a few caveats are in order. Only a handful of organizations offer it, and those who do generally will not allow the IRA assets to be transferred (trustee transfer) to another organization. This could become an issue if the beneficiary wants to work with another IRA provider. Be sure to check the language in the trust document to determine if this is the case.

Trusteed IRAs also provide protection from creditors; however, compared to a trust, it’s limited protection.[IRAs, unlike 401(k)s, are not automatically protected from creditors. Instead, creditor protection is based on state law.]

Because trusteed IRAs are plain vanilla standardized documents, flexibility may be limited, which is another way of saying a trusteed IRA may not give you all the control you want or need, nor achieve exactly what you want.

The bottom line: a trusteed IRA, like a trust, is not for everybody. Be diligent, and think carefully about whom you want to bequeath your retirement assets to. Also be sure to consult with a knowledgeable attorney and CPA, as this form of estate planning is complex!

 

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