Individual Retirement Accounts (IRAs) are administered by trustees (or custodians), such as banks, credit unions, savings & loan associations or other financial institutions. These IRA trustees must abide by state trust laws and regulations when administering your IRA.
Some IRA owners opt to name a trust as beneficiary for their IRAs, although there are several issues to be aware of before doing so.
An Individual Retirement Account, or IRA, trustee oversees its administration according to regulations set by the Internal Revenue Service. Many types of business entities, including banks, credit unions, savings and loan associations and brokerage firms can serve as trustees.
An increasing number of IRA owners are opting to name trusts as beneficiaries instead of custodial IRA providers, because a trust can offer advantages that might otherwise not be available.
An example of such is when a trusteed IRA provides greater flexibility and spendthrift protection for future beneficiaries, which can be invaluable when the IRA owner has multiple children or beneficiaries with diverse needs.
Trusts may also help overcome restrictions on beneficiary ownership by dispersing post-death Required Minimum Distributions over their 5-year ghost life expectancy instead of to one individual beneficiary who may live for less than this amount of time.
Administration of an Individual Retirement Account (IRA) involves maintaining its assets and records. This may involve storing investment assets (like precious metals) and keeping track of transactions, producing statements, and filing tax returns – in addition to meeting any additional IRS requirements that might exist for custodianship of an IRA account.
Trusts as beneficiaries can help beneficiaries with limited ownership access access the account more freely, such as minor children or those with special needs who cannot own it directly. In addition, using one can give beneficiaries more flexibility by allowing them to withdraw funds when necessary for medical emergencies or home purchases.
An additional advantage of including a trust as the beneficiary for an IRA is allowing its trustee to select which financial advisors or investment managers are affiliated with the account (i.e. hire/fire). This provides more of a checks-and-balances system – especially useful if your heirs wish to switch providers after your death.
Trustee’s of an Individual Retirement Account must also report tax-related information to the Internal Revenue Service. This includes annual distributions to beneficiaries as well as making sure the IRA is structured correctly at death.
If an IRA owner wants to ensure a specific beneficiary takes control of their account after death, they can create a trust and name them as the beneficiary of their IRA account. This could help avoid costly errors down the line.
An IRA trust may also provide some level of protection from creditors, since beneficiaries can only access RMDs that are mandated post-death (as they would if the assets had been left directly). However, this type of protection can often be less robust than that provided by using a standalone trust that specifically defines itself as an IRA beneficiary.
An inheritance from an IRA should generally be tax-free (provided the IRA rules are followed). A trustee is also expected to comply with state trust law and file annual taxes and reports to report income directly to beneficiaries. Furthermore, they should understand how investments in real estate or closely held companies work as well as those related to investing in gold bullion as this type of investing is discouraged by the IRS.
Utilizing a trust as an IRA beneficiary can reduce the risk of beneficiaries spending down their accounts too quickly or leaving it open to creditors and ex-spouses. Furthermore, trusts provide more flexibility for dispersal (for instance by permitting distributions beyond RMD amounts) as well as being especially useful when there is an age gap among beneficiaries.
But choosing to use a trust as your IRA beneficiary can also incur expenses. For instance, it requires hiring an attorney with experience drafting such trusts who understands all relevant regulations surrounding IRAs.
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