Who Can Be the Trustee of an IRA?
An asset trusteed IRA differs from a custodial IRA in that its legal ownership remains with the IRA owner; financial Institutions simply follow instructions given by their IRA holders.
This can reduce the risk that beneficiaries will recklessly spend the funds too soon and protects heirs from having to pay taxes sooner than necessary.
What is an IRA?
An Individual Retirement Account, or IRA, can be set up as either a custodial or trusteed account. By law, all qualified retirement accounts must have either one – usually banks, credit unions, financial institutions, or authorized trust companies such as IRA Financial Trust act as custodians/trustees for these types of accounts.
Trusted IRAs allow for more control in meeting wealth transfer goals. You can tailor this type of account to address specific family circumstances (e.g., supporting children from an earlier relationship).
Trusteeship provides additional protection from creditors by keeping an IRA private and out of public record. Furthermore, trusteed IRAs typically include provisions that allow an approved Financial Institution to continue managing it should an owner become incapacitated – this enables ongoing tasks like prudent investment decisions and required minimum distributions to continue uninterrupted.
IRA Custodians
An IRA custodian is a financial institution that holds alternative assets safely and in compliance with IRS reporting. They typically do not offer investment management expertise and charge one annual fee. When choosing an IRA custodian, pay attention to customer service levels and servicing times; look for one familiar with your asset of choice and that offers tailored guidance and servicing plans.
After someone passes, their heirs can access the funds held within a trusteed IRA. The owner can set rules limiting post-death distributions to only the minimum required withdrawal amounts (RMD).
Restricting an inherited IRA prevents its beneficiaries from recklessly spending it and can reduce exposure to creditors or ex-spouses. A trust can offer even more safeguards against beneficiaries using it irresponsibly; however, such an entity could still face issues because they act for multiple beneficiaries at once.
IRA Trustees
Trustees (or custodians) of Individual Retirement Accounts are institutions responsible for administering and reporting on IRA assets according to IRS reporting requirements. An IRA trustee typically includes banks, financial institutions or approved trust companies like IRA Financial Trust.
Some IRA owners opt to have their investments held by an IRA trust instead, which offers several advantages not available through custodial accounts.
Trustworthy beneficiaries can help limit post-death withdrawals beyond RMD amounts and maximize tax benefits by spreading distributions over their life expectancies.
An IRA trust offers another advantage of maintaining control over one’s funds even in the event that their original IRA owner becomes incapacitated, in contrast with custodial accounts which typically become frozen until either a guardian is appointed or Power of Attorney documents are submitted as backup to serve their beneficiaries in place. This factor alone is why so many IRA holders are choosing trusts as beneficiaries instead.
IRA Beneficiaries
Even though it may be tempting to name a trust as an IRA beneficiary, IRA owners must carefully consider all potential implications when choosing such an option.
For example, if you use a conduit trust (a type of look-through trust) as an IRA beneficiary, the IRS treats distributions to that trust as though they had been made directly to its individual beneficiary, meaning retirement benefits will be taxed over their life expectancy and will lose any stretch payout benefits.
Trusts may not offer the same protection against creditors that an individual beneficiary would, since RMD payments must still be distributed to beneficiaries who may become subject to creditors of a beneficiary. Some trusts can be tailored specifically to avoid this, so it may be worthwhile pursuing this avenue, although doing so will require working with a third-party who specializes in this area and agrees to serve in this capacity.
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