Trusteed IRAs are becoming more prevalent among financial institutions. While a separate trust may serve as the beneficiary for an IRA, trusteed IRAs provide several advantages:
They allow an IRA owner to name successor beneficiaries and limit heirs’ ability to liquidate inherited accounts posthumously – helping ensure they take full advantage of post-death Required Minimum Distribution rules.
The IRA owner
Individual Retirement Accounts (IRAs) provide tax advantages to both individuals and their families. These accounts allow investors to invest in various assets, such as stocks and bonds, mutual funds, annuities, real estate and self-directed investments governed by federal law but subject to certain restrictions.
One such restriction is that traditional and Roth IRAs are only open to individuals who meet eligibility criteria; however, many small businesses, independent contractors, and self-employed persons can set up SEP or SIMPLE IRAs instead in order to save for retirement without annual income limits imposed by traditional and Roth IRAs.
Many IRA owners opt to name trusts as beneficiaries in order to bypass these restrictions, making the trustees of the trust the legal owners and able to oversee how its funds are invested. Furthermore, this provides creditor protection for beneficiaries while an inherited IRA would fall under either the 5-year rule or “ghost life expectancy rule” depending on its beneficiaries’ situation.
The IRA custodian
When selecting a custodian for self-directed retirement accounts, it is crucial that they offer excellent customer service and swift servicing. Furthermore, they should possess knowledge regarding IRA regulations in order to assist in avoiding prohibited transactions and provide you with access to various investments, including alternative assets like private placement securities and real estate investments.
Consideration should also be given to the fees charged by a custodian, such as annual account maintenance fees, mutual fund loads and trade commissions. All these costs could significantly impede your investment performance so it’s crucial that you select a custodian with no high-load mutual fund charges.
Fraudsters sometimes pose as IRA custodians but fail to deliver on the services promised; for instance, making investment recommendations or protecting you against potential losses. Legitimate IRA custodians solely hold and administer assets within an IRA account without providing advice or reviewing investments within that account.
The IRA trustee
Individual retirement accounts (IRAs) are structured as custodial accounts; therefore, when their owner dies, legal control of the IRA passes to beneficiaries named on its beneficiary designation form – usually family or charities named in its beneficiary form.
Rollover or transfer refers to this transfer of ownership and can take two forms: direct transfer or trusteed IRA. Direct transfers allow an IRA to move from one custodian/trustee to another without losing its tax-deferred status; trusteed IRAs are trusts controlled by an outside document rather than by Financial Institution.
Though the difference may seem minor, trusteed IRAs offer significant advantages in both terms of how they operate during life and after death. A trusteed IRA allows for succession planning but restricts creditors’ access to the assets within an inherited IRA account.
The IRA beneficiary
An IRA beneficiary is any individual, trust or corporation who inherits an IRA after its account owner dies. Beneficiaries may include individuals as individuals must take annual distributions according to their life expectancies – this is known as Required Minimum Distributions or RMDs).
Rules surrounding inherited IRAs can be complex, and new legislation passed in October 2022 has altered many of them significantly. Therefore, beneficiaries of an inherited IRA should ensure that all beneficiary information on file with their bank or brokerage firm is up-to-date, since incorrect or outdated beneficiary details have resulted in lost funds, costly legal battles and unnecessary family discord.
Eligible beneficiaries for an IRA account can include spouses, minor children, disabled children and certain types of trusts. An inherited IRA can also be divided into multiple inherited IRAs for each beneficiary to manage individually, though all must be empty by 10 years after its original account owner dies.
