Trustee options available for IRAs vary significantly and include banks, credit unions, savings & loan associations and brokerage firms. There are two methods through which they may provide these IRAs: (1) via custodial relationship with the IRS or 2) trust document they create.
Trusteeship of an IRA can provide important estate planning benefits, including control and asset protection for beneficiaries. But trusteeship also has some drawbacks.
Banks
Banks, credit unions and savings associations are authorized by the IRS to serve as trustees and custodians for individual retirement accounts (IRAs). As trustees and custodians for these plans, they must abide by its regulations and standards, such as verifying information such as price or asset values provided in self-directed IRA account statements; some alternative investments are illiquid making accurate valuation difficult.
Financial organizations serving as IRA trustees and custodians often struggle to keep up with complex rules and regulations for these accounts, as well as to understand their effects on operating systems, procedures, and transaction documents. Understanding when you should answer questions related to IRA rules directly versus referring clients/beneficiaries to their accountant/attorney is vitally important.
Credit unions
Trustee services oversee the administration of Individual Retirement Accounts, or IRAs. Trustees must be licensed by the IRS and adhere to their standards; additionally they should report back any activity affecting an IRA owner’s balance such as contributions, withdrawals and reinvestments – these should all be reported back directly. Furthermore, trustees can take on tasks such as annual required minimum distributions that must be taken from beneficiaries; unlike custodial accounts which halt all management once their owner becomes incapacitated (unlike custodial IRAs do). Trustees allow financial institutions to continue managing an IRA account without freezing activities should any owner become incapacitated (unlike custodial IRAs which take over management after being incapacified), trusteed IRAs allow financial institutions continue managing it).
Trusted IRAs provide beneficiaries with protection from creditors by restricting their ability to liquidate the account, but this comes at a price: creating a separate trust may cost more upfront, yet could prove cheaper over the course of decades than paying trusteed IRA fees.
Savings & loan associations
Trustee of an Individual Retirement Account (IRA) typically refers to a financial institution such as a bank, credit union, savings and loan association or brokerage firm. Such institutions can offer various retirement plans including self-directed IRAs (SDIRAs).
Trusteed IRAs often impose restrictions that make them less desirable for certain beneficiaries, such as restricting changes to financial institution after death and not permitting beneficiaries to work with financial advisors or investment managers. This restriction can make trusteed IRAs less suitable in some situations.
Trusted IRAs also pose several other disadvantages, as beneficiaries may find it challenging to receive more than their required minimum distribution (RMD) from them, which could present problems for those needing extra money for health care expenses or other needs. Furthermore, such accounts typically require one financial institution as trustee, making switching providers difficult for beneficiaries.
Brokerage firms
When investing an Individual Retirement Account (IRA), trustees can be any number of business entities such as banks, credit unions, savings & loan associations or brokerage firms. Each must comply with IRS regulations on Individual Retirement Accounts (IRAs).
Trusted IRAs can be an excellent way to protect assets from creditors’ reach, yet establishing one may be complex and require legal expertise to establish. Establishing a conduit trust requires legal services from an attorney familiar with trust-as-beneficiary rules to draft it properly, which could prove expensive.
Custodians of individual retirement accounts (IRAs) must submit IRS Forms 5498 and 1099-R, transfer or rollover assets between accounts, and distribute assets slowly over a period of time to avoid creating tax events and making all distributions on time. Any lump-sum distribution would create a taxable event; instead it’s best to spread out distributions over an extended period so as to limit tax events while still fulfilling distributions on schedule.
