Submitted by Southwest Investment Advisors on May 17th, 2019
A Trusteed IRA, also known as an individual retirement trust (IRT), is a trust account that provides preservation and control of a client’s IRA assets. It allows clients to combine their estate planning and retirement goals within a single framework.
- The Trusteed IRA gives IRA owners the opportunity to restrict payouts to beneficiaries, assuring that assets remain under the care and management of their chosen advisor while deferring taxes for many years.
- Payouts can be customized from one beneficiary to another.
- The Trusteed IRA helps create a dialogue between the advisor and client about estate planning, positioning the advisor as a valuable, holistic resource.
- At no additional cost over a traditional IRA , the Trusteed IRA is a high-value service that we provide.
Primary Beneficiaries – Persons who will receive the Trust Account balance in the Individual Retirement Trust (IRT) upon the death the account owner.
Contingent Beneficiaries – Persons who will receive the Trust Account balance in the IRT upon the death of the account owner if none of the Primary Beneficiaries survive the account owner (or if the account owner selects the per stirpes allocation for the Primary Beneficiaries and none of the lineal descendants survive the account owner).
Per Stirpes Allocation Option – This allocation option means equal shares to the primary beneficiaries’ children, with the descendants of a deceased child receiving the deceased child’s share.
Pro Rata Allocation Option – If any primary beneficiary(ies) dies before the account owner, his or her interest shall terminate completely, and the percentage shares of any remaining primary beneficiary(ies) shall be increased equal to their respective share.
No Surviving Primary or Contingent Beneficiary(ies) – If no primary beneficiary, if no contingent beneficiary, and if the account owner elected “per stirpes” allocation option for any beneficiary, no lineal descendant of such beneficiary survives the account owner, the balance of the Trust Account shall be distributed to the spouse or, if there is no surviving spouse, to the legal representative of the Estate.
Restricted Payout Options
a. Pay Only the RMD – Pay to or for the benefit of the Beneficiary only the Required Minimum Distributions (RMD).
b. Pay the RMD Plus Discretionary – Pay to or for the benefit of the Beneficiary only the Required Minimum Distributions (RMD) plus any additional amounts as necessary for the Beneficiary’s health, support, maintenance and education, taking into account the Beneficiary’s other available resources, as determined by the Trustee, in its sole and absolute discretion.
c. Pay the Greater of the RMD or Unitrust – Pay to or for the benefit of the Beneficiary only the greater of the Required Minimum Distributions (RMD) or an annual unitrust amount equaling 4% of the net fair market value of the IRA assets, valued as of the first business day of each taxable year.
d. Pay the Greater of the RMD or Net Income Annually – Pay to or for the benefit of the Beneficiary only the greater of the Required Minimum Distributions (RMD) or all of the net income annually.
What is the key benefit of establishing a trusteed IRA rather than a custodial IRA?
The IRA owner can control the distribution of the IRA assets after death without needing to create an additional trust for that purpose.
Do trusteed IRAs offer any tax advantages that custodial IRAs don’t?
No. The tax rules for trusteed IRAs and custodial IRAs are the same.
Is there a downside to using a trusteed IRA over a custodial IRA?
An IRA owner can elect to have a trusteed IRA payout directly to a beneficiary upon their death or to have it retained in trust with payouts restricted as they elect.
So, there is greater flexibility. However, trustee’s standard fees will apply upon initial IRA owner’s incapacity, and/or if the IRA remains in the trust after the initial IRA owner’s death. Note: To restrict payouts of a custodial IRA after account owner’s death, a separate trust typically needs to be drafted by an attorney during account owner’s lifetime and named as beneficiary of the IRA.
What is the target market for the trusteed IRA?
Clients with $500,000 to $3 million in IRA assets that represent the bulk of their estate are the typical target.
Is there a minimum account size for the trusteed IRA?
There is not a minimum to establish a trusteed IRA. However, once the IRA owner dies the trustee (PTC) reserves the right to pay out the balance directly to beneficiaries—even if a restricted payout is chosen—if the account is deemed too small to administer or does not meet PTC’s minimum account size.
Can a trusteed IRA be moved once established?
The IRA owner may transfer, withdraw funds, or close the account during their lifetime, subject to the same rules as a custodial IRA.
When the trusteed IRA owner dies, can a beneficiary move the IRA?
Once the IRA owner dies, the trust becomes irrevocable. It may be possible for the IRA beneficiary to move the IRA to a different trustee (subject to their acceptance of the trust’s terms), but the terms of the trust (such as payout restrictions), will remain in effect.
Can PTC use trusteed IRA assets for the benefit of a disabled account owner and/or their family?
Yes. A trustee can be authorized to continue to use the assets for the benefit of a disabled account owner and/or their family, in accordance with IRS rules regarding IRA distributions.
Once beneficiary designations and payout options have been selected, can they be changed?
Yes, the account owner can change beneficiaries and payout options at any time during their lifetime.
Can payout options vary by beneficiary? For example, if there are two beneficiaries, can one be restricted (held in trust) and the other not restricted (paid out)?
Payout options can vary between beneficiaries. For example, one child can be given more liberal access to funds than another. In some case, parents feel that it is in the best interests of a particular child to restrict the availability of funds over time.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.