NEWS AND RESOURCES

Financial Planning for April 2015

Benefits of Converting to a Trusteed IRA

In the United States, approximately $7.3 trillion in assets are held in IRAs. Much of that money will not be spent during the lifetime of the account owners, but instead be passed on to their heirs.

Unfortunately, beneficiaries have a way of squandering money when it comes to them in a large windfall. One traditional way of preventing this from happening to is place assets in a trust; however, investors usually have to work with an estate planning attorney to create a trust, which involves expensive legal fees and substantial administration. But when it comes to IRAs, there is a simpler way.

There are standard terms for a trusteed IRA that are pre-approved and in compliance with IRS regulations. This makes it easy for an IRA owner to name a trust as his beneficiary instead of individuals. When the owner passes away, the IRA is automatically formed to receive the account proceeds, and thereafter the trust is required to distribute assets according to the owner’s pre-written instructions.

This strategy can be useful to avoid complications in a number of different scenarios. For example, in many cases IRA assets automatically pass to the surviving spouse. There are two dangers here. First, the surviving spouse might not have much experience with money management and could spend down those assets too quickly. With a trust as the beneficiary, the trustee would be responsible for continuing to manage the IRA funds and disseminate them as needed.

Second, suppose the surviving spouse remarries and then passes away before her new spouse. The original IRA owner may have assumed the assets would then pass to their children, but often enough they are passed on to the new surviving spouse. When that spouse dies, the assets may then pass to his own children – bypassing the first set of children altogether.

However, if the original owner converts the account to a trusteed IRA, he can dictate to whom assets will go regardless of how relationships develop after he passes away.

In terms of younger generations, naming a trust as beneficiary also can give the owner more control of an inherited, or “stretch” IRA. Normally, an account structured as an inherited IRA allows assets to continue growing tax-deferred after the owner dies. To ensure his heirs adhere to this long-term plan, the owner can use the trust within the IRA to dictate when and how much can be distributed from the account for decades after he passes away. Moreover, with trust terms already laid out, this reduces the chance for any missteps that could trigger the five-year distribution rule for inherited IRAs.

With a trusteed IRA, you may include language to name a trustee to take over management should the owner become incapacitated. The trust also can stipulate protection against creditor claims even after an IRA is inherited. But perhaps the biggest advantage of a trusteed IRA is that you can name a professional trustee to manage and administer the trust once the owner passes away. This alleviates both asset mismanagement issues and complications that can evolve due to family dynamics. IRAs are an effective tool for long-term growth, and by naming a trust as the ultimate beneficiary, the owner can ensure his assets retain their protected and tax-deferred status.

In today’s blended and complex family arrangements, the trusteed IRA offers a simple strategy destined to achieve the owner’s objectives and give him peace of mind.

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