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Is a Trusteed IRA Right for You?

Trusteed IRAs have been in the news recently. More and more financial organization are making these products available. Is a trusteed IRA a good strategy for you? Here is what you need to know about this increasingly popular option.

An Important Decision

When you have an IRA, at some point you must think about what you want to happen to your funds after your death. This is an important decision. You may choose to simply name an individual outright as the IRA beneficiary. Or you may want the control of naming a trust would bring.

Trusteed IRAs offer a third choice. They occupy a sort of middle ground between naming a beneficiary out right on your beneficiary designation and naming a trust with all the expense and complexities that accompany that decision.

What is a Trusteed IRA?

With a trusteed IRA, a financial organization goes beyond the typical plain vanilla IRA agreements. The financial organization adds trust terms and language to the IRA agreement.

The provisions may vary depending on the financial organization offering the trusteed IRA. Usually, provisions are included limiting the beneficiaries’ options and ensuring the maximum stretch. Many trusteed IRAs will also include language prohibiting the transfer of the IRA assets to a different financial organization.

The IRA itself becomes a trust with the financial organization acting as the trustee. The account is administered under the trust provisions both before and after the IRA owner’s death. In general, this will mean greater control for the IRA owner and less choice for beneficiaries.

Advantages

Trusteed IRAs may offer you some advantages. They can guarantee that your RMDs will be paid out during your lifetime, even if you are incapacitated, and they can ensure the stretch for your beneficiaries.

They also can allow you to name successor beneficiaries, and provide some protection from creditors. They are a less expensive way to achieve control over your IRA assets after your death than if you hire an attorney to draft your own trust.

Disadvantages

There are also some disadvantages to trusteed IRAs. A significant one is availability. Not all financial institutions offer trusteed IRAs. Other disadvantages include limited creditor protection compared to a trust and the inability to name a family member as a trustee.

Because trusteed IRAs are standardized documents you also should keep in mind that there will be some limits to how much control you can have. The provisions in the trusteed IRA may not achieve exactly what you want. To have the ultimate level of control and the ability to customize provision to achieve exactly what the you want, your own trust would be needed.

While a trusteed IRA will generally cost less than hiring a knowledgeable attorney to draft a trust, there will still be a fee to set up the trusteed IRA and ongoing fees. Remember, naming an individual as your beneficiary on the IRA beneficiary designation form is free.

Another downside, and it is big one, for trusteed IRAs is the lack of ability to move the inherited IRA assets. While there is no reason that a trusteed IRA could not allow the movement of inherited IRA funds after the death of the IRA owner, these documents are generally drafted in such a way that if this is not outright prohibited it is certainly not guaranteed.

Making the Right Move

Trusteed IRAs are not for everyone. For some, the strategy of the trusteed IRA will make sense, for many others the drawbacks will outweigh the benefits. To know if a trusteed IRA is right for you, your best bet is to discuss the details of your situation with a knowledgeable tax or financial advisor.