How a Trusteed IRA Can Offer Control and Peace of Mind
April 07, 2017
If you are fortunate enough to have assets in an IRA that won’t be needed in your lifetime or by a surviving spouse, the idea of passing your account on to your children likely appeals to you – until you bolt upright in bed one night after dreaming of your son squandering his inheritance on a Lamborghini or your daughter doing the same on a never-ending trip around the world.
Rest easy. There’s a relatively simple way for you to not only pass your wealth on to your beneficiaries, but to also prescribe how and when the money is distributed long after you’ve passed. This may be especially important in cases where minor or special needs children are involved, or if you are not comfortable with ceding total control of your assets after death based on a beneficiary’s money management skills or experience.
Built-in estate planning benefits
As its name infers, a trusteed IRA or individual retirement trust structures your IRA as a trust account. Unlike with traditional IRAs, where beneficiaries take control upon the owner’s death and may withdraw the retirement funds at any time, a trusteed IRA allows you to dictate your account’s payout terms beyond required mandatory minimum distributions (RMDs), while still continuing to potentially grow on a tax-favored basis for as long as possible.
In effect, a trusteed IRA gives you many of the estate planning benefits of an irrevocable trust, but without the complexities or expense of creating a separate trust. Potential advantages include the following:
1. Trusteed IRAs can be designed to give the trustee – a financial institution qualified to offer and administer such plans – discretion to make payments as needed to provide for your beneficiary’s health, welfare, and education. For instance, you can instruct the trustee to use IRA assets should the beneficiary become disabled.
2. Trusteed IRAs offer greater flexibility than traditional IRAs when multiple beneficiaries are involved. With traditional IRAs, distributions are made to all beneficiaries based on the age of the oldest heir. Trusteed IRAs allow the creation of separate accounts for each beneficiary, with minimum distributions based on each person’s life expectancy. Younger beneficiaries benefit from paying taxes on their distributions more slowly and retaining more growth potential within their account.
3. In second marriage situations, trusteed IRAs offer important advantages over traditional IRAs. The surviving second spouse is able to enjoy income from the IRA during his or her life, and then the assets can pass on to the children of the first marriage. And if your second spouse remarries, you can ensure that his or her new spouse will not become a beneficiary of your IRA assets.
4. As the owner of a trusteed IRA, you are protected from expense and delays of guardianship proceedings in the event that you become incapacitated. In such an event, your trustee may make distributions on your behalf, saving you from a penalty that can run as high as 50 percent of the distribution.
5. Finally, because trusteed IRAs can be set up to qualify for a marital deduction for estate tax purposes after the owner’s death when the assets will continue to be held for a surviving spouse, they may also simplify estate tax planning.
The right choice for you?
Trusteed IRAs are not for everybody. Transferring wealth from one generation to the next requires careful planning to ensure that the best interests of the owner and beneficiaries are served. In certain circumstances, a trusteed IRA can give you peace of mind during your lifetime that your assets will be passed in accordance with your wishes, while allowing you to structure their ultimate distribution to your heirs and even to further generations.
Contact a Washington Trust Planning Officer at 800-582-1076 or email us at [email protected] for smart advice that’s focused on your unique financial goals.
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Any views or opinions expressed are those of Washington Trust Wealth Management. The information provided does not constitute legal, tax, or investment advice and it should not be relied on as such. It does not take into account any investor's particular investment objectives, strategies, tax status, or investment horizon. Please consult with a financial counselor, attorney, or tax professional regarding your specific investment, legal, or tax situation. It should not be considered a solicitation to buy or an offer to provide investment advisory or other services. All information is current as of the date of this material and may change at any time without prior notice. The information provided is solely for informational purposes and has been obtained from sources believed to be reliable but its accuracy is not guaranteed.