The Trusted IRA
The Wall Street Journal recently published an article describing a popular new trend in estate planning, the “trusteed IRA.” A trusteed IRA is a designed around traditional retirement account, but has some of the estate planning advantages of a trust. They are designed to provide a long-term distribution plan for withdrawals from IRAs that are left to heirs. While trusteed IRAs cost more to administer than regular IRAs after the original owner’s death, they’re generally cheaper than administering a trust.
Trusteed IRAs are recommended for IRAs worth at least $2 million, whereas smaller accounts will typically be needed during the original owner’s lifetime, or that of the surviving spouse. Trusteed IRA owners can prevent their beneficiaries from spending down the accounts immediately after the owner’s death. Instead, beneficiaries’ withdrawals can be limited to the minimum amount that the Internal Revenue Service requires heirs to take out annually. That way, the principal amount can continue to grow tax-deferred (or tax-free in a Roth IRA).
Many trusteed IRAs also include a provision that gives a trust committee the authority to makes decisions about the IRA owner’s assets if the owner becomes incapacitated during his or her lifetime. Another benefit is that the trusteed IRA can be utilized by blended families (with children from separate marriages), allowing the surviving spouse to benefit from the account for the rest of her life and with the remainder passing on to the owner’s children.
Drawbacks of trusteed IRAs include a lack of flexibility compared with trust/trustee arrangement, as well as the fact that there is a specific payout period as opposed to discretionary distributions.