Whether you elect to establish a trust IRA is dependent on your goals and circumstances.
You need set up an IRA.
But what is the best way to do this?
Should you create a trust or custodial IRA account?
According to a recent Financial Planning article titled “When you should establish an IRA as a trust,” you will need to consider several factors.
First, what are the main differences?
A custodial account is the basic IRA setup.
A trusteed IRA allows for far greater control for you, the owner.
How is a trusteed IRA established?
The financial organization setting up the account will include trust language and terms within the plan, making the IRA a trust.
Then the financial institution becomes the trustee.
How is the account administered?
The financial organization will assume the responsibility of administering the provisions while you are alive as well as after your passing.
The beneficiaries will have reduced control over the assets from the IRA.
Instead of the IRA passing directly to the beneficiaries at your death, the "required minimum distributions" will be paid to the beneficiaries by the trust.
What if they need more for specific expenses like education or health payments?
You can allow for these additional payouts in the language of the trust.
Can you add any stipulations you want?
These are standardized documents.
This means your customization is limited.
Do you already have a trust?
Why not just use that trust?
A typical revocable living trust or a testamentary trust created under a last will and testament may not have the required language and provisions to allow the maximum "stretch" of the distributions for your beneficiaries.
If your IRA is the greatest asset you have, creating a trusteed IRA may make financial sense for you as it may be less expensive than creating a trust.
Still, there may be another reason to create a trusteed IRA.
If you become incapacitated, the trustee could take your RMDs for you.
Under this arrangement, you may be able to have more taken out to cover your health expenses.
The trustee could also pay any required fees for your IRA and make lifetime investment decisions.
Probably the most important reason to have a trusteed IRA is to protect your IRA "from" your beneficiaries.
The yearly RMD distributions will limit the amount one can withdrawal.
This will preserve your IRA assets for a longer time.
What if you are divorced and remarried?
With a trusteed IRA, you can designate successor beneficiaries.
What does this mean?
Your new spouse could be provided for from the IRA during his or her lifetime.
When your spouse dies, the IRAs will go to your own children.
What if your children have creditors?
A trusteed IRA can provide some protection.
If your assets were left directly to a beneficiary, they would be fair game in most states.
Still, once the RMDs are paid, they are not protected once in the hands of a beneficiary.
There are obviously pros and cons to trusteed IRA planning.
Alternatively, you could create a "stand-alone" retirement plan trust.
In the end, it is essential that you work with an experienced estate planning attorney to determine whether a trusteed IRA, or some other alternative, is best for you.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Financial Planning (May 31, 2017) “When you should establish an IRA as a trust”