December 7, 2010 by tfroberts

The tax code allows IRAs to be created as trust accounts, custodial accounts and annuity contracts. The federal tax rules are generally the same for all IRAs. But the structure of the IRA agreement can have a significant impact on how your IRA is administered. This article will focus on a type of trust account commonly called a "trusteed IRA," or an "individual retirement trust."

Why might you need a trusteed IRA?

In a typical IRA, your beneficiary takes control of the IRA assets upon your death. There's nothing to stop your beneficiary from withdrawing all or part of the IRA funds at any time. This ability of your beneficiary to withdraw assets at will, may be troublesome to you for several reasons. For example, you may simply be concerned that your beneficiary will squander the IRA funds.

Or it may be your wish that your IRA "stretch" after your death-that is, continue to accumulate on a tax-deferred (or in the case of Roth IRAs, potentially tax-free) basis-for as long as possible. IRA owners sometimes select much younger IRA beneficiaries because their young age means a longer life expectancy, and this in turn requires smaller required minimum distributions (RMDs) from the IRA each year after your death - allowing more of your IRA to continue to grow on a tax-favored basis for a longer period of time. Your intent to stretch out the IRA payments may be defeated if your beneficiary has total control over the IRA assets upon your death.

Even if your beneficiary doesn't deplete the IRA assets, you normally have no say about where the funds go when your beneficiary dies. Your beneficiary, or the IRA agreement, usually specifies who gets the funds at that point. In a typical IRA, your beneficiary is responsible for investing the IRA assets after your death, regardless of his or her inclination, skill, or experience.

A trusteed IRA can help solve these problems. With a trusteed IRA, you can't stop the payment of RMDs to your beneficiary but you can restrict any additional payments from this IRA. For example, you could maximize the period your IRA will stretch by directing the trustee to pay only RMDs to your beneficiary. You can also ensure that your beneficiary's needs are taken care of by providing the trustee with the discretion to make payments in addition to RMDs as needed for your beneficiary's health, welfare, or education.

Another option is to impose restrictions on distributions only until you're comfortable your beneficiary has reached an age where he or she will be mature enough to handle the IRA assets.

In each case, the balance of the IRA passing, upon your beneficiary's death, can be paid to a contingent beneficiary of your choosing. For example, if you've remarried, you may want to be sure your current spouse is provided for upon your death and also that any funds remaining on your spouse's death pass to the children of your first marriage. You may also want to ensure that if your surviving spouse remarries, his or her new spouse won't be the ultimate recipient of your IRA assets.

A trusteed IRA can be structured to qualify as a marital, QTIP, or credit shelter (bypass) trust. This could potentially simplify your estate planning.

Finally, a trusteed IRA can even be a valuable tool during your lifetime. For example, the IRA can provide that if you become incapacitated the trustee will step in and take over the investment of assets and distribute benefits on your behalf as needed. This ensures that your IRA won't be in limbo until a guardian is appointed.

There are a number of ways you can structure your IRA to protect your assets. Consult with a qualified financial planner and estate planning attorney to set up you IRA so your desires will be carried out.