What is a trusteed IRA? When should I use one?
A trusteed IRA is a simplified way to leave your IRA to your spouse or children while still retaining some control and direction over the disbursement of those assets after you’re gone.
I say it’s simplified because it would combine the functionality of a trust with an investment account without having to set up a separate living trust for your family.
In other words, if you:
Don’t already have or don’t plan on creating a revocable living trust
You want to place some controls on your IRA upon your death or incapacity, and
You want your IRA to be professionally managed (usually this service is provided by an wealth management company - like Merrill Lynch) rather than having a family member or close friend serve as trustee.
If all of the above apply to you, then you may be interested in talking with your advisor about setting up a trusteed IRA.
However (and I admit I am completely biased in my following response), virtually none of my clients do a trusteed IRA for the following reasons:
It doesn’t cover any other assets (the house, financial accounts that aren’t professionally managed, life insurance proceeds, business, etc) so most families will need to create their own revocable living trust anyway, which eliminates the need for a trusteed IRA.
The simplified nature of the trusteed IRA has limited functionality - for example, under the Secure 2.0 Act, required minimum distribution may be needed within a 10 year withdrawal window, but what if you’d prefer that distribution to accumulate further in trust rather than going outright to the beneficiary? In other words, what if you don’t want it to act as a conduit trust for asset protection purposes? The trusteed IRA says it has creditor and divorce protection, but if the account has to distribute money to the beneficiary inevitably because of RMD’s, it’s unclear how a trusteed IRA can make that promise of asset protection in the same way a standalone accumulation trust with trust protectors built-in could.
What if you want to change investment companies or advisors? To be fair, if this was a concern of yours then you wouldn’t have done a trusteed IRA to begin with, but I’ve had situations where the advisor on the trusteed IRA becomes almost non-responsive to my correspondence or the surviving beneficiaries and the expected convenience of the account becomes an extreme (and potentially costly) inconvenience for everyone involved.
Combining the above two points - if you decide that you do need a living trust anyway to account for your assets outside of the IRA or to ensure proper asset protection, then having a trusteed IRA and a separate trust for other assets requires an extra administrative layer because now you have two separate trustees of two separate trusts following their own set of instructions that need to then coordinate their management and distributions of assets to make sure your intentions are being followed. This can make the trust administration process much more confusing than it would have otherwise been if you had instead accounted for all assets under one unified trust document.
With all that being said, if your IRA is your only primary asset and if you love your investment advisor (and that advisor doesn’t plan on retiring anytime soon), and you’d prefer to use a professional trustee rather than a family member or close friend, then I think a trusteed IRA could work great for you.
I should also mention that I’ve drafted many trusts where the family member or close friend is a trustee but the investment company or advisor acted as a distribution trustee or co-trustee with respect to the investment accounts. I’ve found that approach to achieve the same objective without the downsides listed above. So, if you like some components of the trusteed IRA but have hesitation/concerns about the negatives, then building similar provisions into your revocable trust may be the best solution for you.
If you’d like to learn more about creating your own trust and using a professional co-trustee, or if you’d like me to review your trust for you - please feel free to click the link below to schedule a call with me today. I’m always happy to help!
