You may be familiar with Trusts. You may not be familiar, however, with the ‘trusteed IRA’, what many financial planners and estate planning attorneys are touting as an excellent and elegant financial planning tool, particularly for well-off baby boomers. It combines the best of the IRA world with that of the estate document world. However, current trends show that IRA withdrawals will increase significantly over the next decade, both in dollar amount and as a percentage of total retirement income, as the baby boomer generation enters retirement. Total IRA withdrawals increased to about $189.8 billion in 2007 from just $23.7 billion in 1988, according to one research firm Sabelhaus and Schrass, and rose to $227.5 billion in 2008. Similarly, although they held only 45.7% of IRAs nationwide in 2004, taxpayers age 55 and older controlled 72.7% of the total IRA assets. In a typical situation, a person who creates an IRA designates a beneficiary for the amount left in the IRA when the IRA creator or ‘grantor’ dies. The beneficiary is usually a spouse and or children. As a reminder, an Individual Retirement Account (IRA) – around since 1974 – is a kind of savings account with great tax advantages. It has become a popular way to put away money for retirement as the money is invested. Money put into an IRA is not taxed. Rather it is taxed on the backend when one withdraws money later in life. Further, the money grows tax-free when it is in the IRA. With traditional IRAs, a person must start withdrawing money when they reach age 70.5 in the form of RMDs (required minimum distributions). An individual, a selfemployed person or a small business owner, can create IRAs. Usually a person can only place $5,000 a year (if you are under 50) into an IRA. Statistics reveal that IRAs have been one of the fastest developing parts of the nation’s retirement market during the past ten years. It is guesstimated that IRA assets total some $5.5 trillion in assets and that IRA assets denote more than one quarter of the $19.5 trillion U.S. retirement market. Statistics also show that assets held in IRAs have increased on average 10%, from about $636 billion in 1990. No question that millions of Americans are using IRAs to save for their retirement. An estimated 48.9 million U.S. households, or 40.4%, owned IRAs as of 2012. Further, an estimated 39.4 million households owned traditional IRAs, making it the most common type of IRA. A total of 20.3 million households owned Roth IRAs, and 9.2 million U.S. households owned employer-sponsored IRAs such as SEP IRAs, SAR-SEP IRAs, or SIMPLE IRAs.
The problem, however, from an inheritance point of view that arises for the IRA creator is that when he or she dies, the beneficiary can withdraw part or all of the IRA funds at that time. That may be a cause of concern for the IRA creator since the beneficiary might be prone to squandering all the money and not ‘stretch’ and invest it out as the creator really intended or would have liked. Recent statistics suggest that heirs go through inheritances in about two years. Estimates also show that approximately 80% of IRA assets are withdrawn from custodial accounts by beneficiaries within two years of the grantor’s death. Most likely, however, is that the grantor intended the IRA to be similar to a long-term ‘pension’ plan for the beneficiary’s life, not a one-time payout. Further, even if a beneficiary does not deplete the IRA assets quickly, an IRA grantor normally does not have any say as to where the funds go after that first beneficiary passes away. The first beneficiary can control that. The remaining beneficiary or the wording of the IRA agreement usually specifies who would get the IRA funds. Thus, the following scenario could take place: A person passes away and a spouse is the primary IRA beneficiary. Nothing would prevent that spouse from later naming his/her new husband, if he/she remarries, or naming children from a previous marriage as the new primary beneficiary(ies) and, in effect, disinheriting the original grantor’s children. That is probably not what the IRA creator intended long term. What if there was a way, however, to control the ultimate beneficiaries, a way in which one could designate contingent beneficiaries that could not be altered by the primary beneficiary? What if one could continue growing that money tax deferred and make it ‘stretch’ out for several generations like a pension? For example, let us say that someone inherited a $150,00 IRA at age 50. After inheritance taxes and other expenses, the beneficiary may net $100,000 or so if he or she depletes it. What if, however, there was a way that that $150,00 could grow into $500,000 or more for the beneficiary long term? And continue to give the beneficiary RMDs, guaranteed monthly distributions akin to a pension or Social Security Enter the trusteed IRA or ‘individual retirement trust,’ an estate-planning device, which gives people considerable control and flexibility over their IRA funds. If one has a trusteed IRA, one cannot stop the required minimum distributions to a beneficiary with a trusteed IRA but one can set up a situation to stop any additional payments to the beneficiary or a complete withdrawal.
One could only have the beneficiary receive RMDs. In addition to dispersing RMDs to beneficiaries, a trustee could also set it up to disperse additional funds to a beneficiary for such things as health, education and welfare, similar to a spendthrift trust. Meanwhile the funds continue to do what they have always done – accrue tax deferred. The trusteed IRA could also be set up so that a beneficiary could withdraw all the funds — but only at a certain age the creator specifies. The trusteed IRA gives one much more flexibility and control over the ultimate recipient(s) of IRA funds. With a traditional IRA, if one dies and names a spouse as the primary beneficiary, that spouse can name a new spouse, if there is a remarriage, or children from a previous marriage as later beneficiaries, something that may have never been intended. With a trusteed IRA one can set it up so that a spouse will receive RMDs but when that person passes away, children or other specified beneficiaries will receive the remains of the IRA. In addition, if one has an IRA and becomes incapacitated and could not manage one’s own financial affairs, that person would not be able to manage the IRA and invest funds, make RMDs, or use the funds for support. A power of attorney would be required or even a guardianship/ conservatorship. With a trusteed IRA, a designated trustee would be able to manage funds, pay bills, oversee RMDs, etc. How is a trusteed IRA created? One needs to find a financial institution that offers this type of IRA planning. One needs to research and shop around to find professionals, including perhaps an estate planning attorney, who can help create the instrument and language that is desired and needed. Be warned, however, that Trusteed IRAs are not appropriate for everyone. Usually there should to be a significant amount of money in the IRA and the associated fees for setting them up are higher that with normal IRAs. Usually it is for IRAs worth at least $3 million that are right for trusteed IRAS. Now trusteed IRAS are cheaper than a traditional trust and over the long term probably won’t cause many Federal tax issues. Many banks and financial service providers are now offering trusteed IRAs. Typically, trusteed IRAs are for those folk that are planning on leaving IRAs to their heirs with the intent of creating long term distribution plans for withdrawals.