An individual retirement account (IRA) is typically established in one of two ways. As a custodial account, where the bank or financial institution is simply acting as a fiduciary and must follow the directions of the account owner (including the instruction to cash out the entire balance). An IRA can also be held in trust (the Trusteed IRA), in which case the trustee will follow an established set of rules regarding the distribution of the trust’s assets. It is important to note that nearly all IRAs are initially established as custodial accounts. A Trusteed IRA offered by a financial institution is a “pre-packaged” trust with one or two, sometimes three, distribution options for beneficiaries. The trust has all of the required IRS terms that address administration of retirement accounts.
In my experience, clients ask me about the Trusteed IRA after a meeting with their financial advisor. The Trusteed IRA often ensures that, once the individual owner dies, the financial advisor maintains the Trusteed IRA account and manages investments in it for the benefit of the beneficiary. Although there is an obvious benefit for the advisor, there are situations where this option is extremely beneficial, particularly when the individual account holder has a strong relationship with his or her advisor and the individual wishes to ensure that a beneficiary does not cash out his or her inherited IRA. Although not nearly as flexible as a custom, attorney-drafted document, the Trusteed IRA can be a good alternative for some clients.
If you are considering a Trusteed IRA, be sure to ask about the fees associated with administering the trust during your lifetime and after your death. In my experience, the fees for post-death administration have been quite high. Also, be sure to carefully review the distribution provisions for primary and contingent beneficiaries. Keep in mind that Trusteed IRA is a complex trust document. It may be just one part of your estate plan and so be sure to review the trust with your estate-planning attorney to make sure it doesn’t negatively impact your other estate planning documents.