At Isler CPA, sometimes we find our clients have been so successful at accumulating wealth that they not only have enough money in their I.R.A. to live off of, but some that will outlive them. The standard rules that the money from an I.R.A. must be withdrawn starting at age 70 ½, or face up to a 50% penalty, so the IRS can collect taxes, looms for each of these taxpayers.
The Trusteed I.R.A. allows aging parents to have the tax advantages of an I.R.A., the control benefits of a trust, and the protections of a retirement account. A trust can control how, when or why children receive distributions from their accounts after the grantor dies. Additionally An I.R.A. allows the money to grow tax free. Lastly, retirement assets have special protections against creditors that inherited traditional I.R.A.’s do not. See Clark v. Rameker 573 U.S. (2014). These accounts may also be protected from a spouse seeking assets in a divorce. Remember, the “I” in I.R.A. stands for “individual”!
For example, if you have four children, ages 50-65 and you want them to receive the benefits of a lifetime of hard work, but you don’t want them to squander or misuse the funds, the trusteed I.R.A. could be the solution. The savings would be put into 4 separate accounts for the children, with guidelines on when and for what distributions are made. The I.R.A. required distributions are calculated based on each child’s life expectancy. The 50 year old may have the option to withdraw over 30 years, and the oldest almost half of that. This is simpler than the traditionally inherited I.R.A. where the rate of distribution is set by the age of the oldest heir: 65. By using the trusteed I.R.A., the required minimum distributions are stretched out according to each beneficiary’s life expectancy, and likely to see the assets grow and pay taxes on the I.R.A. more slowly.
This trusteed I.R.A. may be particularly useful for taxpayers who would like to support the spouse from a second marriage, and subsequently provide for children of the first marriage. It is not uncommon for a widowed second spouse to combine an inherited I.R.A. with their own I.R.A. and leave it to a subsequent partner, or even children the grantor would not otherwise have approved of. The trusteed I.R.A. directs this money according to the wishes of the individual who earned and created the account.
Another benefit can be found with the trusteed I.R.A. for taxpayers who become incapacitated. The trustee would be empowered by a provision in the trust to request required minimum distributions on someone’s behalf and avoid the 50% penalty.
Of course, attorney fees, management fees required by dividing the account, and carrying out the terms of the trust could diminish the benefit gained by using the trusteed I.R.A., such that there should be sufficient assets in the account to justify it. Typically, taxpayers will find that $250,000 minimum I.R.A. account, and an amount they won’t spend in their lifetime, would justify the use of the trusteed I.R.A. Additionally, a taxpayer who doesn’t care how their money is spent after they’re gone, probably have no use for an I.R.A., and could satisfy their needs by a simple beneficiary designation. To discuss your circumstances, make an appointment to determine how Isler CPA can help you reach your goals!
For additional information see Sullivan, Paul, “How to Give an I.R.A. to Children Without Giving Up Control”, The New York Times: Your Money (Nov. 18, 2016)