Legal Blog

The Weekly Scenario: What is a Trusteed IRA?

Question: What is a Trusteed IRA?

Answer:  The IRS, under the tax code, permits an IRA to be established as a trust or custodial account. The tax code defines an IRA as a trust “for the exclusive benefit of an individual or his beneficiaries.”

The dilemma is that a trust cannot own an IRA (only an individual can own an IRA). While a trust cannot own an IRA, a trust can be named as the beneficiary of an IRA or an IRA can be established within a financial institution as a trust during the IRA owner’s lifetime.

This does not mean, however, that any person can establish a trust and transfer his IRA to it. If an individual did this, it would require drawing funds out of an IRA and depositing those funds into the trust.

With a Trusteed IRA, the IRA is a trust and the financial institution acts as the Trustee. The account is administered under the trust provisions both before and after the IRA owner’s death.

Because the IRA is the trust, any required minimum distributions (RMD) must be paid out to the beneficiary each year in accordance with normal RMD rules. Many Trusteed IRAs require provisions in the agreement that limit a beneficiary’s options while trying to ensure a maximum stretch. Some plans might even prohibit the transfer of IRA assets to a different financial organization in order to preserve the trust options selected by the IRA owner.

Comment: Individuals who wish to ensure the ‘stretch’ feature of IRAs is preserved for their children may want to give serious consideration to this strategy. A typical Trusteed IRA may limit distributions to the minimum required distribution so as to preserve the principal for the beneficiary (child).

 

As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.

ABOUT STEVE SHANE

Steve Shane Casual Smallsshane@offitkurman.com | 301.575.0313

Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.

 

ABOUT OFFIT KURMAN

Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With over 140 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our eleven offices serve individual and corporate clients in the Virginia, Washington, DC, Maryland, Delaware, Pennsylvania, New Jersey, and New York City regions. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.

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