Most of us understand what happens to our IRA when we die: if we have named a beneficiary, the IRA proceeds go to them. It usually doesn't matter what our will may say: the beneficiary designations rule. That's why it's critical to designate the right primary and contingent beneficiary on your IRA, and review this at least every few years.
But what if your beneficiaries don't have the financial discipline that you do? Or they are minors? Or what if your spouse remarries after you die? How do you exercise control over your IRA once you're gone?
One possible solution: a Trusteed IRA. It's a trust account that allows you to control the disposition of your IRA -- the who, how and when -- for multiple generations after you die. These days, many large IRA custodians offer these trust agreements as templates, potentially avoiding legal fees to draft such an agreement.
Here are some of the specific benefits of a trusteed IRA:
1. You can control the timing/amount of distributions from your IRA after you are gone. You can't prevent required minimum distributions to your beneficiary, but you can restrict additional payments. If your beneficiary is a young adult who doesn't realize distributions from a traditional IRA are taxable, having specific restrictions will keep them out of trouble tax-wise and keep them from spending it all right away.
2. After your primary beneficiary dies, your
trusteed IRA can state who will receive the balance. Not so with a traditional IRA: your primary beneficiary can change the next beneficiaries once they inherit your IRA. This may be important if your 2nd spouse is your primary beneficiary and you want to prevent him/her from dis-inheriting your kids after you are gone.
3. A trusteed IRA can also be valuable while you're alive: if you become incapacitated, the trustee can be authorized to take control of your IRA and distribute benefits on your behalf. This could be a huge help if you need distributions immediately to cover the costs of your care.
A Trusteed IRA may be a good choice if you have:
Substantial IRA assets and are interested in continuity and secure disposition of your assets at death.
An estate that consists primarily of retirement assets.
A second marriage and wish to provide for your spouse at your death, while also ensuring that remaining IRA assets pass to your children by your previous marriage.
A desire to provide for regular payments to children or other heirs without passing complete control of IRA assets to them, or make benefit payments contingent upon the beneficiary reaching specific milestones, such as completion of college.
While trusteed IRAs can be flexible, they probably aren't right for everyone. Sometimes a minimum balance is required to establish a trusteed IRA, and fees charged to administer them may be higher than traditional IRAs. And if you don't use the custodian's template, you may incur attorney's fees and transfer costs to set up this account.
As always, it's probably best to consult with your financial planner to evaluate if a Trusteed IRA is right for you.
Karin Grablin, with SRQ Wealth Management, is a registered representative and investment advisory representative. This information is not intended to be a substitute for specific, individualized tax, legal or investment planning advice.