Mind on Money: Trusteed IRA offers estate planning advantages

Mind on Money: Trusteed IRA offers estate planning advantages

The SECURE Act, which became law in December 2019, made some important changes to the rules governing IRAs and other retirement plans.

The two highest profile rule changes were the elimination of the what was commonly referred to the as the “stretch IRA”, and the increase in the age when IRA distributions are required to be taken, and taxed, from age 70 ½ to age 72.

The stretch IRA was a rule applying to inherited IRAs. Under the old rules a person inheriting an IRA from a parent or other non-spouse was able to elect a distribution technique enabling them to take a minimum annual amount out of the IRA based upon their life expectancy, essentially “stretching” the tax deferral features of the IRA for as long as another generation, at least.

The SECURE Act ended the stretch IRA provision, which is now only applicable to an eligible designated beneficiary which includes only a surviving spouse, beneficiaries qualified as disabled or chronically ill, minor children until the age of majority or beneficiaries roughly the same age as the passed IRA owner (within 10 years of age).

Now, under this new law, an IRA inherited by a non-eligible designated beneficiary is required to be fully distributed within 10 years of the IRA owner’s death. The new rule does change the allure of the IRA as an estate planning tool, as the stretch IRA had been used by families and beneficiaries to control taxes over many decades in some cases. But does this mean the IRA is no longer viable as a long-term estate planning tool? I don’t think so, enter the viability to the Trusteed IRA.

When I do planning for clients, taxes are a top consideration; it's just kind of the way we financial types are built. Sometimes, however, it is important for us planners to step back and remember not all decisions are driven by issues like taxes; sometimes families are more motivated by other more human factors, human factors like control.

For most middle-class families IRAs, 401(k)s and similar retirement plans will represent a sizable portion of a family’s liquid net worth. The assets held in these accounts can be used to provide stability for family members, fulfill charitable intentions and a variety of other objectives. A trusteed IRA can provide the control structure to help accomplish a variety of goals, and I think it can work even under the new SECURE Act inherited IRA rules.

A trusteed IRA is a type of special trust account that provides an IRA owner the opportunity to set up provisions to help preserve and control IRA assets after they are passed on due to death death. Using a trusteed IRA can help a family integrate their estate planning goals and retirement goals within a single planning structure.

The trusteed IRA will still have to withdraw IRA funds according to the ultimate beneficiary’s status (eligible or non-eligible), but instead of leaving these decisions up to the individual beneficiary it provides stipulation as to when and how much money can be removed from the IRA after death.

These controls can be effective in situations where beneficiaries may benefit from income from an IRA, but may not be capable of managing the IRA assets. Or in situation of re-marriage or when there are multiple beneficiaries that may need to be treated differently.

A trusteed IRA is set up through a financial institution, but are becoming more widely available as IRA beneficiary planning becomes more complex. I am finding more and more need for this structure as we adjust estate planning in response to the SECURE Act, and I feel going forward more families will want to become educated on how these accounts can potentially solve planning challenges.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal adviser. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.