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California trusts, trusteed IRAs offer distribution control

The reason most Los Angeles residents have an individual retirement account is to help supplement income in later life or, following an account owner's death, to add to the financial support of a surviving spouse. However, some California residents see IRAs as assets meant to be passed through an estate to heirs.

A new financial product has appeared on the market that features benefits similar to a trust in an estate plan. A trusteed IRA gives the account owner control over the distribution of IRA funds over time to a beneficiary, apparently with some tax advantages.

The financial services companies that market trusteed IRAs promote the idea that the products are cheaper than trusts to create. While that may be true, trust administration adds to the cost of a trusteed IRA over other types of individual retirement accounts. The expense may not be worth the investment, unless the IRA is worth a substantial amount; a minimum of $2 million is recommended by product carrier U.S. Bank.

A trust is managed by a trustee, chosen by the grantor. The management of a trusteed IRA is handled by a financial services employee, who may not have the same leeway as a trustee to adjust withdrawals, according to beneficiary need.

A control mechanism in trusteed IRAs allows the long-term dispersal of a limited amount of funds. The withdrawal may be as low as the Internal Revenue Service's yearly minimum requirement, while the remaining funds are free to increase in value. The beneficiary potentially can end up with an asset worth far more than a straightforward cash inheritance.

The IRS is very particular about the way trusts are set up and administered. It's a good idea to discuss the positives and negatives of a trust or trusteed IRA with a tax professional and estate planning attorney before sinking time, effort and assets in either estate-related investment.

Source: Market Watch, "Trusteed IRAs can help heirs manage inheritance" Kelly Greene, Dec. 19, 2013

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