You can prevent your heirs from mismanaging money—and save on fees—with a “trusteed IRA.” Like a traditional trust, a trusteed IRA (individual retirement account) allows you to dictate terms of withdrawals. Bonus: A trusteed IRA, which is set up by an IRS-approved provider such as Merrill Lynch or USAA Federal Savings Bank, lets you avoid thousands of dollars in trust attorney costs. The provider, which also serves as a trustee, charges an annual maintenance fee, typically about 1% of assets.
Over the past decade, dozens of major financial institutions have introduced trusteed IRAs as an alternative to the complex, expensive process of setting up a trust for your heirs then bequeathing your IRA in your will to the trust.
What a trusteed IRA is best for:
• You have at least $500,000 in a traditional or Roth IRA or in a 401(k) plan that can be rolled over to an IRA. That’s the minimum amount that most trusteed IRA providers will accept.
• You want control over when and how much of the money in your IRA is distributed after your death. In a typical inherited IRA, your beneficiary takes control of the assets upon your death and can withdraw all or part of the IRA assets at any time. That can be undesirable if, say, the beneficiary is a child or young adult who can’t handle that much money. A trusteed IRA lets you custom design a long-term distribution plan for withdrawals.
How it works: You are allowed to restrict annual distributions from a trusteed IRA, but you cannot restrict it to an amount lower than the annual minimum required by the IRS. That amount is based on an IRS formula using your beneficiary’s life expectancy. Assets not yet distributed stay in the trusteed IRA and continue to grow tax-deferred, or in Roth IRAs, tax-free. For example, your trusteed IRA might stipulate that your beneficiary will get only federally required minimum annual distributions until age 30, at which time the beneficiary can withdraw as much as he/she wants. Or you can allow your beneficiary to take additional withdrawals above the required minimum amount for specific educational purposes such as paying college tuition.
One big disadvantage: Unlike with many other kinds of trusts, you don’t get to choose a family member or friend to oversee the trusteed IRA and to interpret your wishes after you die if unforeseen circumstances arise. In fact, the financial institution that sets up your trusteed IRA is required by the IRS to act as trustee. So if your beneficiary, say, has a medical emergency and needs money to deal with it, the institution serving as trustee will not release additional funds unless you specifically stipulated such a scenario ahead of time.
