For any number of reasons, clients sometimes want to prevent their inheritors from draining their IRA accounts right after they die.
Frequently, its a man who wants an IRA to last long enough to be inherited by the children of his first marriage. The trick then becomes how to ensure that his second (or fifth) wife can live off distributions from the account until her death, after which it will go to his kids.
Or a different client may not want her charitably inclined son to give away all the contents of her $200,000 IRA right after her demise. To do that, she needs to ensure he will receive a certain distribution annually, but not control the account. Green Bay, Wis.-based CPA and estate planner Robert Keebler says he once had a client in the that situation. You could hardly fault the kid," he says. "However, it does get in the way with parents who want him to have a roof over his head.
For cases like these, financial services giant LPL Financial is joining a handful of other firms in offering a turnkey product -- a so-called inherited trusteed IRA -- for advisors to use. A trusteed IRA, aimed particularly at mass affluent investors, aims to eliminate the necessity of putting IRA assets into complex, customized trusts that may not be warranted.
LPLS BANK ARM
It works both for mass affluent and high-net-worth investors, says Bethany Bryant, president of Private Trust, the LPL subsidiary releasing the product. Investors today have a fair amount of wealth built up in retirement accounts." Unless they pay for customized trusts, she says, "they cant control the ultimate designation or the timing of the distribution of their retirement assets without a trusteed IRA.
Private Trust provides trust services to advisors both in and outside of the LPL network. Acquired by LPL in 2003, the bank has nearly tripled in size in the past decade, according to Bryant: It now has nearly $900 million in AUM and about 1,100 accounts, and serves as a custodian for $93 billion in IRA assets.
Those advisors who use the new trusteed IRA product from Private Trust will have the bank itself appointed as a trustee over those assets, Bryant says. A key component of the offering, she adds, is that the bank works with a clients existing advisor in administering those assets, but does not replace him or her.
Clients like the freedom to not sever the relationship with their investment manager in the trust arena, she added. The document comes with our standard trustee fee so thats dependent on the size of the account.
NOTES OF CAUTION
Although the product is being marketed in part for mass affluent clients, both Bryant and Keebler urge the use of a clients CPA and estate planning attorney, if possible. These advisors should be comfortable with how the trusteed IRA is being used, both say -- and not only comfortable with it, Keebler adds, but [they should] review it thoroughly.
Used incorrectly, he points out, trusteed IRAs could interfere with a federal estate tax marital deduction. That deduction ensures that one spouses estate can pass, tax-free, to a surviving spouse before becoming subject to estate taxes at the latters death.
In particular, there are issues with qualification for the estate tax marital deduction and the definition of income under state law, according to Keebler.
There's another thing to watch out for, Keebler adds: In all likelihood, when you structure a trusteed IRA, you also give up the right of your spouse to do a Roth conversion and/or an IRA rollover.
And in some cases, clients may prefer to use a trust, despite its complexity, if they want to ensure their assets are also protected from creditors, he adds. You certainly dont have the same asset protection [with a trusteed IRA] as you would with a trust, according to Keebler. If Im sued and my money is in the right type of trust with the right drafting then my creditors will never get any money. With a trusteed trust, he says, creditors can wait for distributions and then pounce on those assets. The protective mechanism is not as ironclad as with a trust, he says.
Trusteed IRAs make less sense for clients with a net worth of $1 million of more, Keebler says. In those cases, fees of $2,500 to $4,000 to an estate planning attorney often arent burdensome. However, when an IRA of $200,000 or so is at stake it might make more sense to avoid that expense and use a trusteed IRA, he adds: I think it has a limited role.
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