OCEAN CITY – An IRA can be one of the key building blocks to a secure retirement — millions of Americans save a portion of their assets in individual retirement accounts. But when it comes to estate planning issues, for some people traditional IRAs don’t provide enough of a foundation.
There are limits in traditional IRAs as to what owners can control regarding how their beneficiaries can take distributions after their death. For instance, they’re unable to ensure that their heirs keep the money in the IRA and reap whatever tax benefits may come from any compounded growth. If heirs do elect to withdraw the funds as a lump sum, they can face steep income taxes that can substantially reduce the inheritance you have intended for them.
That’s where a trusteed IRA can make a substantial difference. Trusteed IRAs offer the benefits of a traditional IRA, including tax-deductible contributions within certain limits, tax-deferred accumulation of assets and a simple structure. But they also include many of the benefits of a trust. They can help you direct how beneficiaries may receive the proceeds, guide succession planning over generations and see to the continuous management of assets by a trustee.
“A trusteed IRA provides a way to integrate your retirement assets with an estate plan in a convenient and cost-effective way,” says Mark Newcomb, Vice President and Chief Trust Officer for Merrill Lynch Trust Company.
The key benefit of a trusteed IRA is in the higher degree of control. “You created the wealth, and trusteed IRAs allow you to determine how it can be distributed, essentially providing an income stream for your heirs,” says Newcomb. “It’s quite a gift to be able to give to children and even generations beyond."
Trusteed IRAs also allow you to hold some control over how the assets may be used. The trustee has discretion over the assets in the account and can release them according to guidelines you lay out — for example, to pay for your heirs’ health care, education costs or even emergency expenses.
A trusteed IRA can provide important advantages during your lifetime as well. Maintaining simplicity in your financial matters is important when you’re in the midst of trying circumstances, such as a medical emergency. In cases like these, a trusteed IRA gives you the option of authorizing the trustee or beneficiary to use the funds on your behalf and continue your investment strategy in the event that you become incapacitated. If the assets were in an ordinary IRA, your family would need a durable power of attorney to gain access to the funds—and might have to go to court to release payments for medical expenses or other bills.
Trusteed IRAs can also prove advantageous in more mundane — though still critical — scenarios. “They can even be used to pay bills,” Newcomb notes. “We often see them apply the IRA’s minimum required distributions to day-to-day bills—it can be an efficient withdrawal strategy that can help simplify your financial life.”
Creating a trusteed IRA involves a few additional steps to those you would take in opening a traditional IRA. You will need to figure out what lifetime and after-death benefits you would like to create for your trust. It works best if you integrate both tasks with your broader estate plan strategy by consulting with your lawyer and tax advisor as well as your financial advisor for the results that most accurately reflect your wishes.
(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)