Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

After Joy’s death, XYZ pays annually to Troy’s children, in equal shares, the RMD. As each child reaches age 40, he gains the right to withdraw additional amounts from his share of the trusteed IRA. Here are some reasons why a client might consider using an IRT instead of the more common custodial IRA:  Participant’s disability. The IRT agreement can authorize the trustee to use the IRT assets for the participant’s benefit during disability. An IRA custodian will not perform those duties; custodial IRA assets can be used for the benefit of the disabled participant only through the mechanism of a durable power of attorney or guardianship.  Limit beneficiary’s access. An IRA beneficiary can generally withdraw the entire account at will. An IRT can limit the beneficiary’s withdrawal rights so that the beneficiary can withdraw only the RMDs; or RMDs plus additional payments (such as for health or support). Thus, it may be used in place of a conduit trust in some cases. See ¶ 6.3.05 , ¶ 6.4.05 (A).  Limit beneficiary’s control at beneficiary’s death. Under an IRT, but not under most custodial IRAs, the participant can specify the “successor beneficiary, ” i.e., the person or entity who will become the owner of the account after the original beneficiary’s death. See ¶ 1.5.12 (E).  Avoid complications of RMD trust rules. A trust named as beneficiary of a custodial IRA must meet complicated IRS requirements to qualify as a “see-through trust” ( ¶ 6.2 – ¶ 6.3 ). An IRT does not have to jump through these hoops, because the trust is not the beneficiary of an IRA—it is the IRA. There are two types of trusteed IRAs, custom-drafted and (for lack of a better word) “pre- approved prototype.” The “prototype” form of IRT is a complete trust agreement for which the IRA provider has obtained IRS approval. It comes as a pre-printed booklet (similar to the documents establishing “custodial” IRAs, but longer), which functions as an adoption agreement. The IRA participant is given “check the box” choices for various popular trust provisions, such as: the beneficiary can withdraw only the RMD (or, for a spouse-beneficiary, the greater of the account’s income or the RMD); or RMDs plus more if needed for health or support, or in the trustee’s discretion; with or without the right to greater control upon reaching a certain age. If the participant’s estate planning goal is met by one of these “canned” options, the participant can avoid paying a legal fee to draft a trust agreement by using a trusteed IRA. More customizable trusteed IRAs also exist. Any bank can serve as trustee of a trusteed IRA; no special IRS approval is required. The bank needs to be familiar with the requirements applicable to IRA providers. Then, all that is required is for the participant and IRA provider to enter into a trust agreement that complies with § 408 . The parties can use IRS Form 5305, “Traditional Individual Retirement Trust Account” (or 5305-R for a trusteed Roth IRA), adding any extra provisions appropriate for the client’s estate plan as an attachment (part of “Article VIII” of Form 5305, “additional provisions”). The estate planning lawyer should have a leading role in preparing this document. IRS approval is not required and in fact cannot be obtained for an individual’s IRA or IRT. An IRT has some drawbacks: The provider’s fee (or minimum account size) is typically higher than for a custodial IRA because more services are provided, but that may be appropriate if the client needs the services. Also, since the IRT must pass all RMDs out to the IRT beneficiary