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Experienced estate planning practiIH tioners know that the "stretch" IRA -Ljpromise is often deceptive without using a trust. Beneficiaries receiving retirement plan assets outright can and do withdraw more than the minimum required distribution (MRD), if not the entire amount. Trusts are necessary to keep larger funds in the family bloodline, ensure maximum income tax deferral, use generation-skipping leverage, and provide asset protection benefits to heirs.
The federal income tax rules, however, regarding such use are often unclear and, even when dear, can be problematic. see Keith A. Herman, Coordinating Retirement Accounts with Estate Planning 101 (What Every Estate Planner Needs to Know), Prob. & Prop. 52 Qan./Feb. 2006), a great primer.
This article introduces an increasingly available option, the trusteed IRA, and compares it to the main trust architectures available for trusts receiving retirement benefits: creating a "conduit" trust or an "accumulation" trust (modeled after the two examples in Treas. Reg. § 1.401(a)(9)-5 A-T). Recall that the "conduit" trust example creates a seemingly simple safe harbor for qualifying as a "see-through" trust: if the trust mandates mat the trustee pay any distributions from the IRA "immediately" to the designated beneficiary, only that beneficiary is considered for determining life expectancy. With a conduit trust, the remainder and contingent beneficiaries are irrelevant-even if it is a charity, estate, or other entity without a life expectancy. The "accumulation" trust example is murkier, but in theory the 1RS allows a trust to "accumulate" IRA distributions in the trust. Absent conduit trust language, this is probably how any traditional long-term trust is drafted. These options wiU be compared and contrasted with the trusteed IRA.
What Is a "lbusteed" IRA?
Many people are unaware that there are two legal forms of individual retirement accounts (IRAs): a custodial IRA under Code § 408(h) or a trusteed IRA under Code § 408(a). Historically, most IRAs have been opened as custodial accounts. Under Code § 408, there is no income tax différence between the two forms of IRA. While an IRA owner is living, the minor state law differences in the form are unlikely ever to surface, because most litigation about IRAs pertains to the tax treatment rather than the form of the agreement.
With a more advanced IRA provider, however, there...