Low cost options for Trusteed IRA or IRA Inheritance Trust?

Submitted by Michael Marvelli on Sun, 2015-08-23 20:42

My goal is to “stretch” our IRA accounts over the beneficiary’s life expectancy; in this case, for minor children. Is anyone aware of any specific trust company(s) that offer a Trusteed IRA that does NOT require use of a professional advisor (generally required through the trust company itself)? I am aware of USAA, Key Bank, Merrill, Northern Trust, etc. and they all charge high fees that include investment advisory fees. I’m willing to pay trust fees to cover trust administration costs, but not willing to pay 50-200 bps for investment management. In my mind, such a product should cost under 20 bps a year. Are there “self-directed” trusteed IRAs that allow a non-professional trustee to manage the account? Specific names would be helpful. I’m not seeking a lot of customization here, just the basic goal to stretch the IRA.

An alternative would be to create a standalone conduit trust that would ensure the stretch out. There are many examples of these…IRA Beneficiary Trust, IRA Inheritance Trust, etc. For a $1 million in retirement assets, what should it cost to have such a trust drafted by an estate planning attorney? I am not seeking customization (i.e. not seeking spendthrift provisions, accumulation trusts, toggles, etc.); just the basic assurance that it will be stretched. Will this cost $1,500, $3,000, etc? Finally, there should be a basic conduit trust for this purpose that a consumer can configure online through a group like Nolo. Does such an off-the-shelf product exist, with a few check-the-box options?

I’ve read Mr. Slott’s recommendation to purchase life insurance instead. Unfortunately, this is not a viable option in this situation.

Thank you, in advance, for any feedback offered!



Submitted by Alan - IRA critic on Sun, 2015-08-23 22:39

Cannot answer most of your questions, but you may want to review the article on trusteed IRAs in the list of articles in this link:http://kkwc.com/attorney/bruce-d-steiner/

Submitted by Michael Marvelli on Mon, 2015-08-24 02:30

Thank you for replying and pointing me to Mr. Steiner’s article on Trusteed IRAs. It appears that the product is fraught with potential and subtle pitfalls. I’ll turn my attention to exploring the other alternative of naming a trust as beneficiary of the IRA. I understand that creating a sub trust within one’s revocable living trust (for all other assets) is possible but difficult to implement in practice, and that is why I mentioned a standalone trust in my post above. I suspect that a testamentary trust could be created in one’s Will as an alternative. I am about to have a will and trust drafted, and would be appreciative of any feedback whether it is more cost effective and efficacious to create this in one’s Will or a separate trust instrument. For context, we live in California and the beneficiaries are twin 7 year olds so I can consider a pot trust as opposed to two separate trusts for each child. If a trust is created in one’s Will for this purpose, can CA probate be avoided for the IRA assets?

Submitted by William Tuttle on Mon, 2015-08-24 15:32

I don’t know if he frequents this forum, but I have seen him on Bogleheads.org. I do not believe he is admitted in CA, but he has shown to be very generous with general information in reponding to posts. I don’t know if he would be inclinded to respond to a direct request. After all, his time is valuable and he might be wary of giving direct advice..I believe Bruce’s recent position is that standalone trusts are unecessary and he usually does testamentary trusts for this purpose. Yes, with twins a single trust would suffice, because they are the same age and would have the same distribution divisor. Either trust type and a beneficiary deignation to such a trust, keeps the IRA assets out of probate..Also, many years ago, I seem to remember Bruce stating that he had some success with specific IRA custodians accepting custom beneficiary designations mandating lifetime distributions. If I am recalling correctly this was based on a PLR, where the IRS ruled that this was a legitimate action of an account owner.

Submitted by Michael Marvelli on Tue, 2015-08-25 00:37

Thank you for your input. Your specific feedback “Either trust type and a beneficiary designation to such a trust, keeps the IRA assets out of probate” is encouraging. Elsewhere I have read the following, although not specific to IRA assets: Quote: “Unlike living trusts, testamentary trusts do not avoid probate. The executor will probate the will and as part of the probate process, he or she will create the trust. ” And further “The testamentary trust is not automatically created at death but is commonly specified in a will and so as a will provision, the trust property must go through probate prior to commencement of the trust.” The above quote is talking about testamentary trusts in general. I presume that a testamentary trust solely focused on IRAs while such trust is named as the IRA beneficiary is what allows this type of testamentary trust to avoid probate? Quote: “From the time of the settlor’s death until the expiration of the testamentary trust, the probate court checks up on the trust to make sure it is being handled properly. Depending on how long this time frame lasts, legal fees could add up, so this should be a consideration when deciding whether to opt for a testamentary trust.” Does anyone know whether this periodic checkup by the probate court applies to IRA testamentary trusts in CA?

Submitted by William Tuttle on Tue, 2015-08-25 04:16

First of all, I Am Not A Lawyer (IANAL), just giving you my experience. For wills and trusts you should retain legal counsel. I am only anwering broad questions.The quotes above are in the context of assets that would either be in a will or a living trust. These are assets that will either be distributed through probate or through the living trust. The common factor is that they usually are referring to near term distribution and be done with it.Just because a testamentary trust is created by will, does not mean it contains only or any probate assets. You can create a testamentary trust purely for the purpose of collecting non-probate assets.You are talking about an asset that can be passed directly to beneficiaries. If you choose to use a trust to provide a greater degree of control. This is done by a trust created outside of the will or within the will. Either way to enforce the lifetime distribution the trust will have a lifetime of the beneficiaries (of course you could designate termination at some specified age.Regardless of the birth of the trust, at least in my state the trust will be administered by the probate court and annual reports will be required. I don’t know about CA or for that matter any other state. 

Submitted by Ben Meyer on Tue, 2015-08-25 17:17

  • Spiritrider, hearing that your state requires probate court supervision of a trust “[r]egardless of the birth of the trust” sounds like a matter of concern.  Do you mean to say that a credit shelter trust established at the time of death by a living trust is subject to probate court supervision in your state?  This sounds quite unusual.  What state is your state?
  • It would be understandable that a probate court would be involved in the establishment of a testamentary trust, but should not be required for a trust established pursuant to a pre-existing living trust.

Submitted by William Tuttle on Wed, 2015-08-26 02:22

Depends what you mean by “supervision”. Trustee’s accounting must be submitted each year in NH. 

Submitted by Michael Marvelli on Wed, 2015-08-26 02:49

Thanks for the continued feedback. One of my goals with creating my estate plan is to avoid probate in California–one of the more onerous states in this regard. Although I have read Mr. Steiner’s posts elsewhere in direct response to the question as to whether an IRA with a beneficiary designation that names a testamentary trust created in a Will is included in one’s probate estate (he says that it is not), that does not prevent the executor of the Will from having to obtain validity of the Will in probate in order to create the testamentary trust. According to this quote:”Since your testamentary trust is created and funded by the language of your will, a probate court must make a determination that your will is valid before the trust can be created. Generally, courts do this at the beginning of the probate process. The court next appoints an executor to manage your estate, typically the person you named to perform that duty in your will. Since your will creates the trust, your executor has the responsibility of establishing the trust according to the terms of your will. Your executor is responsible for distributing your assets once he pays your creditors, but he cannot distribute assets to a trust until he creates that trust during probate.”I wish to avoid probate so this takes me back to square one; having to go to the expense of a standalone retirement trust I suppose. Benn, confirm with your attorney, but my understanding is that an intervivos trust (including a credit shelter trust created therein) avoids probate entirely.  

Submitted by William Tuttle on Wed, 2015-08-26 14:41

While this is not CA, here is my experience of being Executor of multiple wills and Trustee of multiple trusts (Conduit, Living, and Testamentary).The Executor and Trustee, petition the Probate Court for appointment. These are routinely granted and the petitioner receives appointment. The Trustee of a Testamentary Trust is named separately from the Executor in the will and can be a different person.  There can be estate (probate) assets or non-probate assets (those with designated beneficiaries). These can be taxable accounts, retirement accounts, life insurance, etc… The Executor only has control of probate assets. If some or all of probate assets are directed into the Trust, the Executor distributes them to the Trust just like any other probate asset going to a designated recipient. Non-probate assets fall ouside of the probate process. Those assets that have named beneficaries go directly to them. Likewise, non-probate assets with a Testamentary Trust as the beneficiary go directly to the Trust. This is why Mr. Steiner stated that an IRA with a beneficiary designation that names a testamentary trust is not included in the probate estate, just llike an IRA with a live person as a beneficiary is not a probate asset.The usual disclaimers, IANAL, this is for NH not CA, and the above is general experience and the law being the law (an employment program for lawyers), I’m sure their can be deviations based on some specific fact pattern. The bottom line being that you need real professional representation to plan and execute these documents. 

Submitted by Ben Meyer on Wed, 2015-08-26 17:52

  • New Hampshire apparently has a statutory probate requirement that is not shared by most other states. NH requires an annual accounting to be filed with the probate court where a testamentary trust has been established under a will.  However, effective January 1, 2012, a will may establish a testamentary trust and waive the annual probate court accounting requirements.  Accountings must still be provided to the beneficiaries.  (See http://www.bondpa.com/blog.php?s=changes-to-new-hampshire-trust-laws-effective-september-1-2011)
  • Spiritrider, if you are required to submit an annual trust accounting to the court, you may be able to petition the court to remove the filing requirement, assuming you have the concurrence of all trust beneficiaries.  It sounds like a burdensome thing to contend with, so possibly you may be able to secure court permission to submit a less formal accounting to only the beneficiaries.  You may also save some annual accounting fees as a result.  An experienced NH estate attorney would be needed to achieve this. 
  • The trustees of inter-vivos trusts that have become irrevocable are required to account to the beneficiaries of the trust on an annual basis, without court supervision, unless the trust expressly provides otherwise.  (See http://ansellpa.com/index.php/estate_and_trust_administration/)

Submitted by Bruce Steiner on Thu, 2015-09-03 03:29

  • As others have pointed out, the trusteed IRAs are designed for the corporate trustee to retain and manage the assets.  They tend to be inflexible.

 

  • Including trusts to be the beneficiaries of the IRA should cost very little beyond the cost of the Will (or revocable trust).  We generally include them in the Will.  

 

  • In most cases, in most states, probating a Will is not particularly difficult, expensive or burdensome.  Living trusts are overhyped and oversold, and for most people, in most states, are not necessary, and tend to be a distraction.

 

  • However, if you’re in California where revocable trusts are commonly used (for reasons specific to California), you could just as easily include the trusts that will receive the IRA benefits in the revocable trust.  Whether in the Will, or in a revocable trust, they’re essentially the same as the trusts for the nonretirement assets, except that in order to qualify for the stretch, they have to meet certain requirements.  Essentially, none of the IRA benefits can ever go to anyone older than the person whose life expectancy you want to use to measure the stretch (for example, the oldest chlid), or to anyone other than an individual (in other words, no charities) or another trust subject to the same restrictions.

 

  • Conduit trusts rarely if ever make any sense.  If the beneficiary lives to life expectancy (which is what you would expect), all of the assets will be thrown into the beneficiary’s estate, and exposed to the beneficiary’s creditors and spouses, thus defeating the purpose of the trust.  There’s no additional cost to drafting the trusts to be discretionary, so that the trustees can distribute the income and principal, or accumulate the income (and the distributions from the IRA), as they think best.  Indeed, it would probably be less expensive to make the trusts discretionary, since that’s how the trusts for the other assets would be, and since we do far more discretionary trusts than we do conduit trusts.

 

  • I’m familiar with the toggle approach (a conduit trust that someone can convert to a discretionary trust), but I don’t think it makes any sense.  It requires someone to do something to get to where you should have been in the first place.  I think it’s more of a marketing gimmick than anything else. 

 

  • For more on trusts as beneficiaries of retirement benefits, see my article on that subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal:  http://www.elderlawanswers.com/Documents/Trusts%20as%20Beneficiaries%20of%20Retirement%20Benefits.pdf.

Add new comment

Log in or register to post comments