The Benefits Of A Trusteed IRA Over A Traditional IRA (Episode # 300)

0:32 Welcome afternoon, Michigan Anders. It is Tuesday, March twelve, twenty twenty four, and of course this is Tuesday with Tom, Michigan's only weekly Internet show where we do answer your questions about a state planning and estate settlement in Michigan, and we don't send you a bill. As always, I'm your host, Tom Doyle, a state planning attorney, lifelong Michigan resident, and ambassador for all things good in this great state of Michigan. Welcome, Welcome, Welcome to today's program. Well, just a brief recamp of last week's episode. I talked about six reverse mortgage myths. So if you're thinking about having reverse mortgage, you want more information about it, or you're concerned about some of the things that you've heard about them, I encourage you to listen to last week's program where I talk about the common myths that there are out there about reverse mortgages. Today, going to continue a theme that I started a couple weeks ago. We're going to talk a little bit about the benefits of a trusteed I Ray over a traditional I ray. But please remember what I'm about to discuss is as always for educational purposes only in It is not intended to be legal advice, or tax advice or financial advice for you.

2:07 You need to work with your attorney to determine what is appropriate for you, and of course your tax advisor, your financial advisor, all of them is part of your team to help determine what is appropriate for you and your estate plan. The benefits of a trustee I RAY over a traditional I are a well, most of you are no doubt familiar and likely have what's considered a traditional I RA. Perhaps you have it with a financial organization, maybe something like a Merrill Lynch or a Schwab, or maybe you have it at your bank or your credit union, where you understand you have put money aside.

3:02 A traditional IRA, that money is put aside pre tax and then when you begin drawing the funds out of your IRA, you're going to pay the tax as income tax at that time or, as you probably also understand, if you die, you can name a beneficiary or multiple beneficiaris if you want, who will then receive the IRA. They will take the money out of the IRA, and they will then pay the taxes on whatever was in the IRA. That is what is considered in its simplest terms a trust a traditional IRA.

3:44 Now, one of the questions that frequently is presented to us though when we're putting together in the state plan is I have a traditional IRA, but I don't want upon my death the proceeds simply to go outright to a beneficiary. I want it to be managed for them in some sort of a trust arrangement. I mean, part of the reason we're oftentimes creating a trust for clients is to provide management of an estate after they die. Maybe they have minor children, maybe they have adult children, but they don't want them to get their hands on the money all at once, whatever the circumstances be.

4:27 Where we are looking at using a trust as a tool to manage an estate after you die, well, one possibility that is sometimes explored as well, what if I simply take my traditional IRA and I make my living trust the beneficiary on that IRA. That is something that we used to do regularly with clients. We would have visions in the trust itself, and when the proceeds came into the trust, those provisions provided for the trust to be what we would call a see through or a look through trust, so that the benefits from the IRA would get taxed at the beneficiaries level rather than at the trust.

5:18 The problem a number of changes that have occurred. The secure acts come around a number of rules and regulations that come out by the IRS, And as a result of all of that, we have determined that we no longer recommend to our clients that they simply make their living trust the beneficiary on the IRA. We've run into situations where a custodian of the IRA doesn't want to recognize the terms of the trust. Maybe the custodium of the IRA wants to have their own terms and a trust whatever happens to be. And it's become problematic because also the IRS periodically makes change to their rules and regulations and their interpretations concerning iras and when a trust is a beneficiary, and it's just more difficult to even manage the whole updating process that is oftentimes required. So what's an alternative. An alternative that many clients are beginning to look at today is what is called a trusteed ira. What is it? A trusteed ira is very much like your traditional IRA. However, the real difference is is that there is now a trust if you think about it, inside the IRA,

6:48 at least that's the way to think about it. So let's say that you have your IRA at Merrilynch. Just use Merri Lynch as an example. If you have a TRUSTEEDRA with Merrill Lynch, it is a separate trust, separate from your living trust that we've created for you, and its sole purpose is to manage and control the IRA that is associated with that trust. So it's exactly the same as a regular IRA, with the exception that the account assets are being held in a trust rather than what we generally think of as a custodial account. However, under the tax code, because both types of iras are considered identical, they are still treated as the same under the tax code regarding irase. The IRA provider in this case, what we will refer to as the financial institution is the one who's going to administer the IRA, also serves as the trustee of the trusteed IRA, rather than simply as a custodian your traditional iray. They're holding onto your funds, perhaps investing them, but that's really all that they are doing, whereas under a trusteede diarray they now

8:18 have additional responsibilities as a trustee to manage the investments and to distribute the proceeds of the IRA as you direct in the terms of the trusteed IRA. It should be clearful what I'm saying. A trusteede IRA is something that you will have to look for to find out does the company, perhaps the financial organization that you're already working with, have or offer trusteed iras. What I will do is after this broadcast airs, we have the ability to post a blog on Tuesday with Tom. I'm going to post a blog on Tuesday with Tom which will be a list of what I have come up with so far as current financial organizations that are offering trusteed ira. So you can look at that list see if it's somebody that you're already working with, then you can reach out to them and have a discussion with them about the possibility of a trusteed IRA. If it's not somebody that you're already working with, then you can reach out to one of these other organizations or check with whoever is the custody and you're currently working with, and maybe they have other resources available. But

9:50 what's the advantage, So think about this. Okay, Let's say, for example, that you have minor children you're looking in saying, hey, upon my death I don't want my minor children to receive the inheritance now that includes the IRA. I don't want to receive the IRA now, I want it to be managed, if you will after my death for them by using a trustee IRA. Essentially you're creating a trust again with the financial institution, and the terms of that trust can control who will inherit the IRA, just like you do now with your traditional IRA, and it will control how quickly they can withdraw the funds. Now that's important because it's the trust terms of the IRA that's going to control how quickly the beneficiary can withdraw the funds. It's not the beneficiary who's going to be making that choice upon your death. It will be already defined in the term terms of the trust that you've created.

11:01 So under those circumstances, you can provide, if you will, that you want the proceeds not to simply be distributed outright too in this case the children, you want it to be distributed over time, and under the current IRIS rules, you'll be looking at the option of how long can you actually stretch out that distribution it used to be over your child's life expectancy. That's not available in most cases. Now it's normally going to be a ten year period of time. When you're talking about minor children, it's going to be ten years from when they become adults. But tax advantages to distributing that over period of time, the trusteed I R RAY is going to be able to be used to preserve those potential tax advantage. Another example, though, maybe you have a blended family and you might be looking in saying, hey, I want to take care of my spouse after my death, but once my spouse dies, I want my estate to go to my children. Very common planning with second marriages where someone is saying I want to take care of my spouse, but I don't want my estate to go to my spouse's children. I wanted to go to my children. With the traditional IRA, you normally would be looking at making the spouse the beneficiary of the IRA so that the spouse

12:33 can roll it over into his or her own IRA. But now what it now belongs to the spouse, and the spouse can then determine who they want to be a beneficiary. Well a trustee IRA, you can create a structure that will provide benefits to your spouse while your spouse is alive and still be sure that the remaining amount in the IRA at the day of your spouse will in fact go to your children. Another advantage if you listen to my February seventeenth episode, which was what happens if my minor child receives my IRA, well, if you have a minor child who's going to receive your IRA, what's going to be needed is somebody is going to have to go to the probate court have themselves appointed a conservator that's going to be the person legally who can receive the funds on behalf of a minor child until they get to be eighteen. If you use a trustee IRA, however, it will not be necessary to have that conservator appointed. So there certainly will be some financial savings to the family of the miner, who otherwise would have to be paying a lawyer, no doubt, to have the conservatoire established for them. Another advantage is there can be spendthrift protection from creditors because the proceeds are still being controlled

14:05 by the trust they haven't been distributed out right in this case to your children. Your children's creditors are limited to what they can do and trying to actually get those proceeds from the trust if there's a debt that your child has during your lifetime. Though, there are benefits in that you still have professional management. If you become in capacity to think about traditional IRA, you own it, you manage it. You become incapacitated, Now you need somebody to manage it for you. Now, hopefully you have an appropriate power of attorney in place that will do that for you. But if you don't, one advantage of having the trustee IRA is that that trustee will now begin managing that IRA for you during your lifetime, So there is a management aspect to it even during your lifetime in the event of in capacity. Another potential advantage I guess is that it preserves the continuity of the IRA management during your lifetime and after your death. Right now, your traditional IRA, maybe it's going to get distributed out. Maybe that new person that's going to get distributed out to decides to take up to a different financial services company to manage it for them.

15:26 Well, one of the advantages, if you think about it, of a trustee DIRA is again let's say that you have that at I'll pick somebody else. Let's say Charles Schwab. You've got Charles Schwab who's investing it during your lifetime, you're happy with what Charles Schwab is doing for you. After your death, those proceeds can continue to be managed by Charles Schwab, So there's a continuity, if you will, in the management after your death. Important and this is one of the reasons that we have decided to no longer recommend to clients that they make their revocable living trust the beneficiary. Again, the IRS is always looking at regulations, interpreting the law and coming up with new regulations and coming up with new interpretations, and as a result of that, oftentimes it requires a trust that is going to receive proceeds from an IRA to be updated. Well, if it's a trustee IRA, that will be something that the financial company that's the trustee in managing your IRA is normally going to do. They will make sure that the trust is always up to date.

16:45 They will make sure that it's complying with whatever the new rules and regulations are that the IRS has, whereas that is not as readily done in the world of revocable living trust when they are prepared by an attorney and another consideration is that in many cases it is less expensive to have the trusteed IRA because the alternative that many clients are now looking at not making their revocable trust the beneficiary, but they're looking at having a totally separate, standalone IRARA trust created.

17:30 So there's a cost associated with that, having a separate, standalone IRA trust created, and there are good reasons to do even that rather than putting them into the traditional revocable trust that's being created for you. So even in our situation, if a client says, hey, I would like to have my IRA proceeds paid into a trust that is more controlled and designed by me, that can be done. But we will be recommending that that is done by a separate trust from the normal revocable living trust. So I've got two trusts going on, and there's reasons I don't need to go in to today as to why we would recommend that. But so there's a cost associated with that, and then there's going to be a cost associated with maintaining that separate IRA trust. Well, you might well find that the financial institution that you're working with, whatever fees they have associated with the trusteed IRA are oftentimes less than creating and managing the separate ira trusts. Now, for some people that might be considered a disadvantage. There will be fees, no doubt charged by the financial company in order to create and set up and manage the trusteed ira.

19:00 So you need to obviously look to whatever those fees are going to be, compare those fees to what it costs otherwise to have your traditional ira. Another disadvantage is with a traditional ira, you might be familiar with this. Let's say that I have a traditional ira and maybe let's pick somebody else. Let's say that I've got one with E Trade, and I've got my Ira at E Trade and one day decide, you know what, I don't want my Ira to be at E trade anymore. Maybe I'm now going to transfer it over to let's say, to the America Trade. I've going to transfer it over to a new ira. Well, you can normally arrange what's called a trustee to trustee transfer that goes directly in that case from one custodian to the other custodian. It's not considered a distribution, so you don't have to pay taxes as part of that transfer. Unfortunately, many trustee di arrays and again, this is something that you need to discuss with the company that you're discussed talking to. Many trustee irays don't allow assets to be transferred to another financial organization, so you need to know that, and if that's the case, you need to understand that when you're setting up that trustee IRA. And for a number of clients too, the problem sometimes with going with a trustee diarrase.

20:30 Let's say you're working with a financial advisor already that you really have a good relationship with and you're happy with the services that you're providing, but perhaps their company doesn't offer trusted iras. You might find that when you go shopping for trustee iras, many of the financial companies that are offering the trusteed dirays might not permit you to name your current investment advisor to continue to be in charge of investment advice for the trustee iras. You will in fact have to now use an investment advisor from the other companies. So what if you're happy with the investment advisor that you already have and you're going to look for a trusteed IRA, than what you need to look for is a trusteed IRA where you can control the investment advisor, and what normally that is going to be, It's going to be more of what you might consider an independent type trustee.

21:42 And that's probably more what you're going to be looking for, is an independent trustee. It might be, for example, the private trust company. That's one of the companies that I'm somewhat familiar with. The private trust Company, at least in their literature in indicates that you can continue to utilize your same investment advisor. They will create the trusteed i r RAY. They will be the trustee of the I RAY. They'll have obviously their free use for doing it, but they will continue to permit you to allow your current investment advisor to remain as the investment advisor to the trust. Now that's just one example of the private trust company that I've come across. I believe there are others out there, and if you go through the list of trusteed iras that I will post on our blog, you can probably pick out some of those that you might want to consider checking into if that is a concern for you.

22:44 But the bottom line is, if you are considering having your trust be the recipient of IRA proceeds, you really should take a look at the trusteed irase. It's really, if you think about it, it's the marriage of a trust and an IRA. It's a single tool that's the trusteed IRA that takes advantage of both the trust and the IRA worlds. If you will, It blends the custodial IRA account into a trust and takes advantages of the tax advantages that are available through the IRA. That essentially is what a trusteed IRA is. And again, when you have your iras and you're looking at putting your plan together, if you're consulting with amand and I, we're going to have a discussion with you about options that you might consider relative to how you're going to be handling your IRA proceeds. And one of those is certainly going to be recommending that you be in contact with your financial company that you're working with or the financial advisor that you're working with and see what might be available for you. Now, for more information on iras in general, simply head

24:17 on over to the website Tuesday with Time dot Com. There you'll find a search bar. And I've had a number of episodes on different aspects of irays. I've talked about self directed iras, what a checkbook IRA, is maybe you want to have consider having multiple irays using your IRA to buy a house and last week's or a week ago, I guess it wasn't last week's but two weeks ago. I think it was now two episodes ago is when I talked about what happens if your IRA is going to be inherited by your children.

25:19 A reminder, of course, then amand and I would be honored to have the opportunity to help you protect your loved ones by putting together your state plan, a, mending a current plan, or assisting you in settling an estate. Simply head on over to the office website that's Doyle LAWPC dot com. There you're going to find information on how you can schedule a consultation with it, be it virtual through zoom or telephone, or in person at the East Lansing office. Reminder too, there is the legal Store available on our website that is there in case you're just looking for a particular individual document.

26:02 Maybe all you need is a new durable power of attorney. Head on over to the Legal Store, take a look and you might be able to order that online where we can prepare it and email it to you to be printed at your end. Again, that is all available and much more at the website Doyle LOWPC dot com. Well, I think that's probably going to be enough for today's program. As always, though, if you have a comment about the program, you have a topic that you'd like to have me discuss, or questions that you would like to have answered, please send me an email is one option. That's Tom at Tuesday with Tom dot com. And if you've been listening lately, you know that the new website has a microphone on it. Simply click on that microphone and you can leave a voice message for me, perhaps a comment about the program, topic you'd like to have me discuss, etc. Also, please follow us on Facebook, invite your family and friends to follow us. That is at Tuesday with Tom and the office is at Doyle Law PC. Remember two. The program is available on Apple Podcasts, Spotify, Amazon Music, Google Podcast, iHeartRadio, Spreaker,

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