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Trusteed IRAs: A Sales Pitch

A 'trusteed' IRA has several significant advantages over a 'custodial' IRA, but they come at a cost.

Natalie Choate, 02/14/2014

Question: Most of my clients' IRAs are so-called "custodial IRAs." Is there any reason why they should consider switching to "trusteed IRAs" instead?

Answer: A "trusteed" IRA has several significant advantages over a "custodial" IRA. Those advantages come at a cost, so the benefit and cost must be weighed for each client.

Let's start with some background. A custodial account and a trust are two different forms of title-holding for property. Trusts are well known to most planners. A trust involves three parties:

--The donor (or trustor) who creates and funds the trust and establishes its terms via the trust instrument he or she drafts and signs.

--The trustee, who carries out the terms of the trust instrument in accordance with a long-established canon of statutory and common-law rules governing fiduciary behavior.

--The beneficiary(ies), for whose benefit the trust is created and administered.

Though the trustee holds "legal title" to the trust assets, he does so solely in a fiduciary capacity, for the benefit of the "beneficial owner" of the property--namely, the trust beneficiary. The trustee must invest and administer the trust's funds for the benefit of the beneficiary.

A custodial account is much less elaborate. The custodian holds title to assets merely as a passive agent for the true owner, and acts solely at the direction of the owner.

Natalie Choate practices law in Boston with Nutter McClennen & Fish LLP, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is a leading resource for professionals in this field.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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