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