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Is the Secure Act Good or Bad for Trusteed IRAs?

Here’s a look at what a trusteed IRA is and why it was a “dream product” until the Secure Act came along.

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Depending on your view, the Secure Act has either “killed” the trusteed IRA or given it a new lease on life. I’m in the latter camp. From my angle, the trusteed IRA is the perfect cure for one of the biggest Secure Act-created problems--namely, how to control distributions to a beneficiary under the 10-year rule. But if you’re a financial advisor looking for a sales pitch for the trusteed IRA, the Secure Act made your job harder.

Here’s a look at what a trusteed IRA is, why it was an easy-sell “dream product” until the Secure Act came along, and why it, although no longer a dream product, still has an important role in estate planning for retirement benefits under the Secure Act's 10-year rule.

Quick review: A trusteed IRA is an individual retirement account. It is just like any other IRA except it is in the legal form of a trust instead of the more common custodial account. For tax purposes there is no difference--both are just regular old IRAs (or Roth IRAs, as the case may be).

Before the Secure Act came along, the financial advisor whose firm offered trusteed IRAs had a terrific sales pitch: “We’re already managing the investments in your IRA. You want to leave your IRA to your children or grandchildren for a long-term gradual life expectancy payout. Did you know you don’t need to get a separate trust written up and name said trust as your IRA beneficiary to accomplish that goal? Instead, for no fee increase over what you’re paying us now, the IRA itself can contain the terms of the trust! And then we here at XYZ MegaBank will continue to manage the funds after your death, and we will pay out minimum distributions annually for 30, 40, 50, or whatever years to your children/grandchildren--plus more if you wish to specify larger distributions. We are professional trustees, and our trusteed IRA agreement is already IRS-approved. The trusteed IRA is the ideal vehicle to combine investment management and distribution management for you and your heirs!”

Who could resist that pitch? Where do I sign?

But along came the Secure Act at the end of 2019 and abolished the life expectancy payout for most beneficiaries. Now, the longest post-death tax deferral you can get for most IRA beneficiaries is just 10 years. You can still leave your IRA to your 25-year-old granddaughter “Amy,” but no longer can you tie it up so she will receive only annual required minimum distributions over her 50-plus-year life expectancy. If she is named as beneficiary of your IRA (whether it’s a custodial IRA or a trusteed IRA), she will receive outright distribution of the entire account no later than approximately age 35 (10 years after she inherits it).

For large IRAs, liquidation of the account over just 10 years will probably have a significant effect on the income tax levels payable by the recipient. For most families, it will not be possible to keep tax brackets low on such large distributions. Planners expect that a combination of careful timing of distributions (distributing more in lower-income years, less in high-income years) and deferral will keep the tax hit as small as possible, especially if integrated with proper tax-management of the recipient’s non-IRA investment portfolio.

Here is the new “menu” of options for leaving your IRA to Amy, with the pros and cons of each. For purposes of explanation, this assumes you die in 2021:

Name Amy as beneficiary of your "custodial" (nontrusteed) IRA. She can withdraw all the money immediately after your death, or she can spread out her withdrawals any way she wants over the 11 taxable years of the distribution period (2021–31), provided she withdraws the entire account no later than Dec. 31, 2031. One hopes she will obtain professional advice and/or educate herself about taxes in order to devise a sensible plan for when to draw down the IRA and integrate its management with the investment strategies of her non-IRA portfolio.

Create a separate trust for Amy and name that trust as beneficiary of the IRA. This approach allows the IRA owner to indicate exactly when Amy will receive distributions and for what purpose. For example, the trust could say Amy would receive "income of the trust plus principal if needed for her health, education, or support." The IRA owner-trust donor could specify that the trust would last for Amy's entire life or be distributed to her at whatever age the IRA owner thinks best--typical choices being age 35, 40, 45, and so on. The trustee of the trust would provide professional investment management and also be responsible for the timing of distributions from the IRA to the trust, subject to tax code requirements. Assuming the trust is structured so as to qualify for the 10-year payout rule for the IRA, all distributions from the IRA to the trust would have to be completed by Dec. 31, 2031. The trust approach offers the greatest possible customization: This is the only approach that allows the IRA owner to delay the beneficiary's total control for more than 10 years. However, this feature comes with a price: Distributions from the IRA to the trust will almost all be taxed at the highest possible income tax rate (37% currently) unless they are distributed to Amy in the same year received. But presumably the distributions will not all be passed right out to Amy (even to capture her lower tax bracket) since the whole point of naming a trust as beneficiary was to prevent the outright distribution of funds to her within the 10-year rule period. Thus, naming a trust as beneficiary will normally result in higher income taxes to achieve the trust's goals. But if Amy is going to be in the highest tax bracket anyway (she's CEO of a public company with a salary in the millions), this drawback is not a drawback!

Name Amy as beneficiary of a trusteed IRA. Just like a plain old custodial IRA, a trusteed IRA payable to Amy as beneficiary would have to be entirely distributed to her within 10 years after your death (by Dec. 31, 2031, in this example). The difference is that, unlike with a custodial IRA, Amy does not control the timing of distributions to herself. That distribution rate is controlled by you, the IRA owner, and (to the extent you indicate in the custodial agreement) by the IRA trustee. For example, you could dictate that distributions from the IRA to Amy would be made ratably over the duration of the trust (1/11th in the year of death, 1/10th the next year, and so on). Or you could require that no distributions be made until the end of the 10-year payout period, or that distributions be made before that time only for health, education, or support. Or you could give the trustee the duty of determining the best timetable for distributions (within the 10-year deadline) with regard to Amy's needs and tax bracket. As IRA owner, you control the rate, purpose, and timing of distributions as much as it is possible to control those within the ironclad limit of 100% distribution of the account to Amy by the end of the 10-year period.

Some would say that the trusteed IRA has another advantage over the IRA-payable-to-separate-trust model, and that is you don’t have to pay a lawyer to draft a separate trust. I do not support that as a reason to use one format or the other. To make sure the estate plan will work as you intend for your beneficiaries, the estate-planning lawyer should be fully involved in drafting the trusteed IRA and all other aspects of planning for the IRA and other assets. The trusteed IRA, if done properly as part of your entire estate plan, would not necessarily result in lower legal fees.

In summary, a trusteed IRA allows you the maximum possible control over timing of and reasons for distributions to the beneficiary within the constraints of the 10-year rule only. It does not protect the IRA money from potential future vicissitudes of the beneficiary's life (creditors, divorce problems, addiction issues, and so on) beyond the end of the 10-year payout period, nor does it allow you to make sure the trust fund will continue to benefit the next generation (your great-grandchildren). A real trust named as beneficiary can do those things, but at the price (in most cases) of higher income taxes on the IRA distributions.

Natalie Choate is a lawyer in Wellesley, Massachusetts, who concentrates in estate planning for retirement benefits. The 2019 edition of Choate's best-selling book, Life and Death Planning for Retirement Benefits, is available through her website,, where you can also see her speaking schedule and submit questions for this column. The views expressed in this article do not necessarily reflect the views of Morningstar.

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