The following is for educational use only. This material is not intended to replace any tax or legal advice. The reader should obtain personal counsel before implementing any methods described herein. Masculine can mean feminine, and singular can mean plural.
An online estate planning service platform providing powerful and unique auto-processing applications at fingertip control of the client through secure 24/7 login access has arrived. Welcome to The eStatePlanTM / Dynamic Trust Portfolio platform.
Our proprietary The eStatePlan dynamics enable end-user clients, in the privacy of their own home or at their advisor’s office, and with the assistance of Client Management Services (CMS) staff, to create a digitized/paperless living trust estate plan that can be electronically (i) implemented, (ii) funded, (iii) stored, (iv) modified, (v) shared, and eventually (vi) settled all within a cloud-based environment.
Among the many features that The eStatePlan system provides is the enabling functionality allowing total control of The eStatePlan’s SuperCharged IRA offering. The following provides a description of what it is and how it works.
Comparing IRA Administrative Services
There are two primary holding accounts for IRAs – “custodial accounts” and “trust accounts”. (IRAs can also be held in annuity contracts as a third option.) The majority of IRAs are held in custodial accounts since they are easy to establish and inexpensive to maintain, and it’s the only IRA admin format most financial institutions offer. A custodial IRA administrator does little more than house the IRA and perform the minimally required federal reporting duties on behalf of the account owner.
The drawback with custodial IRAs is their inability to function as trusteed-IRA accounts and thus provide no meaningful planning opportunities for the account owner other than to name a remainderman beneficiary. The only way custodial IRAs can be managed by a trustee (with trustee managerial services) is by having the IRA payable to the owner’s trust upon his decease. And many IRA owners don’t make those simple arrangements. Alternatively, trust (i.e., trusteed) accounts can be held by a corporate trustee in a “directed trust” arrangement, which allows the IRA owner’s investment advisor to direct the trustee as to the investable trust assets, including “trusteed IRAs”.
A Need for Planning Opportunities
The consequences over a lack of planning for inherited IRAs are obvious. Such accounts can become fully vested in a one-time, lump sum taxable disposition to a financially unsophisticated beneficiary. That presents at least the imminent prospect of a short, taxable spend-down to depletion or even a destructive, self-inflicted path because of the access to immediate and uncontrolled wealth. There are other concerns to consider including the fact that IRA funds distributed outright and free of trust can be exposed to the beneficiary’s spendthrift (or divorcing) spouse and/or potential creditor.
Controlling Inherited IRAs
Prior to the enactment of the SECURE Act in January of 2020, annual distributions of Inherited IRAs could be stretched/calculated all the way out – for required minimum distribution (RMD) purposes – to the actuarial life expectancy of the IRA beneficiary. Now under the current SECURE Act, all Inherited IRAs, with the exception involving “Eligible Designated Beneficiaries” (a surviving spouse, a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are less than 10 years younger than the original IRA owner), must be distributed entirely by the end of the year representing the 10th anniversary of the IRA owner’s decease. Nevertheless, significant income tax savings, investment opportunities, and up to a 10-year term of insulation from (potential) creditors are still available with proper planning involving Inherited IRAs payable to living trusts when qualifying as “Designated Beneficiary Trusts”, which can be accomplished with proper document language construction.
So, why would any responsible parent or grandparent wanting to benefit their loved ones with their assets, including IRAs, not take the time to establish thoughtful planning safeguards instead of just defaulting to a custodial IRA arrangement? Why would an IRA owner jeopardize his/her earned retirement plan to a careless spenddown scenario by a financially unsophisticated, at risk, or irresponsible heir when there are controlling tools available to address and completely avoid the problem? The answer is primarily two-fold: a lack of planning information and the general absence of advisor-related facilitating services. This is where a well-informed advisor can help make a big difference.
Assessing the Marketplace
When measuring the potential of this opportunity, consider the numbers published by Investment Company Institute (ICI) concerning IRA-related facts. It is known that there are about 75 million baby boomers – near or now in retirement – many of whom want to create reasonable and reliable income streams for their retirement years and to plan for the proper management/disposition of those asset accounts should they not use up the account funds during their lifetimes. According to ICI (as of this writing), there are now $12.2 trillion in traditional & Roth IRA accounts in force representing more than one-third of the total US retirement market assets and about one-tenth of all US household financial assets. As of 2020, nearly 48 million US households, representing 37% of all US family households, owned IRAs.
Ancillary Applications
Other retirement plans can also be connected to the picture as defined-contribution plans may be rolled over to IRA accounts. In fact, 401(k) accounts can also be rolled over to an “Inherited IRA” by a vested 401(k) beneficiary or even by the trustee of a living trust that was named as the see-through beneficiary of the defined-contribution plan. The ability for a trustee rollover of a defined-contribution plan to an IRA can be important since tax-savings and creditor protection can be enhanced with the administration of Inherited IRA accounts with trusts. And that administrative function always requires the services of a “qualified” trustee. The eState Plan platform supports and facilitates administrative structures with qualified, directed corporate trustees to help make it all work for you and your client.
How & Why Can It Work?
A corporate trustee must always operate within and under the authority of a governing trust instrument – in receiving, holding, investing (as a directed or delegated trustee) and distributing assets – whether the trust is an in-house template or a declaration of trust created by the trust company’s client. Unless superseded by state law, the terms of the trust must always apply and are in full force as a legal contract as long as there are vested beneficiaries living (or state law terminates the trust).
It needs to be understood that so called “trusteed IRAs” are established and operated under the same body of law as would govern a classic RLT agreement; there is no difference. In fact, trusteed IRAs operating agreements are revocable living trusts since they exist under the full, general-power-of-appointment control of the IRA owner, which is the same unrestricted control as the IRA owner has over his own RLT.
Without exception, a trust – any domestic trust arrangement – must always involve three distinct parties which are (i) a grantor, (ii) a trustee, and (iii) a beneficiary. The problem with grantors funding their IRAs to their personalized RLTs exists in the fact that the vast majority of grantor RLTs are also “grantor-trusteed”. In other words, RLT grantors almost always name themselves as the trustee(s) of their own trusts. But that arrangement essentially precludes grantors from transferring their IRAs to their RLTs – because of two main factors.
The first issue is that grantor-trustees are generally not a “recognized” trustee (by federal regulations) of an IRA account. Any trustee who avails itself to the duties of an IRA trustee (or custodian) must follow the rules defined in 26 CFR 1.408-2. If the trustee’s obligations are not performed according to those federal regulations with respect to IRA accounts held by the trustee, then the loss of the tax-favored status of the IRA account can be expected, which would cause a “deemed” taxable disposition of the entire account to have occurred just as if the IRA owner had elected to take a lump sum distribution.
Classic RLT arrangements provide unhindered access to ALL trust-assigned / trust-held assets. If a grantor-trusteed RLT is holding an IRA then the prospect of “self-dealing” – by either a willful act or a mistake by the grantor – is a likely event. In addition, the grantor-trustee is not required to operate under the fiduciary rules that a corporate trustee must follow. That’s why the IRS would take the “understood” position that self-dealing would occur with IRA accounts in a grantor-trusteed RLT arrangement. And that would explain why the “perceived” no-IRAs-in-RLTs prohibition exists.
Is there a way then for the RLT grantor to have his cake and eat it too when it comes to blending an IRA account into the asset base of his own RLT even though it is a grantor-trusteed design? The answer is YES. There is no rule or statutory prohibition that exists to deny the validity of that arrangement, but it absolutely requires the participation of regulated corporate trustee’s services to make it work.
The Answer Lies in the RLT’s Structure
Established trust law allows a grantor to appoint a “Special Trustee” – or “agents” of the trustee – to hold certain assets for the purpose of carrying out special duties and functions. Special trustee/agent arrangements can come in many forms such as an administrative trustee/agent”, a “nominee trustee/agent”, a valuation trustee/agent, etc. The special trustee/agent is an independent third-party administrator, which of course fits the description and purpose of a corporate trustee. These applications provide much flexibility for administrative “trusteed IRA” planning.
Introducing The eStatePlan’s SuperCharged IRATM
Our (The eStatePlan) Dynamic Trust Portfolio document set already features the structural design to allow for the administration of trusteed IRAs. The design requires the participation of a corporate trustee who is also set up to perform “trusteed IRA” administrative duties. The corporate trustee will be able to seamlessly administer IRAs assigned to a grantor’s RLT when the RLT has been established through The eStatePlan platform. That creates what we refer to as the SuperCharged IRATM. When a corporate trustee has been identified by name in the Dynamic Trust Portfolio document, that entity is appointed – through the default language of the document – as the “IRA Administrative Trustee”. The corporate trustee, as the IRA Administrative Trustee, will take title to any IRA accounts assigned to the trust (during the grantor’s lifetime). The IRA Administrative Trustee is not allowed to co-mingle the IRA account with any of the grantor’s other assets that may have been “retitled” to the trust whether in the name of the grantor-trustee or the corporate trustee.
The Supporting Dynamics of the Platform
With The eStatePlan, the grantor’s use of an “electronically implemented” Asset Assignment Ledger enables the client/grantor to “assign” his assets to the trust without having to retitle the assets to the trust – during the grantor’s lifetime. The retitling process is done by the successor trustee after the client’s decease. That avoids the duplicating of the retitlement process. The structure also helps facilitate this application of transferring the grantor’s IRA to the corporate trustee – the IRA Administrative Trustee. The eStatePlan grantor has FULL access and UNHINDERED ability to make changes relative to his IRA account even though the IRA is effectively under custody of the IRA Administrative Trustee and the grantor himself is still the trustee of his own trust. The grantor can also change the beneficiary designations of the IRA, at any time and under his full discretion, regarding the selection of beneficiaries who are to receive portions of the IRA and the value of their vested portions of the SuperCharged IRA.