Can I Protect My IRA Account After My Death?

You have worked hard your whole life to build up a substantial IRA nest egg and want to leave your heirs with a legacy. With a traditional “custodial” IRA, once you (the IRA owner) die, your beneficiaries are free to do whatever they want with your money. They can be responsible and withdraw only the annual required minimum distributions (RMDs) based on their life expectancies, which will “stretch” your IRA into their golden years. Or they can squander your hard-earned savings on frivolous vacations, fast cars, or the blackjack table because, after you die, your custodial IRA becomes their property. Studies have shown that as much as 80% of inherited IRA assets are withdrawn within two years of the IRA owner’s death.

However, there are ways to prevent this from happening. One such way is the “Trusteed” IRA, which is set up during the IRA owner’s life and becomes an irrevocable trust at death. The trust documents will determine how the distributions are issued and can limit those distributions to no more than the annual RMDs. The trust documents may also be customized to allow for additional distributions should a specified need arise. Not only may the trust documents specify the initial beneficiary, but may determine successor beneficiaries as well. So, you can’t stop your widow from marrying that guy you hated in high school, but you can make it impossible for him to get his hands on your money if your widow dies. With a trusteed IRA, a financial institution serves as trustee of the account and actively manages the funds, as opposed to a custodial IRA, whereby the financial institution merely holds the funds for the owner. Because of the active management and administration of the trust by the financial institution, trusteed IRAs can be expensive to maintain and are only recommended for large IRAs.

To summarize, there are two types of IRA’s: the traditional “custodial” account and the less traditional “trusteed” account. The major difference between the two lies in who determines how the funds are distributed. A custodial IRA is distributed based on the whims of the beneficiary while a trusteed IRA is distributed based on trust documents that were designed by the original IRA owner.

Another way to protect your retirement account after you are deceased is by naming a trust as the IRA beneficiary. In this situation, the IRA is still considered a custodial IRA, but an irrevocable trust serves as an intermediary between the IRA account and the underlying beneficiaries (your spouse, children, or significant others). The IRA must still distribute RMDs annually, but those distributions go into that trust which may or may not distribute those funds to the underlying beneficiaries. Here again, the trust documents, which were created according to the original owner’s desires, determine how the funds are dispensed. In order to take advantage of the “stretch” provisions of RMDs, which are based on life expectancy, all of the designated, underlying beneficiaries of the trust must be individuals.

Both the Trusteed IRA and a Trust as an IRA beneficiary can provide significant asset protection for your retirement savings. In addition, both structures can protect the funds from the creditors of the individual beneficiaries. Yes, you can protect your IRA account from the grave.

If you would like to discuss these options, please give us a call.

CassidyCPA | DeVoe

By Cheryl DeVoe, CPA


  1. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
By |2019-10-18T14:28:21+00:00October 18th, 2019|Estate Planning, IRA, Retirement|0 Comments