Individual retirement arrangements can be established in either of two legal forms: a custodial account (Internal Revenue Code §408(h)); or a trusteed IRA (§408(a)). Both are treated identically for tax purposes. Most IRAs are established as custodial accounts rather than trusts. This article deals with using a trust as a conduit for a beneficiary of an IRA or other retirement plan, in place of a standard custodial IRA, payable to a beneficiary. A Roth IRA can also be in the form of a trusteed IRA. A trusteed IRA is also known as an individual retirement trust (IRT).
What is an Inherited IRA?
An Inherited IRA is a traditional or Roth IRA that has been inherited after its owner’s death. See IRC §§408(d)(3)(C)(ii) and 408A(a). If the heir is the owner’s spouse, as is often the case, the spouse has a choice: He or she may “roll over” the IRA funds into his or her own IRA, or keep the IRA as an inherited IRA. When anyone other than the owner’s spouse inherits the IRA, he or she cannot roll over the funds; the only option is to hold the IRA as an inherited IRA.
