How is an IRA Structured Legally?
IRA’s are a special type of “Trust” which is just a fancy term for an agreement in which one party (you, the investor) contributes money which is then held in safekeeping by another party (the “Custodian”) for your benefit.
If you’ve ever established an IRA, you’ll recall that you had to sign a large stack of papers. Most of those papers were a “Custodial Agreement” that stipulates things like
- Where will your money and assets be held?
- Who makes investment decisions?
- Who gets your account if you pass away?
In essence, the custodial agreement is nothing more than the terms under which your custodian is agreeing to be the trustee for your IRA.
The important thing to remember is that from a legal perspective, your IRA is a “Trust”. This becomes important again later when we discuss protection from creditors and a dreadful pest known as UBIT.