It has never been clear to me just what exactly an IRA is for state law purposes. It could be viewed as akin to a bank account or contract. It could be viewed as a trust. It could be viewed as the alter-ego of the IRA owner.
The situation is exacerbated by the fact that IRAs come in at least two basic flavors: custodial IRAs and trusteed IRAs, not to mention Individual Retirement Annuities.
Compare the differences between IRS Form 5305 Individual Retirement Trust Account Form IRA, and IRS Form 5305-A Individual Retirement Custodial Account Form IRA. The only noticeable difference between the two forms is that one uses the term “Custodian” where the other uses the term “Trustee.”
For federal income tax purposes it makes little differences whether the IRA is trusteed or not.
For purposes of this section, a custodial account shall be treated as a trust if the assets of such account are held by a bank (as defined in subsection (n)) or another person who demonstrates, to the satisfaction of the Secretary or his delegate, that the manner in which he will administer the account will be consistent with the requirements of this section, and if the custodial account would, except for the fact that it is not a trust, constitute an individual retirement account described in subsection (a). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.[1] [Emphasis added.]
The section referred to above is 408, but the Title is Title 26, which is the IRC.
An IRA, even a custodial IRA, is probably considered a trust for generation skipping transfer (GST) tax purposes. If a tax is owed, whether on account of a taxable distribution, taxable termination, or direct skip, the tax will be charged against the IRA “unless otherwise directed pursuant to the governing instrument by specific reference to the tax imposed by this chapter.” [2] [Emphasis added.]
An IRA would almost certainly be considered a trust for GST purposes, even if it was only a custodial IRA. IRC §2652(b) provides-
Sec. 2652. Other definitions. . . .
(b) Trust and trustee.
(1) Trust. The term "trust" includes any arrangement (other than an estate) which, although not a trust, has substantially the same effect as a trust.
(2) Trustee. In the case of an arrangement which is not a trust but which is treated as a trust under this subsection, the term "trustee" shall mean the person in actual or constructive possession of the property subject to such arrangement.
(3) Examples. Arrangements to which this subsection applies include arrangements involving life estates and remainders, estates for years, and insurance and annuity contracts.[3]
While not mentioning IRAs specifically, the regulations tend to
support the notion that a custodial IRA is to be treated as a trust for GST
purposes.
(b) Trust defined. (1) In general. A trust includes any arrangement (other than an estate) that has substantially the same effect as a trust. Thus, for example, arrangements involving life estates and remainders, estates for years, and insurance and annuity contracts are trusts. Generally, a transfer as to which the identity of the transferee is contingent upon the occurrence of an event is a transfer in trust; however, a transfer of property included in the transferor's gross estate, as to which the identity of the transferee is contingent upon an event that must occur within 6 months of the transferor's death, is not considered a transfer in trust solely by reason of the existence of the contingency.[4]
Taxation of an IRA is generally governed by IRC §408. If, or to the extent to which, it is not taxed under §408, it would be taxed to the IRA owner under any of several statutes found in IRC §§673-677.
The question of state law is more problematic. Over time I have been more inclined to view a trusteed IRA as a true trust, though I resisted the inclination for quite a while. I still think that there are some important differences, and that state trust law, if it operates at all, must operate in some modified form here, but I am no longer so sure about how and why exactly.
In the case of a custodial IRA, I think that there is a difference, notwithstanding what the IRC says. There is a long and well established difference between a custodian and a trustee. It may be that both are fiduciaries, but their duties and powers are certainly not the same.
I expect that this an area of developing law in which we will see new cases arise in the not too distant future.