Restricted management accounts can improve returns.

If you are tired of clients starting to zero in on short-term performance after a strong market in 2003, take a look at the estate planning world. Perhaps you should be considering restricted management accounts (RMAs) for clients with estate tax concerns and oversized individual retirement accounts.

In brief, an RMA is an account governed by a contract between an investor and a bank or trust company. Under the contract, the investor cannot access funds placed in the account for a stated period-five years with a one-year rolling renewal is common in practice. Registered investment advisors may not enter into these agreements because under Securities and Exchange Commission rules, clients can not be denied access to their funds.

The investor retains ownership of the restricted account, which perhaps may be transferred. However, control over asset management is turned over to the institution or an independent, trust-protector-like third party, which may then tap you to serve as investment manager. The lock-up lets you stay fully invested as you invest for the long run, rather than quarterly performance, to provide the client with potentially superior returns.

In addition, proponents aver that the illiquidity, limitations on transfers, lack of control over the investments and other factors may merit a 20% to 40% discount from the account's market value for federal transfer tax purposes-notwithstanding the fact that RMAs are so new that they're neither court-tested nor sanctioned by the Internal Revenue Service. The advanced technique can be useful in late-life planning scenarios, with sales to defective trusts, and when IRA assets aren't needed for living expenses, says Jeffrey Lauterbach, chairman and CEO of The Capital Trust Company of Delaware, in Wilmington.

A financial advisor is "the ideal person to be recommending an RMA because then the client selects it as one of many investment choices put forth," says David A. Handler, a partner at law firm Kirkland & Ellis LLP, in Chicago. In many cases where the IRS has successfully attacked discounts begat by family limited partnerships, the taxpayers had learned about family entities from their estate-planning attorney-a genesis courts consider dubious for something supposedly motivated by business, rather than tax, reasons. "The RMA should be suggested as an investment product whose primary purpose is to manage money for long-term return and which may have potential estate tax benefits," Handler says.

But the new tool may not enthuse every advisor. The agreement moves the decision about who manages the client's money away from the client, and while it is possible for you to be named investment advisor, there is no guarantee. Even if you are appointed, you can probably be dumped at will. Despite such shortcomings, the RMA can provide an advisor with entrée to the next generation of clients. At death, the agreement continues for its remaining term and is counted as an asset of the estate. "If someone inherits an RMA with four years left, they'll get to know the money manager over the next four years," Handler says.

Select Clientele

Among the best candidates for a restricted management account are sophisticated clients interested in pursuing valuation discounts without the fuss and uncertainty of a family limited partnership (See sidebar). "The transfer restrictions in an RMA account can be structured similar to those of an FLP," says Domingo P. Such III, a Chicago partner in the law firm McDermott, Will & Emery. "With both (non-IRA) RMAs and FLPs the planning question, depending on the client's objectives, is whether the client should gift ownership units or hold them," Such says.

Loss of control over the investments for the contract term makes the upstart technique appropriate only for those who can let go, observes Barry Kohler, a certified financial planner licensee at BDMP Wealth Management in Portland, Maine, an affiliate of accounting firm Berry, Dunn, McNeil and Parker. The affluent generally detest relinquishing power, as advisors know. "It gets magnified with an RMA because you're talking about investable assets, something the client is used to managing," Kohler says.

The client must also have a sizeable estate-mid-seven figures or higher. RMA minimums are usually measured in millions, and the inaccessibility to funds means a client cannot afford to put in his entire wealth or assets needed for paying death taxes. "We worked with an estate that was about $15 million, and the client put $2 million in the RMA," Kohler says.

Of course, because the technique has yet to be addressed by the IRS, it is only appropriate for clients who can tolerate working in the gray zone, Kohler says. "We talk to clients about litigation risk" before recommending an RMA, he says.