Under normal circumstances, it is reasonably tax-efficient for you and your spouse to pass on as much as you can in the form of an IRA or Self-Directed IRA – especially a Roth IRA. This is because the vehicle allows heirs to maintain the tax deferred or tax-free status for many years, depending on the specific circumstances – especially if the deceased IRA owner passed on before beginning to take required minimum distributions.

Meanwhile, assets held in a Self-Directed IRA inherited from one’s spouse enjoy substantial protection from creditors in the event of bankruptcy under both federal and state law.

Unfortunately, a 2014 Supreme Court case, Clark v. Rameker, established that assets in an inherited IRA for a non-spouse beneficiary do not enjoy the same creditor protection that we normally associate with retirement accounts. In the event your heir files for bankruptcy, or if there’s already a judgment against your heir, those assets you worked so hard to amass and pass on could get seized by trial lawyers and passed on to banks and other lenders or creditors.

Individual states are free to extend creditor protection to inherited IRAs for beneficiaries other than spouses, however. Thus far, the following states offer creditor protection to IRAs inherited by your children or other non-spouse beneficiaries:

• Alaska
• Arizona
• Florida
• Missouri
• North Carolina
• Ohio
• Texas

Elsewhere in the country, Self-Directed IRA owner should be cautious about leaving money directly to non-spousal heirs who are undergoing significant legal problems, or who have recently filed bankruptcy or who may be filing bankruptcy in the future.

To protect assets against potential seizure by your heirs’ creditors, you may consider establishing a trust to hold the assets, naming your non-spousal heirs as a beneficiary.

This keeps the IRA out of your heir’s name, and makes it impossible for plaintiff’s lawyers or bankruptcy trustees to seize the assets. They might be able to get a “charging order,” which may enable them to intercept assets as they leave the IRA or other retirement account, and as they leave the trust. But most creditors, seeing that they would have to wait many years for their money, if they ever receive anything, are willing to settle on a favorable basis rather than assault a legally nearly impregnable financial fortress.

Doing so takes a bit of advanced planning: First, you’ll need to establish the trust. Don’t rely on a pre-packaged off-the-shelf trust you get at office depot: The specific language in the trust is crucial to the asset protection. You should have an attorney licensed in your state who is experienced with handling trusts and who knows exactly what you are trying to accomplish establish your trust for you.

For the maximum asset protection, the trust should be irrevocable, and not controllable by your beneficiary. That is, your beneficiary should not be the custodian or the trustee of the trust.

That way, plaintiffs cannot even get a court order directing your heir to take money out of the trust. Only the trustee can do that, and if the trust is set up properly, so that your heir is the only beneficiary, your trustee has a fiduciary obligation not to release that money for the benefit of anybody else – and the plaintiff’s lawyers can’t force him to.

There are some specific tax ramifications to this strategy, as trusts are taxed differently than individual IRA owners. For example, if there are several beneficiaries in the trust, the IRS will use the oldest beneficiary to decide on the required minimum distribution timeline. This may mean your younger heirs will wind up having to take distributions sooner than expected and they will lose some of the benefit of tax deferral.

You should work with a qualified tax professional to determine the best way to structure the transfer of assets from your IRA to the trust, or series of trusts, to minimize the eventual tax bill to your heirs.