For many of us, an individual retirement account (IRA) is one of the best ways to save for our golden years. And, once we’re gone, it’s easy for our surviving spouse to roll these funds over into his or her IRA.

The conversation about IRAs becomes a bit more complex when we have to think about what happens when a spouse passes on, too, and the IRA is passed down to the next generation.

A recent Supreme Court decision added a new wrinkle. In 2014, they ruled that inherited IRAs are not protected from creditors, since they are not considered the beneficiary's retirement funds. The court reasoning was based on some key differences between an active IRA and an inherited one, the most important ones being that the beneficiary cannot contribute to an inherited IRA, is required to withdrawal money from the accounts, and can withdrawal the full balance of the account without any penalty.

This court decision has added one more bullet point to the extensive conversation advisors have with their clients over their financial legacy.

Have your beneficiaries run into significant issues with debt and creditors? Have they taken out a substantial loan? Are they gamblers? Do they find it hard to resist purchasing luxury items?

If the answer to any of those questions is “Yes,” it’s time to investigate other protected places to shelter your wealth.

1. Trusts
While trusts come with trustee fees , legal fees, and considerable administrative burdens, they provide the grantor the power to control distributions to the beneficiary, and thus have control from beyond the grave. Trust assets are also much better protected from creditors and the beneficiaries themselves, especially with the inclusion of a spendthrift provision. Adding this clause to the trust will make it nearly impossible for the beneficiary to move the principal at his or her discretion. As a result, the funds, for example, can’t be used as collateral for a loan, or taken by creditors if the beneficiary defaults. (As an aside, trusts can also help protect physical assets, like a vacation home.)

2. Trusteed IRAs
This is an option that lives somewhere in between an IRA and a trust. It’s an IRA that incorporates many trust provisions. It allows you to restrict the payout from the IRA, and allows the trustee to make additional distributions to the beneficiary for purposes of their health, education, maintenance and support. It also allows you to identify contingent beneficiaries that can’t be changed by the primary beneficiary. It’s important to note that not many custodians offer trusteed IRAs, so they’re not widely available.

The Supreme Court ruling has definitely created yet another important thing to think about for those planning to leave a legacy for future generations. You spend most of your life building your wealth and you want to ensure your children—and  maybe even their children—can benefit from your life of hard work.

For many, an inherited IRA is the easiest and less restrictive solution. But, for those who have concerns about their beneficiaries’ ability to manage money on their own, a trust or a trusteed IRA are two effective ways to protect your legacy by limiting access to the funds and continuing to help them long after you’re gone.

Is an inherited IRA for your non-spousal beneficiaries, the right way to pass on your wealth or should you consider another option that will protect your beneficiaries from external forces and from themselves?

Contact us here to meet with a Wescott advisor to discuss how to protect your legacy.