So you have decided that taxes have nowhere to go but up, and you are converting your traditional IRA to a Roth. But what happens if you die when your grandchildren are still young?

Short answer: Unless you take precautions, such as setting up a trust, you could wind up giving a teenage heir the wherewithal to buy a shiny red sports car—and potentially forfeit decades of tax-free growth.

Roth individual retirement accounts, which are funded with after-tax dollars, are increasingly being eyed as inheritance vehicles. They have several advantages over traditional IRAs. For the most part, withdrawals are tax-free, as long as you meet rules for minimum holding periods.

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Mark Matcho

Effective Jan. 1, the federal government dropped the income limit for transferring savings to a Roth IRA from a traditional IRA or an employer-sponsored retirement plan, making it easier for people with higher incomes to take advantage of Roth accounts. Also, your heirs won't owe income tax on withdrawals either—though Roth assets are considered in calculating estate taxes.

A person who inherits a Roth—unlike the original owner of the account—is required to withdraw a percentage of the funds annually, based on his age.

The younger you are when you inherit an IRA, the longer you can stretch out those withdrawals, enjoying more time for potential tax-free growth of the investments. That means that your inheritance could get bigger as you get older. (For more information on how to calculate those withdrawals, go to the Internal Revenue Service's Web site, www.irs.gov, and click on Publication 590.)

Michael and Susan Christy, a retired couple in their early 60s who live in Columbia, Mo., hope to leave a sizable Roth IRA to their two adult children and their four grandchildren, all of whom are under age four.

The couple plans to split up the account, giving 35% each to their children and 7.5% each to the grandchildren. But they are concerned about the potential for leaving a substantial sum to teenagers, and are considering setting up trusts to withhold sums beyond mandatory distributions until the children are age 30.

Trusts work particularly well with Roth IRAs, since there are no required distributions until after the owner's death, says Natalie Choate, an estate-planning attorney at Nutter, McClennen & Fish in Boston. Such trusts also work for traditional IRAs—but those inherited accounts typically are smaller because owners have to take mandatory withdrawals starting in their 70s.

Of course, there are all kinds of trusts to protect assets you pass along to heirs. But the main tool for protecting the IRA "stretch," as it is called, is to set up "see-through" or "conduit" trusts for the benefit of each grandchild, and then name those trusts as beneficiaries of the Roth, says Seymour Goldberg, an attorney and certified public accountant in Woodbury, N.Y., who wrote a J.K. Lasser guide to IRA trusts, published last month.

Each year, the required distributions from the Roth, divided into separate inherited accounts, would be calculated based on each grandchild's age and would go into his or her individual trust. Mr. Goldberg suggests having the mandatory distributions paid to the child's parent or other custodian until the child is 21.

One note: This will work only if you name the separate trusts, and specify their shares, on your Roth beneficiary designation form, Ms. Choate says.

Mr. Goldberg recommends having the minimum distribution continue to go to the trust after the child reaches age 21, and then be paid directly to the grandchild. That way, the grandchild can't take out more than the minimum each year. Those few thousand dollars could be particularly helpful for grandchildren setting up their first households in their early 20s, but it usually isn't enough to mess with their work ethic or pay for a fancy toy. If the grandparent died when the grandchild was 18, for example, the payout would be spread over 64 years.

When the grandchild reaches age 35 or 40, Mr. Goldberg generally recommends ending the trust and paying the annual distributions directly to the grandchildren. At that point, they could withdraw money from the inherited Roth at will.

The expense and effort of setting up such trusts, typically at least a few thousand dollars, mainly makes sense for Roths worth at least about $100,000, Mr. Goldberg says. In addition to helping grandchildren stay fiscally disciplined, they also protect the assets against bankruptcy in most states, he says. (Notable exceptions are Florida and New York.)

A few caveats: The trust has to be worded so that it precisely follows some "tricky" IRS rules, so make sure you work with an attorney who has extensive experience setting these up. Make sure your trustee knows to file a copy of the trust documents with the IRA custodian by Oct. 31 of the year following the IRA owner's death; otherwise, you could blow the payout period for your grandchildren, Mr. Goldberg says.

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