Can a Trust Left to Your Children Be Sued in New York?

Parents who set aside money for their children worry about more than estate taxes. They worry that a future creditor, a divorcing spouse, a lawsuit or a bankruptcy could swallow the inheritance. The short answer under New York law is that a properly drafted trust gives a child’s inheritance meaningful protection, but the protection is not absolute. It depends on how the trust is written, who created it, what kind of distributions it requires, and the type of claim being asserted. This page explains, with reference to the New York statutes that govern the question, when a creditor can and cannot reach a trust you leave to your children. For the related question of when a trustee is personally responsible for mishandling trust assets, see our page on breach of trust.

The Core New York Rule: EPTL 7-1.5 Spendthrift Protection

New York’s foundational statute is EPTL § 7-1.5, which makes a beneficiary’s interest in a trust created by another person generally inalienable. The beneficiary’s right to receive the income from trust property and apply it to his or her use cannot be transferred by assignment or otherwise, and, just as importantly, it cannot be reached involuntarily by the beneficiary’s creditors. This is the legal source of what most people call a “spendthrift” trust.

The consequence for parents is this. When you leave money in trust for your child, a so-called third-party trust because you rather than the child are funding it, New York treats the child’s interest as protected. A creditor who obtains a judgment against your child generally cannot order the trustee to hand over the principal. The interest is not the child’s property in the way a bank account is; it is a stream of benefits controlled by the trustee under the terms you wrote.

The Critical Exception: Self-Settled Trusts Under EPTL 7-3.1

The protection of EPTL 7-1.5 does not extend to a trust your child creates for himself or herself. Under EPTL § 7-3.1, a disposition in trust for the use of the creator is void as against the creator’s existing and subsequent creditors. In plain terms, you cannot shield your own assets by putting them in a trust for your own benefit, and neither can your child.

This is why the structure of the trust matters so much. If you leave assets to your child in a properly drafted third-party trust, EPTL 7-1.5 applies. If your child later takes his or her own money and pours it into a trust for his or her own benefit, EPTL 7-3.1 strips the protection away. The distinction between third-party and self-settled trusts is the single most important factor in whether a child’s inheritance is safe from creditors in New York.

The Limits of Spendthrift Protection: CPLR 5205(c) and (d)

Even a valid spendthrift trust has gaps, and New York’s exemption statute, CPLR § 5205, defines them. The first is the income-attachment rule of CPLR 5205(d), often called the 10% rule. Where a judgment debtor is entitled to a stream of trust income, a court may direct that the portion of income exceeding what is reasonably needed for the support of the debtor and his or her dependents be applied to the judgment. Courts have historically used a figure of roughly 10% of excess income, but the analysis is fact-specific and tied to actual need. Spendthrift income, in other words, is not perfectly insulated: a judgment creditor may reach the surplus beyond what the beneficiary genuinely requires for support.

The second gap is that self-created trusts are not exempt. CPLR 5205(c) protects certain trust property from creditors, but it expressly withholds that exemption from additions a person makes to a trust for his or her own benefit, reinforcing the EPTL 7-3.1 rule. The third is that funds lose their protection once distributed. When the trustee actually pays money into the child’s own hands or bank account, those funds become the child’s ordinary property and can be reached like any other asset.

Mandatory vs. Discretionary Distributions

Within a third-party trust, the strength of the protection turns heavily on how distributions are structured.

Most well-drafted New York trusts for children pair broad trustee discretion with a spendthrift clause. The discretion keeps the beneficiary from having a compellable right; the spendthrift clause invokes EPTL 7-1.5 to block involuntary transfers.

Practical New York Scenarios

Divorce and Equitable Distribution

New York is an equitable-distribution state. Property your child inherits is generally separate property under Domestic Relations Law § 236(B) and is not divided in a divorce, unless it has been commingled with marital assets or its appreciation is attributable to marital effort. A trust that holds the inheritance and makes distributions for the child’s benefit, rather than depositing lump sums into a joint marital account, helps preserve that separate-property character and reduces the risk that a spouse can claim a share.

Judgment Creditors

A creditor who sues your child and wins a money judgment can try to enforce it through restraining notices and income executions under CPLR Article 52. A spendthrift third-party trust blocks direct seizure of the corpus, but CPLR 5205(d) may let the creditor reach excess income, and any cash already distributed is fair game.

Bankruptcy

In federal bankruptcy, a beneficiary’s interest in a spendthrift trust that is enforceable under applicable nonbankruptcy law (here, EPTL 7-1.5) is generally excluded from the bankruptcy estate under 11 U.S.C. § 541(c)(2). This is one of the strongest protections available, but again it applies only to genuine third-party spendthrift trusts, not to self-settled arrangements.

Medicaid Recovery and Special Needs

If a child receives or may need means-tested government benefits, an outright inheritance or a support trust can disqualify him or her. A properly structured special needs trust can hold the inheritance for the child’s benefit without counting as an available resource, addressing both creditor and benefit-eligibility concerns under New York and federal rules.

Trustee Liability and Beneficiary Rights

Protective provisions only work if the trustee administers the trust correctly. A trustee who mismanages assets, makes improper distributions or ignores the trust terms can be held personally liable for breach of fiduciary duty in Surrogate’s Court. Beneficiaries also have statutory and common-law rights to information and to an accounting; see beneficiaries’ rights to trust information. Choosing a competent, impartial trustee, sometimes an institutional bank trustee, is part of protecting the inheritance you leave behind.

How to Strengthen Protection for Your Children’s Inheritance

Five drafting choices do most of the work.

Frequently Asked Questions

Can my child’s ex-spouse get the trust in a divorce? Inherited assets are generally separate property in New York, and a discretionary spendthrift trust helps keep them that way, provided the funds are not commingled with marital property.

Can a creditor reach the trust before any money is distributed? Under EPTL 7-1.5, generally no for a third-party spendthrift trust, though CPLR 5205(d) may let a creditor reach surplus income beyond what the beneficiary needs for support.

What happens once money is paid to my child? Distributed funds usually become the child’s own property and can be reached by creditors. Direct payment of expenses by the trustee avoids this exposure.

Speak With a New York Trust Attorney

Whether your children’s inheritance is protected depends on precise drafting under the EPTL and the CPLR. To discuss creating or reviewing a trust designed to shield an inheritance from creditors, divorce and lawsuits, call the Law Offices of Albert Goodwin at 212-233-1233 or email [email protected]. You can also read more about our trust practice in New York City.