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 your children's inheritance meaningful protection, but that 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 actual New York statutes that govern the question, when a creditor can and cannot reach a trust you leave to your children. For the related issue of when a trustee can be held personally responsible for mishandling trust assets, see our discussion of 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. Under this section, the right of a beneficiary to receive the income from trust property and apply it to their use cannot be transferred by assignment or otherwise — and, just as importantly, it cannot be involuntarily reached by the beneficiary's creditors. This is the legal source of what most people call a "spendthrift" trust.

The key consequence for parents is this: when you leave money in trust for your child (a so-called third-party trust, because you, not the child, are the one funding it), New York law treats your child's interest as protected. A creditor who obtains a judgment against your child generally cannot order the trustee to hand over the trust principal. The interest is not your 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 apply to a trust your child creates for themselves. Under EPTL § 7-3.1, a disposition in trust for the use of the creator is void as against the creator's existing or subsequent creditors. In plain terms, you cannot shield your own assets by putting them in a trust that benefits you — and neither can your child.

This is why the structure of the trust you create matters so much. If you leave assets to your child in a properly drafted third-party trust, EPTL 7-1.5 protection applies. If your child later takes their own money and pours it into a trust for their 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 that New York's exemption statute, CPLR § 5205, defines:

• The income-attachment rule. Under 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 a portion of income exceeding the amount reasonably needed for the support of the debtor and their 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. This means that even spendthrift income is not perfectly insulated — a judgment creditor may reach the surplus beyond what the beneficiary genuinely requires for support.
• Self-created trusts are not exempt. CPLR 5205(c) protects certain trust property from creditors, but it expressly does not extend that exemption to additions a person makes to a trust for their own benefit — reinforcing the EPTL 7-3.1 principle above.
• Funds lose protection once distributed. When the trustee actually pays money into the child's own hands or bank account, those funds generally 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:

• Mandatory distributions — for example, "the trustee shall pay the beneficiary all net income annually" or "the trustee shall distribute one-third of principal at age 30" — create an enforceable right. Once that right ripens and the money is paid out, it is exposed. A creditor with a judgment can target the distributed funds, and the predictable nature of the payments makes them easier to plan around and attach.
• Discretionary distributions — where the trustee decides whether, when, and how much to distribute — give the beneficiary no fixed legal right to compel payment. Because the child cannot demand the money, a creditor generally cannot reach what the child has no right to receive. A trustee can pause distributions while a lawsuit or judgment is pending, or pay the child's expenses directly (tuition, rent, medical care) rather than handing over cash, keeping the funds out of a creditor's reach.

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 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 attempt to enforce it through restraining notices and income executions under CPLR Article 52. As discussed above, a spendthrift third-party trust blocks direct seizure of the corpus, but CPLR 5205(d) may allow the creditor to reach excess income, and any cash already distributed is fair game.

Bankruptcy

In federal bankruptcy, a beneficiary's interest in a valid spendthrift trust 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 them. 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 New York Surrogate's Court. Beneficiaries also have statutory and common-law rights to information and 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

• Use a third-party trust you fund — never structure the gift so the child funds a trust for their own benefit (EPTL 7-3.1).
• Include a clear spendthrift clause invoking EPTL 7-1.5.
• Favor discretionary distribution standards over fixed mandatory payouts, and authorize the trustee to pay expenses directly.
• Give the trustee express authority to suspend or limit distributions during a lawsuit, divorce, or creditor problem.
• Coordinate with benefit-eligibility planning where a child has, or may have, special needs.

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 permit a creditor to 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 New York's EPTL and CPLR. To discuss creating or reviewing a trust designed to shield your children's inheritance from creditors, divorce, and lawsuits, the Law Offices of Albert Goodwin can help. We maintain offices in New York City, Brooklyn, and Queens. Call 212-233-1233 or email [email protected] to speak with a New York trust and estates attorney. You can also learn more about our trust practice in NYC.

Author: Albert Goodwin, Esq., a New York estate and trusts attorney admitted to practice in New York. This article is for general information about New York law and is not legal advice; consult an attorney about your specific circumstances. Last updated: 2024.