I often receive phone calls from parents who want to leave money to a child, but who are quietly worried about what will happen to it once it lands in that child's hands. Maybe the child is going through a divorce. Maybe there is a lawsuit hanging over them, an old debt to a credit card company, or a business that never quite got off the ground. The parent's question is always some version of the same thing: is there a way to leave this inheritance to my child without also leaving it to my child's creditors?
When a beneficiary inherits assets outright, through a will or through a bank account or brokerage account passing directly to them, those assets become the beneficiary's personal property the moment they receive them. Once that happens, the money is fair game. A judgment creditor can garnish the account. A divorcing spouse can claim a share as marital property. There is no legal wall left standing between the inheritance and whoever is owed money by the beneficiary.
A properly drafted trust changes this picture entirely. Under New York's Estates, Powers and Trusts Law, a trust may include what is known as a spendthrift provision. This clause prevents a beneficiary from assigning, pledging, or transferring their interest in the trust before a distribution is actually made, and it equally prevents a creditor from attaching or garnishing those same assets while they remain inside the trust. As we discussed in a prior article on revocable living trusts, the trustee, not the beneficiary, holds legal control over the property. That separation is precisely what keeps a creditor from stepping into the beneficiary's shoes and reaching the funds.
I always tell my clients this protection is not absolute. Once the trustee actually distributes money to the beneficiary, that money becomes personal property again and is immediately exposed to creditors, just as an outright inheritance would be. New York law also carves out exceptions for certain support-related claims, such as a beneficiary's child support obligations. That is why I advise clients to think carefully with their trustee about the pace and structure of distributions, rather than assuming the trust alone does all of the work.
I have seen clients try to protect their own assets by placing them in a trust for their own benefit. That does not work here. New York law makes clear that a trust created for the benefit of its own creator offers no protection against that creator's creditors. Spendthrift protection is built for what a parent or grandparent leaves to someone else, not for shielding your own property from your own debts.
A trust with a well-drafted spendthrift provision remains one of the most effective tools I use to make sure an inheritance actually reaches, and stays with, the person it was meant for.
If your loved one left behind an inheritance which needs to be protected from a beneficiary's creditors, contact us today at (347) 766-2685 for a free phone consultation.
Contributed by Dan Rose, a local business writer specializing in trust and estate planning services in New York City.
