Beneficiary Holding Inheritance PaperworkParents go to great lengths to provide for their children, no matter their age. While estate planning offers parents many strategies to continue providing for their families even after death, children are not always the best at managing money, whether because they have special needs or because they are impulsive spenders.

Strategies to Protect a Child’s Inheritance From Poor Decision-Making

Leaving a large sum of money to an unprepared, irresponsible, or cognitively impaired child could spell disaster. Fortunately, New York law provides parents with advanced strategies to ensure that their children remain protected, both from the uncertainties of life and from poor financial decision-making.

Depending on your family’s circumstances, you could benefit from the establishment of any one or more of the following:

A Spendthrift Trust

Trusts are a form of legal entity that can receive, hold, and manage assets. A trust can, for example, own assets including but not limited to:

  • A home
  • Real property
  • Cash accounts
  • Motor vehicles
  • Investment portfolios

Different categories of trust provide the founder—or trustor—with varying levels of control over trust assets. Trusts can also be conditioned, insofar as the trustor may determine that trust funds will only be distributed if certain conditions are met. A spendthrift trust is a trust that includes additional protections intended to prevent large sums of money from being distributed to a potentially irresponsible or incompetent heir.

A spendthrift trust will typically contain provisions that:

  • Limit how much money is distributed to an heir.
  • Restrict trust spending to essential expenses, such as payments for medical care, groceries, and education.
  • Stipulate that a beneficiary will only receive gifts if they meet certain conditions, such as graduating college or maintaining a high GPA.
  • Strategically release funds at specific, pre-determined milestones. For example, a child might receive a portion of their spendthrift trust when they turn 25, another portion at 30, and the final disbursement at 35.

Spendthrift trusts essentially allow parents to exercise control of their assets from the grave, since their wishes are fulfilled by an appointed trustee, who could be a family friend, relative, or trusted estate planning attorney.

A Special Needs Trust

New York allows for the creation of two distinct types of special needs trusts:

  • First-party special needs trusts. A first-party special needs trust must be established by the beneficiary before they attain 65 years of age.
  • Third-party special needs trusts. A third-party special needs trust can be established by the beneficiary, or by the beneficiary’s parent, guardian, or grandparent. In general, special needs trusts provide funds to ensure the recipient can maintain a dignified quality of life while preserving their eligibility for needs-based government benefits. If drafted properly, a third-party special needs trust allows any unused or remaining assets to be distributed to other heirs.

The Importance of Choosing a Qualified Trustee

Under state law, trustees—the person or persons tasked with administering a trust after the grantor’s death—are considered fiduciaries. A fiduciary is somebody who acts on behalf of another person.

In New York, fiduciaries have a legal duty to act in the best interests of the trust. Under most circumstances, this means:

  • Honoring the trustor’s intent and stated wishes
  • Responsibly managing the trust’s assets
  • Filing taxes on the trust’s behalf
  • Distributing assets in accordance with the terms of the trust

Depending on the exact size and nature of the trust, acting as a trustee can be a time-consuming and somewhat risk-filled undertaking. While trust assets are typically exempted from New York probate, trustees can still be challenged in court if a beneficiary or other interested party believes that they are mismanaging the trust. If the court finds in favor of a beneficiary, the trustee could be subject to harsh civil and criminal penalties.