You have a somewhat confusing summary. Your former sister-in-law was either the beneficiary, (which is what this sounds like), or she was the custodian of these funds. She could not have been both. If she was the beneficiary, then she is the owner of these funds 100%. She may feel morally obligated to use the funds to take care of the kids, but there would be absolutely zero legal responsibility to do so. If that is your case, then you need to tread VERY lightly, let the kids handle this, and hope that your SIL does the right thing.
If she was custodian, then the answer is tougher, because it depends on how this was set up. If there was a trust, then it depends on the term of the trust. If the Will provided for this, it depends on the terms of the Will. If the profit-sharing plan listed her as custodian, then it may depend on the terms of the plan. If this is your case, you MAY want to consult with an attorney, because your SIL likely WOULD have some fiduciary responsibilities and your kids would need to know what to expect and how to proceed.
My guess is that she was named beneficiary with the understanding that she would take care of the kids.
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A good first step would be calling the bank/brokerage and having your adult children inquire. Sometimes, an adult child can claim the funds directly upon reaching the age of majority, even absent the permission of the custodian.
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It depends on whether the funds are a part of a will, a trust, or another arrangement.
The children would be well-served to discuss their dilemma with a New York estate attorney in a confidential forum as soon as possible.