Dec172025
Estate Planning Q&A Series

What’s the difference between a third-party special needs trust funded by family assets and a trust funded with the child’s own money, and which fits our situation? – North Carolina

Short Answer

In North Carolina, a third-party special needs trust is usually funded with someone else’s money (often parents or relatives) for a person with disabilities and is designed to preserve means-tested benefits while improving quality of life. A trust funded with the child’s own money is commonly a “first-party” (self-settled) special needs trust or a pooled trust subaccount and it comes with stricter rules, including limits on who can create it and, in many cases, a required payback to Medicaid at the child’s death or when the trust ends. For a married couple planning ahead using family assets, a third-party special needs trust often fits, while a first-party option is more common when the child receives money in the child’s own name (like an inheritance, settlement proceeds, or back benefits).

Understanding the Problem

Under North Carolina estate planning, the key question is: can parents set up a trust for a minor child with disabilities that lets family money be used for the child’s needs without causing a loss of needs-based public benefits, and what changes if the money belongs to the child rather than the family. The decision often turns on who owns the funds going into the trust and what benefit program rules apply. The choice also affects who can sign, when court involvement is needed, and how planning should address the change in legal adulthood at age 18.

Apply the Law

North Carolina recognizes different structures used in special needs planning. A third-party special needs trust generally holds assets that never belonged to the child (parents, grandparents, and others fund it), while a first-party (self-settled) special needs trust or a pooled trust subaccount holds assets that belong to the child. The “child’s money” category commonly triggers tighter Medicaid-related requirements, including the concept that remaining funds may have to reimburse Medicaid up to the amount of medical assistance paid on the child’s behalf. Pooled trusts are specifically addressed in North Carolina law and are administered by nonprofit organizations with beneficiary subaccounts.

Key Requirements

  • Whose money is being used (ownership/source of funds): Third-party trusts are funded with family/other people’s assets; first-party/pooled trusts are funded with assets that belong to the child.
  • Sole-benefit administration: Distributions from the trust must be structured so they are for the beneficiary’s benefit, and pooled trust subaccounts in particular may only disburse funds if the disbursement is for the beneficiary’s sole benefit.
  • Payback/termination rules (when the child’s money is involved): Pooled trust subaccounts are irrevocable and, when they end, remaining funds can be subject to repayment to the State up to the amount of Medicaid assistance paid on the beneficiary’s behalf.

What the Statutes Say

Analysis

Apply the Rule to the Facts: The facts describe a married couple who wants to set up a special needs trust for a minor child and expects the trust to be funded by family assets. That matches the core feature of a third-party special needs trust: money that belongs to the parents or other relatives is set aside for the child’s benefit. If, instead, money is expected to arrive in the child’s name (for example, a settlement, back benefits, or an inheritance left outright to the child), that would shift the analysis toward a first-party structure or a pooled trust subaccount, which often brings stricter Medicaid-related rules and potential payback at termination.

Process & Timing

  1. Who files: For a family-funded plan, typically the parents work with an estate planning attorney to draft and sign a third-party special needs trust and coordinate it with wills, beneficiary designations, and any gifts from relatives. Where: Trust documents are usually signed outside court; if court approval becomes necessary (more common when the child’s own money is involved), the matter is generally handled in the North Carolina county courthouse where the child resides. What: The core document is the special needs trust agreement; related documents often include updated wills and beneficiary designation guidance. When: Planning is usually best done before any funds are left to the child directly and before major life events (like a move or a change in benefits).
  2. As the child approaches age 18, the planning conversation often expands to decision-making authority and benefit eligibility changes. Even if the trust is in place, age 18 can trigger new consent and signature rules for medical care, education records, and finances, and it can affect how benefit applications and renewals are handled.
  3. If the child later receives funds in the child’s own name, the next step may be to evaluate whether a first-party special needs trust or a pooled trust subaccount is needed to keep benefits on track. With pooled trusts, administration is handled by a nonprofit trustee that maintains a separate subaccount for the beneficiary, with required accounting and termination procedures.

Exceptions & Pitfalls

  • Mixing assets can cause problems: Combining family assets and the child’s own assets in one trust can create administration and benefit-eligibility issues. Many plans keep third-party funds separate from any first-party/pooled funds to avoid confusion about payback and reporting.
  • Leaving money to the child “by accident”: A common pitfall is naming the child directly on life insurance, retirement accounts, or payable-on-death accounts. That can convert “family planning” into a “child’s money” problem overnight.
  • Not planning for age 18: A trust can manage money, but it does not automatically give parents authority to make adult medical, educational, or financial decisions. At age 18, families often need to consider additional documents or a court process depending on capacity and goals.
  • Pooled trust limits and payback concepts: Under North Carolina’s pooled trust rules, subaccounts are irrevocable and remaining funds at death or termination can be subject to repayment to the State up to Medicaid assistance paid, which can change the family’s expectations about what happens to leftover funds.

Conclusion

In North Carolina, a third-party special needs trust is generally the right tool when parents and relatives plan to fund the trust with their own assets to support a child with disabilities while protecting eligibility for needs-based benefits. When the money belongs to the child, planning usually shifts to a first-party structure or a pooled trust subaccount, which carries stricter rules and can involve Medicaid repayment at termination. A practical next step is to inventory what assets might ever be titled in the child’s name and then draft and sign the correct trust before any funds are paid to the child.

Talk to a Estate Planning Attorney

If a family is deciding between a third-party special needs trust and a trust funded with a child’s own money, our firm has experienced attorneys who can help clarify which structure fits the assets, the benefit rules, and the age-18 transition. Call us today at (919) 341-7055.

Disclaimer: This article provides general information about North Carolina law based on the single question stated above. It is not legal advice for your specific situation and does not create an attorney-client relationship. Laws, procedures, and local practice can change and may vary by county. If you have a deadline, act promptly and speak with a licensed North Carolina attorney.

Category: Estate Planning Q&A Series

Author: jpierce

Attorney Jared Pierce is the founder of Pierce Law Group in Raleigh, North Carolina, a firm he established with a dedicated focus on probate administration and estate planning across North Carolina. Born and raised in the Republic of South Africa, Jared moved to Durham with his family in 2001, bringing with him a rich cultural background and a distinctive accent that often serves as a conversation starter.