Jan72026
Estate Planning Q&A Series

If we use inherited money to settle or pay off credit card debt, could that create problems with Medicaid or other benefits? – North Carolina

Short Answer

Yes, it can. In North Carolina, an inheritance received by a person on Medicaid can affect eligibility because it may be treated as income in the month received and/or as a countable resource if kept into a later month. Using inherited funds to pay legitimate debts is often an allowable “spend down,” but timing, ownership of the inheritance, and proper reporting to the county Department of Social Services can still create problems if handled incorrectly.

Understanding the Problem

In North Carolina, when a Medicaid recipient becomes entitled to receive inherited funds, questions often come up about whether those funds must be reported, whether they can be used to pay debts like credit cards, and whether paying those debts could cause a loss of Medicaid or other needs-based benefits. The key decision point is whether the inheritance is treated as available money or property for Medicaid eligibility purposes at the time it is received (or becomes available), and what happens if the funds are kept or transferred after that point.

Apply the Law

North Carolina Medicaid eligibility rules generally look at both income and available resources. An inheritance can trigger a re-evaluation because it may be considered available to the recipient once it is payable or received, even if it comes from an account that passes outside a formal probate process. If the inheritance is available and not properly handled, the county Department of Social Services may determine the recipient is over the resource limit, which can lead to termination, a required “spend down,” or an overpayment issue. Separately, transfers for less than fair market value can create a penalty period for certain long-term care Medicaid services.

Key Requirements

  • Availability/ownership of the inheritance: Medicaid problems usually start when the inheritance is legally available to the Medicaid recipient (not just expected). How the account is titled and how distribution occurs can matter.
  • Resource and income impact: If the inheritance is received and kept, it may count as a resource going forward. If it is received as a lump sum, it can also affect the month it is received depending on the Medicaid category.
  • No disqualifying transfers: Giving inherited money away, or moving it in a way that looks like a transfer for less than fair market value, can trigger a penalty for certain long-term care Medicaid benefits.

What the Statutes Say

Analysis

Apply the Rule to the Facts: Here, a spouse is already on Medicaid and is expected to receive an inheritance from a parent’s account that will be split with a sibling and may pass without a formal probate. Once the spouse’s share becomes available (for example, distributed to the spouse or otherwise payable), the county DSS may treat it as a change in financial resources that can affect eligibility. Using the inherited funds to pay legitimate credit card debt is often consistent with reducing countable resources, but it must be done carefully so it does not look like a gift or an unverified transfer and so the change is properly reported and documented.

Process & Timing

  1. Who reports/handles it: The Medicaid recipient or an authorized representative. Where: The county Department of Social Services (DSS) that manages the Medicaid case in North Carolina. What: Written notice of the inheritance and documentation showing the amount and the date it became available (for example, account statements and distribution paperwork). When: Promptly after learning the inheritance is available or after receipt, because DSS can redetermine eligibility when resources change.
  2. Document the spend down: If inherited funds are used to pay credit card debt, keep clear proof of the debt and the payment (statements showing the balance, payoff letters, cancelled checks, or bank records). DSS typically wants a paper trail showing the money went to a legitimate expense and not to someone else.
  3. Confirm continued eligibility: After the inheritance is received and any debt payments are made, DSS may request verification and then issue a redetermination notice. If the inheritance temporarily put the recipient over the resource limit, DSS may require corrective action or may close coverage depending on the Medicaid category and timing.

Exceptions & Pitfalls

  • Paying someone else’s debt: Using the Medicaid recipient’s inherited funds to pay a different person’s credit card (even a spouse’s or child’s) can be treated as a transfer for less than fair market value and may trigger a penalty for certain long-term care Medicaid services under North Carolina’s transfer rules.
  • Gifts to family instead of paying debts: Giving inherited money to a sibling, child, or anyone else (or “sharing” more than the sibling’s legal share) can create a transfer issue. Transfers are a common reason people get hit with a penalty period.
  • Timing and account titling mistakes: If the inheritance is deposited into a joint account, it can create confusion about whose resource it is and whether it is available. Mixing funds can also make documentation harder during a DSS review.
  • Not keeping records: Even when paying legitimate debts, missing statements, missing payoff letters, or unclear bank records can lead to DSS treating the transaction as an unexplained transfer.
  • Estate recovery confusion: Paying off credit card debt does not “avoid” Medicaid estate recovery. North Carolina can seek recovery from a recipient’s estate after death for certain services, and planning should account for that separately.

Conclusion

In North Carolina, an inheritance received by a Medicaid recipient can affect eligibility because it may be treated as available funds and may count as a resource if kept. Using inherited money to pay the recipient’s legitimate credit card debt is often an acceptable way to reduce countable resources, but gifts or payments for someone else can create transfer-penalty risk. The most important next step is to report the inheritance to the county DSS promptly and provide clear documentation showing the amount received and how it was spent.

Talk to a Estate Planning Attorney

If you’re dealing with an expected inheritance while a spouse is on Medicaid, our firm has experienced attorneys who can help explain options, reporting steps, and timing issues. 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: Pierce Law

Pierce Law Group is a North Carolina law firm focused on probate administration, real estate partition matters, and surplus funds claims across North Carolina. We know these situations often come with stress, family dynamics, and time-sensitive decisions—so we prioritize clear communication, steady guidance, and a practical plan from day one. Our goal is to make a complicated process feel manageable, while protecting what matters most to you.