Jan112026
Estate Planning Q&A Series

Can I create and fund a special needs trust with my own money, or does someone else have to fund it for me? – North Carolina

Short Answer

In North Carolina, a person who receives disability benefits can sometimes use their own money to fund a special needs trust, but it usually cannot be a simple “do-it-yourself” trust. When the money belongs to the person with a disability (like a lump-sum back payment), the trust generally must be set up and administered in a way that fits Medicaid’s rules, and it often requires a court, a legal representative, or a qualifying pooled trust structure. If the trust is not set up correctly, Medicaid can treat the funds as available and that can affect eligibility.

Understanding the Problem

Under North Carolina estate planning and benefits rules, the key question is whether a person who receives disability benefits can place a lump-sum payment into a special needs trust using their own funds without causing Medicaid eligibility problems. The decision point is whether the money is the beneficiary’s own money (such as disability back pay) versus money that belongs to someone else (such as a parent’s gift or inheritance planning). Timing matters because holding a lump sum in a regular account can create a resource issue, while moving it incorrectly can create a transfer problem.

Apply the Law

North Carolina generally recognizes “36D trusts” (including pooled trusts) as a way to hold assets for a person with a disability while aiming to preserve eligibility for certain public benefits, as long as the trust meets strict requirements and is administered consistently with those requirements and applicable federal rules. When the funds are the beneficiary’s own funds, Medicaid focuses on whether the trust is structured so the beneficiary cannot freely access the money and whether required payback/termination rules are followed. If a transfer is treated as a transfer for less than fair market value, Medicaid can impose a penalty period for certain long-term care services.

Key Requirements

  • Right type of trust for “my money”: If the funds belong to the person with a disability (for example, a lump-sum back payment), the trust must be the kind of special needs arrangement Medicaid will treat as non-countable when properly drafted and administered, rather than a standard revocable trust or informal account.
  • Proper control and administration: The trust must be set up so the beneficiary cannot simply demand distributions like a regular bank account, and the trustee must make distributions in a way that follows the program rules (including “sole benefit” concepts in pooled-trust administration).
  • Payback/termination and compliance: North Carolina law allows the State to be repaid from remaining pooled-trust funds at death or termination up to the amount of Medicaid paid, and the State can impose sanctions or terminate eligibility if the trust fails to comply or is administered inconsistently with the governing requirements.

What the Statutes Say

Analysis

Apply the Rule to the Facts: Here, the lump-sum back payment belongs to the person receiving disability benefits, so it is “own money,” not a third party’s money. That typically means the trust must be structured as a first-party style special needs arrangement (often through a pooled trust subaccount or a court-established trust) rather than a simple trust the beneficiary creates and controls. If the funds sit in a regular bank account, Medicaid may treat them as available resources; if the funds are moved into a non-qualifying trust or given away, Medicaid may treat that as a transfer that can create a penalty for certain services.

For example, if the back pay is deposited into a standard checking account and remains there, it can push countable resources over program limits depending on the Medicaid category. If instead the funds are placed into a properly structured pooled trust subaccount that is irrevocable and administered for the beneficiary’s sole benefit, the goal is to keep eligibility intact while allowing the trustee to pay for permitted supplemental needs.

Process & Timing

  1. Who files: Typically a legal representative (such as a guardian) or another authorized party works with counsel and the pooled trust organization; in some situations a court process is used to establish/approve the arrangement. Where: Often through the nonprofit pooled trust administration and, when required, the North Carolina state court with jurisdiction (commonly the Clerk of Superior Court in the county where the person resides). What: Trust joinder/subaccount documents for a pooled trust and related funding instructions; if court involvement is required, a petition and proposed trust documents. When: As soon as practical after the lump sum is received, because holding it in a personal account can create an eligibility issue.
  2. Next step with realistic timeframes; gather benefit award letters, account statements showing receipt of the back payment, and confirm the Medicaid program category because different categories can treat income/resources differently.
  3. Final step and expected outcome/document; fund the trust correctly (retitle/transfer funds into the trust account) and keep records so the Medicaid caseworker can verify the funds are no longer a countable resource and that the trust meets the required structure.

Exceptions & Pitfalls

  • Confusing “my money” with “someone else’s money”: a third-party special needs trust (funded by parents or others) is not the same as a trust funded with the beneficiary’s own back pay, and using the wrong structure can cause Medicaid problems.
  • Funding mistakes: depositing money into the wrong account first, mixing funds, or transferring funds in a way that looks like a gift can trigger transfer-of-assets scrutiny under North Carolina’s transfer rules.
  • Administration mistakes: even a properly drafted trust can cause trouble if distributions are made in ways that violate program rules or if required payback/termination provisions are not followed.

Conclusion

In North Carolina, a person can sometimes use their own money (including disability back pay) to fund a special needs trust, but it generally must be a properly structured first-party arrangement—often through a pooled trust subaccount or a court-involved setup—so Medicaid does not treat the funds as available. The trust must be administered consistently with the rules, and certain structures require repayment to the State from remaining funds at death or termination. The next step is to have the correct trust documents prepared and fund the trust promptly after receiving the lump sum.

Talk to a Estate Planning Attorney

If you’re dealing with a disability back payment and concerns about Medicaid eligibility, our firm has experienced attorneys who can help explain which trust options may fit and what timelines matter. 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.