Jan72026
Estate Planning Q&A Series

Can we put inherited money into a special needs trust after the person has already inherited it, and would that help with Medicaid? – North Carolina

Short Answer

In North Carolina, once a Medicaid recipient actually receives an inheritance, that money usually becomes a countable resource and can disrupt Medicaid eligibility. Moving that inherited money into a typical “third-party” special needs trust after receipt generally counts as a transfer for less than fair market value and can trigger a Medicaid penalty period. In some situations, a properly structured first-party option (often a pooled trust subaccount with a Medicaid payback requirement) may help preserve eligibility going forward, but timing and the type of trust matter.

Understanding the Problem

Under North Carolina Medicaid rules, can a spouse who is already on Medicaid receive an inheritance and then place that money into a special needs trust, and would that change Medicaid eligibility? The decision point is whether the inheritance is already legally owned by the Medicaid recipient (meaning it is available to pay for care) versus being directed into an appropriate trust before it becomes the recipient’s asset. This question commonly comes up when a parent dies and an account is paid out directly to children without a formal probate process.

Apply the Law

North Carolina follows federal Medicaid concepts that treat most assets a recipient owns as “available” resources, and it penalizes certain transfers made for less than fair market value during the look-back period. If inherited funds are received outright, they are typically treated as the recipient’s resource. Transferring those funds into a trust after receipt may be treated as a disqualifying transfer unless an exception applies. North Carolina also has a statutory framework for Medicaid pooled trusts (often used as a first-party special needs trust option) that can keep the beneficiary’s trust interest from being treated as an asset for eligibility purposes if the trust complies with the rules.

Key Requirements

  • Ownership/receipt: If the inheritance is paid to the Medicaid recipient (or becomes payable to the recipient and is accessible), it is generally treated as the recipient’s resource for eligibility purposes.
  • Transfer rules (look-back/penalty risk): Moving the recipient’s own inherited funds into a trust after receipt can be treated as a transfer for less than fair market value, which can cause a period of ineligibility for certain long-term care Medicaid services.
  • Correct trust type and structure: A third-party special needs trust is typically funded with someone else’s money. If the money belongs to the Medicaid recipient, a first-party structure is usually required (commonly including Medicaid payback at death), and administration must follow Medicaid rules (including “sole benefit” limitations for certain pooled trust distributions).

What the Statutes Say

Analysis

Apply the Rule to the Facts: In the stated scenario, the spouse on Medicaid is expected to receive an inheritance from a deceased parent’s account that will be split with a sibling, possibly by direct distribution outside of probate. If the spouse receives the funds outright (for example, a check or direct deposit into an account the spouse owns), the inheritance is typically treated as the spouse’s resource. If those funds are then moved into a special needs trust after receipt, North Carolina Medicaid may treat that move as a transfer for less than fair market value, which can create a penalty period under the transfer rules.

Process & Timing

  1. Who acts: The Medicaid recipient (or an authorized agent) and the trustee/pooled trust organization. Where: Planning is handled privately, but Medicaid eligibility is administered through the county department of social services in North Carolina. What: A trust document (and, for a pooled trust, the required joinder/subaccount paperwork) plus proof of the inheritance and the funding transaction. When: Ideally before the inheritance is paid out to the Medicaid recipient; once received, timing becomes critical because the funds may be counted and any transfer may be reviewed under the look-back rules.
  2. Eligibility reporting: If the spouse is already receiving Medicaid, the inheritance and any change in resources generally must be reported promptly under program rules and local DSS instructions. Delayed reporting can create separate problems even if a trust strategy is available.
  3. Penalty/exception evaluation: If a transfer penalty is assessed, the county DSS applies the penalty rules and issues notice. In limited cases, an undue hardship waiver may be requested, but the statute sets short timelines after notice and requires documentation efforts to recover the transferred asset or value.

Exceptions & Pitfalls

  • “Special needs trust” is not one-size-fits-all: A third-party special needs trust is usually not the right tool for money that already belongs to the Medicaid recipient. Using the wrong trust type can lead to a denial or penalty.
  • Receipt is the trigger: Even if probate is not required, a direct beneficiary payout can still create a countable resource once the funds are accessible. Planning often needs to happen before the distribution is made.
  • Transfers can create a penalty even if the goal is good: Paying money into a trust after receipt may still be treated as an uncompensated transfer under North Carolina’s transfer-penalty statute.
  • Pooled trust compliance and administration: North Carolina’s pooled trust framework includes requirements like irrevocability and Medicaid payback from remaining funds. Administration also matters; distributions must follow Medicaid rules and are commonly limited to items that benefit the beneficiary and do not replace benefits that Medicaid already covers.
  • Estate recovery expectations: Even when eligibility is preserved, Medicaid can have recovery rights at death in certain situations, and pooled trust payback rules may apply to remaining trust funds.

Conclusion

In North Carolina, inherited money that is received outright by a person on Medicaid is usually treated as that person’s resource, and moving it into a special needs trust after receipt can trigger a Medicaid transfer penalty. The most important step is to match the trust type to who owns the money and to address timing before the inheritance is distributed. When a penalty notice is issued, the next step is to respond through the county DSS process promptly, including requesting any available waiver within the required deadlines.

Talk to a Estate Planning Attorney

If Medicaid is involved and an inheritance is about to be paid out, small timing and paperwork choices can change eligibility and create penalties. Our firm has experienced attorneys who can help evaluate whether a trust option fits North Carolina Medicaid rules and what steps to take before the funds are distributed. 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.