How can I set up a special needs trust so my child keeps disability and other government benefits? – North Carolina

Short Answer

In North Carolina, a properly drafted special needs trust (also called a supplemental needs trust) can hold money for a child with a disability without counting as the child’s own asset for most means-tested benefits, like SSI and Medicaid. The trust must be irrevocable, limit distributions to supplemental (not basic support) needs, and follow federal and state rules, including North Carolina’s Chapter 36D rules for certain pooled trusts. The choice between a third-party trust, first-party trust, or pooled trust depends on whose money funds it and the child’s long-term needs.

Understanding the Problem

The core question is how a parent in North Carolina can leave money or other property for a child with a disability without causing the child to lose needs-based public benefits such as Supplemental Security Income (SSI) and Medicaid. The concern is that if the child receives money outright, those funds may push the child over strict asset limits and cause a loss or reduction of benefits. The focus here is on using a special needs trust as an estate planning tool to preserve benefit eligibility while still improving the child’s quality of life.

Apply the Law

Under North Carolina law and federal benefit rules, a special needs trust is a trust designed so that assets are not counted as the beneficiary’s own resources for SSI, Medicaid, and similar means-tested programs, as long as the trust meets specific requirements and is administered correctly. These trusts are typically used for a child who meets the disability standard used for SSI, and distributions must be made in a way that supplements, rather than replaces, public benefits. North Carolina also recognizes specific pooled trust arrangements governed by Chapter 36D of the General Statutes for beneficiaries with disabilities.

Key Requirements

Correct trust type and funding source: Decide whether the trust will be funded with a parent’s or other third party’s assets (third-party special needs trust), with the child’s own assets (first-party or “(d)(4)(A)” trust), or through a nonprofit-managed pooled trust under North Carolina’s Chapter 36D. The funding source determines whether a Medicaid payback clause is required and what options exist at the child’s death.
Irrevocable, supplemental purpose language: The trust must be irrevocable (especially for pooled and first-party trusts) and clearly state that its purpose is to supplement, not replace, government benefits. It should restrict distributions so they do not give the beneficiary direct cash or basic support in a way that would count as income or resources under SSI/Medicaid rules, except when the trustee intentionally accepts a known reduction.
Compliance with SSI, Medicaid, and Chapter 36D rules: The trust must be established and administered for the sole benefit of the child with a disability, use a qualified trustee, and comply with federal law and state rules, including North Carolina’s definitions and requirements for pooled trusts and disability standards. For certain pooled or first-party trusts, the document must include Medicaid payback provisions and meet any approval or rule requirements set by the North Carolina Department of Health and Human Services.

What the Statutes Say

N.C. Gen. Stat. § 36D-2 (Definitions for 36D Trusts) – Defines key terms for North Carolina Medicaid pooled trusts and community third-party trusts, including “beneficiary,” “Medicaid Pooled Trust,” and “sole benefit.”
N.C. Gen. Stat. § 36D-7 (Special requests on behalf of beneficiary) – Explains that Community Third Party and Medicaid Pooled Trusts may fulfill special (supplemental) requests for the beneficiary, consistent with Chapter 36D.
N.C. Gen. Stat. § 36D-9 (Beneficiary’s interest not an asset) – States that a beneficiary’s interest in a qualifying 36D Trust is not treated as an asset for income eligibility for publicly operated programs, if the trust and its administration meet statutory and rule requirements.
N.C. Gen. Stat. § 36D-12 (Administrative rules) – Authorizes the Department of Health and Human Services to adopt detailed rules for Medicaid Pooled Trusts, including irrevocability, Medicaid payback, and subrogation requirements.

Analysis

Apply the Rule to the Facts: With no specific facts given, consider two common situations. In one, parents want to leave life insurance and retirement assets for an adult child on SSI. A third-party special needs trust created in their wills or revocable trust, with clear supplemental language and a reliable trustee, can hold those funds and pay for extras such as therapies or transportation without being counted as the child’s resource. In another, a child with a disability receives a personal injury settlement; a first-party or pooled special needs trust that meets federal and Chapter 36D requirements, including Medicaid payback, can preserve Medicaid coverage while allowing settlement funds to enhance the child’s life.

Process & Timing

Who files: Typically a parent, grandparent, legal guardian, or the individual with a disability (if competent) works with a North Carolina estate planning attorney. Where: The trust instrument is drafted and signed under North Carolina law; court involvement is usually only required if the trust is funded from a court-approved settlement or created by court order. What: A written special needs trust agreement, plus related estate planning documents (wills, beneficiary designations, powers of attorney). When: Ideally, the trust is signed before significant assets pass to the child or before a settlement is approved.
After the trust is signed, the parent or other contributors retitle assets or update beneficiary designations so funds pass to the trust instead of directly to the child. For pooled trusts under Chapter 36D, enrollment forms and a joinder agreement with the nonprofit trustee must be completed, and the subaccount funded according to the organization’s procedures. Timeframes vary but often take several weeks from drafting to full funding.
Once funded, the trustee manages investments, responds to benefit agency inquiries, and makes distributions for supplemental needs. For first-party and pooled trusts, the trustee tracks Medicaid expenditures and, at the beneficiary’s death, uses remaining funds to repay Medicaid if required, then distributes any remaining balance as the trust allows.

Exceptions & Pitfalls

Giving money or property outright to the child instead of to the trust can push assets over SSI/Medicaid limits and cause suspension or loss of benefits.
Improper trust drafting—such as allowing the beneficiary to demand distributions, giving broad cash payments, or making the trust revocable when it should be irrevocable—can cause the trust to be treated as a countable resource.
Using the child’s own funds in a third-party style trust, or omitting required Medicaid payback language for first-party or pooled trusts, can violate federal and state rules and trigger penalties or loss of eligibility.
Trustee selection and administration matter: if the trustee makes distributions that provide basic food and shelter in certain ways, SSI may be reduced; if the trustee fails to follow Chapter 36D and agency rules for pooled trusts, the Department of Health and Human Services can impose sanctions or terminate eligibility.
There is also a separate tool called an ABLE account for certain individuals with disabilities; coordination between ABLE accounts and special needs trusts can be helpful but must be handled carefully to avoid tax or benefit issues, with guidance from a tax professional or advisor.

Conclusion

In North Carolina, a special needs trust can allow a child with a disability to benefit from family resources while keeping means-tested benefits like SSI and Medicaid, if it is correctly structured and administered. The key steps are choosing the right type of trust based on whose money funds it, using irrevocable, supplemental-needs language, and complying with federal rules and North Carolina’s Chapter 36D where applicable. A practical next step is to work with a North Carolina estate planning attorney to draft and sign a special needs trust before any significant inheritance, gift, or settlement is directed to the child.

Talk to a Estate Planning Attorney

If you’re dealing with how to leave money for a child with a disability without disrupting SSI, Medicaid, or other benefits, our firm has experienced attorneys who can help you understand your options and timelines. 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.