How does a supplemental needs trust work and who should serve as trustee? – North Carolina

Short Answer

Under North Carolina law, a supplemental needs trust (often called a special needs trust) is designed to hold funds for a person with a disability without counting as that person’s own asset for means-tested benefits, as long as it follows specific federal and state rules. The trustee controls and spends the money only for the beneficiary’s benefit, typically to pay for extras that government programs do not cover. A suitable trustee is someone—often a trusted individual, professional fiduciary, or qualified nonprofit—who understands the beneficiary’s needs, is organized and financially responsible, and is willing to follow strict benefit and trust rules.

Understanding the Problem

The core question is how a North Carolina supplemental needs trust functions and what type of person or entity should serve as trustee. In estate planning, families often ask whether they can set aside money for a loved one with a disability without causing the loss of Medicaid, Supplemental Security Income, or other needs-based benefits. They want to know what a supplemental needs trust is supposed to pay for, how tightly the trustee must follow benefit-program rules, and whether a family member, professional fiduciary, bank, or nonprofit should take on the trustee role.

Apply the Law

Under North Carolina law, trusts created to supplement a disabled beneficiary’s care—without disqualifying the person from public benefits—must follow both federal special needs trust rules and state trust rules, including the provisions that govern Medicaid pooled trusts and other Chapter 36D trusts. These rules focus on who qualifies as a disabled beneficiary, how the trust is drafted and funded, and how the trustee administers the funds for the beneficiary’s sole benefit.

Key Requirements

Disabled beneficiary and proper purpose: The trust must be established for a person who meets the disability standard tied to federal law and is intended to enhance quality of life rather than replace basic support provided by government benefits.
Correct trust structure and funding: The trust terms must make it irrevocable when required, limit distributions to the beneficiary’s sole benefit, and, in certain Medicaid-related trusts, provide that the State is reimbursed from remaining funds up to the amount of medical assistance paid.
Trustee duties and administration: The trustee must manage and spend trust assets prudently, keep the funds legally separate from the beneficiary, and make distributions in a way that complies with state regulations, federal Medicaid and SSI rules, and any additional rules adopted by the North Carolina Department of Health and Human Services.

What the Statutes Say

N.C. Gen. Stat. § 36D-2 (Definitions for Chapter 36D Trusts) – defines key terms such as beneficiary, Medicaid pooled trust, trustee, and “sole benefit.”
N.C. Gen. Stat. § 36D-3 (Scope of Chapter 36D Trusts) – explains that Chapter 36D trusts are subject to North Carolina’s nonprofit and trust laws and clarifies trustee liability in pooled trusts.
N.C. Gen. Stat. § 36D-7 (Special Requests on Behalf of Beneficiary) – confirms that distributions must be consistent with the trust’s purposes and, for Medicaid pooled trusts, must be for the sole benefit of the beneficiary.
N.C. Gen. Stat. § 36D-9 (Beneficiary’s Interest Not an Asset) – provides that a qualifying Chapter 36D trust is not treated as an asset when determining eligibility for publicly operated benefit programs, if statutory and regulatory requirements are followed.
N.C. Gen. Stat. § 36D-12 (Administrative Rules) – authorizes the Department of Health and Human Services to adopt detailed rules for medical assistance eligibility and requires Medicaid pooled trust subaccounts to be irrevocable, with a payback to the State for medical assistance provided.

Analysis

Apply the Rule to the Facts: For someone considering a supplemental needs trust in North Carolina, the first question is whether the intended beneficiary meets the disability definition tied to federal law and relies on means-tested benefits such as Medicaid. If so, a properly drafted supplemental needs trust can help hold gifts, inheritances, or settlement funds without being treated as the beneficiary’s countable asset, as long as the trustee spends only for the beneficiary’s benefit and respects benefit-program limits on cash and food-and-shelter payments. The choice of trustee then becomes central, because an inexperienced or inattentive trustee can make distributions in a way that jeopardizes eligibility or conflicts with Chapter 36D and related rules.

Process & Timing

Who files: Typically, a parent, grandparent, legal guardian, the disabled individual (if legally able), or a court establishes the trust. Where: The trust document is drafted and signed under North Carolina law; in some cases, court approval is required, especially when settlement funds are involved. What: A written trust agreement tailored to supplemental needs, sometimes combined with joinder documents if using a pooled trust run by a nonprofit. When: Ideally before large assets pass to the disabled beneficiary, or before finalizing a personal injury or other settlement that will fund the trust.
After the trust is signed, assets are retitled or paid into the trust (for example, by updating beneficiary designations, wills, or settlement documents). The trustee then opens trust accounts, ensures appropriate tax identification is obtained, and begins managing investments and recordkeeping.
On an ongoing basis, the trustee reviews the beneficiary’s needs, evaluates requests for distributions, and documents decisions to show that payments are for the beneficiary’s sole benefit and consistent with the trust terms and applicable Medicaid/SSI rules. For Medicaid pooled trusts governed by Chapter 36D, the trustee or administering nonprofit must also comply with any rules issued by the Department of Health and Human Services, including payback obligations when the trust terminates.

Exceptions & Pitfalls

Not all trusts for disabled individuals qualify as Chapter 36D or other protected special needs trusts; if the wording allows distributions to others or does not limit use to the beneficiary’s sole benefit, benefit agencies may treat the assets as belonging to the beneficiary.
Improper distributions—such as giving the beneficiary unrestricted cash or paying certain housing and food expenses without planning for the benefit-program impact—can reduce or suspend SSI or other benefits, even if the trust itself technically qualifies.
Choosing a trustee who lacks time, organization, or familiarity with disability benefits can lead to missed reporting, poor investment decisions, or violations of Department of Health and Human Services rules, which may result in sanctions or termination of medical assistance.
For Medicaid pooled trusts under Chapter 36D, a trustee that does not follow the “sole benefit” standard can be held liable to the Department, and the beneficiary’s eligibility can be affected.
Tax treatment of special needs trusts can be complex; it is important to coordinate with a tax attorney or certified public accountant to understand reporting duties and potential consequences for both the trust and the beneficiary.

Conclusion

In North Carolina, a supplemental needs trust is an estate-planning tool that holds assets for a disabled beneficiary while aiming to preserve eligibility for Medicaid, SSI, and other needs-based programs. To work properly, it must be drafted and funded to satisfy federal disability-related trust rules and Chapter 36D requirements, and it must be administered so that distributions are for the beneficiary’s benefit and consistent with agency regulations. A key next step is to select and formally appoint a capable trustee—family member, professional, or nonprofit—who is willing to follow these rules and maintain careful records.

Talk to a Estate Planning Attorney

If a loved one may benefit from a North Carolina supplemental needs trust, our firm has experienced attorneys who can help evaluate options, draft the right kind of trust, and guide the trustee on benefit-compliant administration. 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.