Should this be a first‑party or third‑party special needs trust if the funds come from my child’s inheritance? – North Carolina

Short Answer

Under North Carolina law, an inheritance left directly to a child with a disability is treated as the child’s own money, so it usually must go into a first-party (self-settled) special needs trust or a qualifying pooled trust to preserve Medicaid and SSI, and it will be subject to a Medicaid payback at death. If the inheritance is structured so the child never owns the funds (for example, a parent’s will or revocable trust leaves assets into a supplemental needs trust), then a third-party special needs trust is used and no Medicaid payback is required. The right answer turns on who legally owns the inheritance at the moment it is funded and when planning takes place.

Understanding the Problem

The core question is whether an inheritance intended for a disabled child in North Carolina should be placed in a first-party special needs trust or a third-party special needs trust. In estate planning, families often want to leave money for a child who receives needs-based benefits such as Medicaid or SSI without causing loss of eligibility. The decision turns on whether the funds legally belong to the child, how the inheritance is structured in a parent’s plan, and whether planning occurs before or after the parent dies. The discussion below focuses only on that decision point under North Carolina estate planning and public-benefits rules.

Apply the Law

Under North Carolina law and federal Medicaid rules, the type of special needs trust depends on the source and ownership of the assets. A first-party trust holds the disabled person’s own assets (including an inheritance received outright), must follow strict statutory and Medicaid requirements, and typically must repay Medicaid at the beneficiary’s death. A third-party trust holds funds that never legally belonged to the disabled beneficiary and is more flexible, with no mandatory Medicaid payback. The main forum for reviewing these trusts, if questions arise, is the county Department of Social Services for Medicaid and the Social Security Administration for SSI. Timing matters because once a child becomes entitled to an inheritance in his or her own name, it is generally treated as the child’s resource unless transferred into a compliant first-party or pooled trust within the allowed time frames.

Key Requirements

Ownership of the funds: If the inheritance becomes legally payable to the disabled child (for example, under a will that leaves money directly to that child), the funds are treated as the child’s own assets and typically must go into a first-party or pooled special needs trust to remain non-countable for Medicaid and SSI.
Source of the funds: If parents or others plan ahead and direct their own assets into a properly drafted supplemental needs trust at death, without the child ever owning them, the trust is treated as a third-party special needs trust.
Public benefits compliance: To keep trust assets from counting as resources for Medicaid and other programs, the trust must limit distributions to supplemental, non-basic needs, be for the sole benefit of the disabled beneficiary where required, and comply with North Carolina’s special trust rules, including Medicaid payback rules for first-party and Medicaid pooled trusts.

What the Statutes Say

N.C. Gen. Stat. § 36D-3 (Scope of 36D Trusts) – Applies North Carolina’s special rules to Community Third Party and Medicaid Pooled Trusts and ties them to the Uniform Trust Code.
N.C. Gen. Stat. § 36D-6 (Gifts and surplus trust funds) – Addresses how Community Third Party and Medicaid Pooled Trusts handle surplus funds, including Medicaid lien repayment from pooled trust subaccounts.
N.C. Gen. Stat. § 36D-7 (Special requests) – Requires that Medicaid Pooled Trust disbursements be for the sole benefit of the beneficiary, a key requirement for special needs planning.
N.C. Gen. Stat. § 36D-9 (Beneficiary’s interest not an asset) – Provides that a qualifying 36D Trust is not counted as an asset for income-eligibility purposes if it meets statutory and regulatory requirements.
N.C. Gen. Stat. § 36D-11 (Settlement and trustee limits) – Describes termination and final accounting for Medicaid pooled trust subaccounts, including coordination with Medicaid.
N.C. Gen. Stat. § 36D-12 (Administrative rules and Medicaid payback) – Authorizes detailed Medicaid rules, confirms that pooled trust subaccounts are irrevocable, and requires repayment of up to the total Medicaid paid upon death or trust termination.

Analysis

Apply the Rule to the Facts: With no specific facts given, consider two simple scenarios. If a parent’s will leaves “all to my children in equal shares,” and one child is disabled and on Medicaid, that child’s inheritance share is treated as that child’s own asset. In that case, preserving benefits usually requires a first-party special needs trust or a qualifying pooled trust, which then must follow Medicaid payback rules. By contrast, if the parent’s will or revocable trust says “on my death, hold my disabled child’s share in a supplemental needs trust for that child,” the disabled child never owns the inheritance directly. That trust is third-party, can be drafted to avoid Medicaid payback, and can name remainder beneficiaries at the child’s death.

Process & Timing

Who files: Typically, a parent, other family member, or guardian works with a North Carolina estate planning attorney. Where: Trusts are created by private trust agreements and, if tied to an estate, through the county Clerk of Superior Court’s estate file. What: A third-party special needs trust is usually built into a will or revocable living trust; a first-party or pooled special needs trust is created by a separate trust agreement that meets Medicaid and SSI rules. When: Third-party trusts are ideally set up before a parent’s death; first-party or pooled trusts should be funded promptly after the disabled person becomes entitled to an inheritance so benefits agencies do not treat the inheritance as an available resource.
After the trust is signed and funded, the trustee typically provides the trust documents and funding proof to the county Department of Social Services (for Medicaid) and, when needed, to the Social Security Administration (for SSI). Review and approval timelines vary by county and agency workload, but it often takes several weeks to a few months.
Once the agencies recognize the trust as compliant, the trustee administers it by paying for approved supplemental needs and tracking all distributions. For pooled Medicaid trusts governed by Chapter 36D, the nonprofit trustee must later provide a final accounting and pay any required Medicaid reimbursement when the beneficiary dies or the trust terminates.

Exceptions & Pitfalls

A poorly drafted trust that allows cash gifts directly to the beneficiary or covers food and shelter in a way that violates program rules may be treated as a countable resource, even if labeled “special needs.”
If an inheritance is paid directly into the disabled child’s bank account and no compliant first-party or pooled trust is created, Medicaid or SSI may suspend or terminate benefits until the funds are spent down or properly sheltered.
Using a pooled Medicaid trust under Chapter 36D can help when the inheritance is modest or when there is no individual trustee available, but pooled trusts must follow strict “sole benefit” and Medicaid payback rules.
Beneficiary designations on life insurance, retirement accounts, or payable-on-death accounts that name the disabled child outright can accidentally create first-party assets and disrupt benefits; these usually should instead name the third-party supplemental needs trust.
Tax treatment of trusts can be complex; families should consult a tax attorney or CPA before funding larger trusts with retirement accounts or other tax-sensitive assets.

Conclusion

For an inheritance under North Carolina law, the correct type of special needs trust depends on who legally owns the funds at the time of transfer. If the inheritance is structured so the disabled child never owns it, a third-party special needs trust is usually preferred and avoids Medicaid payback. If the child already owns or becomes entitled to the inheritance, a first-party or pooled special needs trust is generally required to preserve benefits and must follow Medicaid payback rules. The practical next step is to review existing wills, beneficiary designations, and any pending inheritance with a North Carolina estate planning attorney and direct future gifts into an appropriate special needs trust.

Talk to a Estate Planning Attorney

If a disabled child may receive an inheritance and continued Medicaid or SSI eligibility is a concern, our firm has experienced estate planning attorneys who can help structure the right type of special needs trust and coordinate it with your overall plan. 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.