What type of trust will prevent a five-year Medicaid look-back from clawing back assets? – North Carolina

Short Answer

In North Carolina, a third-party supplemental needs trust (also called a special needs trust) funded by someone other than the Medicaid recipient is the tool that avoids the five-year look-back clawing back assets. It keeps the inheritance out of your name, uses discretionary and spendthrift terms, and is generally not treated as your asset for SSI/Medicaid. If money is already in your name, a first-party special needs trust may still help, but it has strict limits and a Medicaid payback.

Understanding the Problem

You’re asking whether there’s a North Carolina trust that can keep your expected inheritance from counting against your SSI/Medicaid and from being clawed back under the five-year look-back. The role here is a disabled beneficiary on SSI/Medicaid who expects to receive cash from the sale of a family home. The goal is to protect benefits by directing that inheritance into the right kind of trust at the right time.

Apply the Law

Under North Carolina law, trusts that protect a beneficiary’s eligibility for needs-based benefits use two core features: (1) discretionary distribution language so the beneficiary cannot demand payments, and (2) a spendthrift clause to block creditor reach until funds are actually distributed. A third-party supplemental needs trust (funded by someone other than the beneficiary) is typically used for inheritances. Court involvement is through the Clerk of Superior Court for trust proceedings when a new trust must be created or an estate distribution needs direction. Timing matters: the trust should be in place before an estate pays the beneficiary directly.

Key Requirements

• Third-party funding: The trust must be funded by someone other than the SSI/Medicaid recipient (for example, by a parent’s will or by the estate before distribution).
• Discretionary distributions: The trustee must have discretion over payments so the beneficiary has no right to demand distributions.
• Spendthrift protection: Include a spendthrift clause so creditors cannot reach trust assets before distribution.
• Avoid revocable or self-settled structures: Do not use a revocable trust funded by the beneficiary; assets of a revocable or self-settled trust can be reachable by the settlor’s creditors.
• Correct forum and timing: If a new trust is needed during estate administration, file a trust proceeding with the Clerk of Superior Court and obtain authority to distribute the beneficiary’s share directly to the trust before payment is made to the beneficiary.

What the Statutes Say

• North Carolina Gen. Stat. § 36C-5-502 (Spendthrift provisions) – Validates spendthrift clauses that restrict transfers and creditor reach before distribution.
• North Carolina Gen. Stat. § 36C-5-504 (Discretionary trusts) – Protects discretionary interests from most creditors until actually distributed.
• North Carolina Gen. Stat. § 36C-5-505 (Creditor claims against settlor) – Makes revocable trust assets available to the settlor’s creditors; limits protection for self-settled irrevocable trusts.
• North Carolina Gen. Stat. § 36C-2-203 (Trust proceedings jurisdiction) – Identifies the Clerk of Superior Court’s authority over internal trust matters, including creating trusts.

Analysis

Apply the Rule to the Facts: You expect to inherit proceeds from the sale of your family’s home. If your share is paid to you outright, it can count as your resource for SSI/Medicaid and may trigger transfer penalties if you try to move it later. Directing your share into a third-party supplemental needs trust—before distribution—keeps the funds out of your name, uses discretionary/spendthrift protection, and typically avoids the five-year look-back because you are not transferring your own assets.

Process & Timing

1. Who files: The personal representative or an interested party. Where: Clerk of Superior Court in the North Carolina county where the estate is administered or where venue is proper for a trust proceeding. What: Petition to create a supplemental needs trust and to authorize distribution of your estate share to it; use ESTATE SUMMONS FOR TRUST PROCEEDING (AOC-E-150) for respondents. When: File before the estate distributes any funds to you.
2. Obtain an order authorizing the personal representative to fund the third-party supplemental needs trust with your share. The trustee opens a trust account and provides wiring or check instructions. Local county timelines vary; uncontested matters often proceed on the clerk’s summary calendar.
3. The personal representative pays your share directly to the trust, then completes estate distributions and closes the estate. The trustee administers the trust for your supplemental needs in coordination with SSI/Medicaid rules.

Exceptions & Pitfalls

• If funds are already in your name, a first-party special needs trust may still be possible, but it typically requires court or statutory authority, may have an age limit, and usually includes a Medicaid payback at death.
• Do not use a revocable or self-funded trust for this purpose; under North Carolina law, the settlor’s creditors can reach those assets.
• A trust with mandatory distributions or a right for you to demand payments can be treated as your resource; keep distributions fully discretionary.
• Disclaimers and informal redirections of inheritance can affect benefits; handle changes through a proper trust proceeding and estate court order.
• Serve all necessary parties in the trust proceeding and follow venue rules to avoid delays in getting authority to fund the trust.

Talk to a Estate Planning Attorney

If you’re dealing with an expected inheritance and need to protect SSI/Medicaid eligibility, 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.