Short Answer

In North Carolina, a properly drafted Special Needs Trust (also called a Supplemental Needs Trust) can protect assets without disqualifying a disabled person from Medicaid. If the assets already belong to the disabled person (like an inheritance in her name), a first-party special needs trust or a pooled trust is used and must include a Medicaid payback. If the assets come from someone else, a third-party supplemental needs trust is preferred and does not require payback. These trusts do not shield ongoing disability income; they protect assets.

Understanding the Problem

North Carolina: You want to know if you can set up a trust so your spouse can keep Medicaid when she starts disability benefits and has inherited real property. The decision is whether a trust can lawfully protect her assets (the inheritance) without disrupting Medicaid, and what type does that.

Apply the Law

Under North Carolina law, special needs planning focuses on whether money or property is a “countable resource” or “countable income” for Medicaid. A Special Needs Trust (SNT) is drafted so the trustee—not the beneficiary—controls distributions, and the trust only supplements public benefits. There are three main options:

• First-party SNT: Holds the disabled person’s own assets (e.g., an inheritance already in her name). It must be established and funded before age 65 and must repay Medicaid at the beneficiary’s death.
• Pooled Special Needs Trust: A nonprofit manages individual subaccounts. It can accept the disabled person’s assets; transfers after age 65 can trigger long-term care Medicaid transfer penalties. Remainder goes to the State or the nonprofit per the trust terms.
• Third-party Supplemental Needs Trust: Holds assets never owned by the disabled person (e.g., from a spouse’s or parent’s estate/plan). No Medicaid payback is required if drafted correctly.

Key point: An SNT protects assets. It does not convert disability income (like SSDI) into non-countable income. Income paid to her remains her income, even if routed through a trust. Distributions from the trust should be discretionary and for supplemental needs so they do not count as her resources.

Key Requirements

• Disability status: Beneficiary meets the federal disability standard (typically proven by SSA/SSDI or SSI disability determination).
• Trust control: Trustee has full discretion; the beneficiary cannot demand distributions. Include strong spendthrift and supplemental needs language.
• Funding source rules: First-party/pooled trusts can hold assets already in the beneficiary’s name; third-party trusts hold assets from others.
• Age/payback: First-party SNT must be funded before age 65 and must include Medicaid payback at death.
• Administration: No routine court supervision in NC; trustee must follow fiduciary duties and keep records. Court involvement is available if needed.

What the Statutes Say

• North Carolina Gen. Stat. § 36C-5-502 (Spendthrift provisions) – Protects trust interests from transfer/most creditors if properly drafted.
• North Carolina Gen. Stat. § 36C-5-504 (Discretionary trusts) – Trustee discretion and creditor limits help keep assets non-countable.
• North Carolina Gen. Stat. § 35A-1121 (Single protective arrangement) – Allows a court-approved one-time arrangement (such as funding an SNT) without a full guardianship when needed.

Analysis

Apply the Rule to the Facts: Because your spouse has inherited real property in her name and will receive disability benefits, a first-party SNT (or a pooled trust subaccount) is the tool to hold her inherited asset so it does not count against Medicaid. That trust must be funded before age 65 and include a Medicaid payback. The trust will not change how her disability income is counted, but it can prevent the inherited property and its sale proceeds from disqualifying her.

Process & Timing

1. Who files: The disabled individual (if competent), a parent/grandparent, a court-appointed guardian, or by court order. Where: Usually no filing is required to create the trust; if court approval is needed, file a trust/guardianship petition with the Clerk of Superior Court in your county (special proceeding). What: Draft a “First-Party Supplemental Needs Trust” (or join a pooled trust) with required payback language; if incapacity requires it, seek a single protective arrangement under G.S. 35A‑1121 (the court may issue orders and, if temporary guardianship is needed, the AOC-E-421 Letters form is used). When: Establish and fund the first-party SNT before age 65; report the trust and funding to your county DSS caseworker promptly.
2. Title the inherited real property into the SNT (record a deed at the Register of Deeds). If the property is sold, direct net proceeds to the SNT. Provide the trust and funding documents to DSS so eligibility workers can update the case. Timeframes vary by county.
3. Administer the trust: the trustee keeps records, pays for supplemental needs directly to providers, and avoids cash to the beneficiary. No routine court accountings are required unless ordered or the trust mandates it.

Exceptions & Pitfalls

• Trusts do not shield income: SSDI/other disability income paid to her will still be counted; routing it through a trust does not change that.
• Age limits and penalties: First-party SNT funding must occur before 65; transfers to pooled trusts after 65 are allowed but can cause transfer penalties for long-term care Medicaid.
• Payback clause: First-party/pooled trusts must repay Medicaid at death before heirs receive any remainder.
• Disclaimers: Refusing an inheritance can be treated as a transfer for Medicaid; get advice before disclaiming.
• Distribution errors: Paying cash to the beneficiary can affect benefits. Trustees should pay vendors directly for supplemental items/services.
• Court involvement: North Carolina trusts aren’t under routine court supervision; seek Clerk of Superior Court orders only when needed (e.g., incapacity, trustee appointment, or protective arrangement).

Talk to a Estate Planning Attorney

If you’re dealing with protecting Medicaid while handling an inheritance for a disabled adult, our firm has experienced attorneys who can help you understand your options and timelines. Call us today to discuss your situation.

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.