NC Special Needs Trusts: Keep Benefits, Avoid Probate

What is a Special Needs Trust?

A Special Needs Trust (SNT) is a trust designed to supplement, not replace, public benefits for a person with a disability. When properly drafted and administered, an SNT can hold assets for the beneficiary without causing disqualification from means-tested programs such as Supplemental Security Income (SSI) and Medicaid. The trust pays for supplemental needs—things that enhance quality of life—while keeping program eligibility intact. See the Social Security Administration’s guidance on trusts and special needs trusts for details (POMS SI 01120.200; POMS SI 01120.203; SSA Spotlight on Special Needs Trusts).

Why Use a Special Needs Trust in North Carolina?

Families often worry that leaving money directly to a loved one with a disability will jeopardize SSI or Medicaid. An SNT lets you set aside resources for care, services, and life enhancement without disrupting eligibility. In North Carolina, an SNT can be integrated with your overall estate plan to minimize court involvement, provide management by a trusted trustee, and coordinate with state Medicaid administration. For background on NC Medicaid and estate recovery, see the NC Department of Health and Human Services (Estate Recovery).

First-Party vs. Third-Party SNTs

• First-party (self-settled) SNT. Funded with the beneficiary’s own assets (for example, a personal injury settlement or an inheritance received outright). Federal law requires these trusts to meet specific requirements, including that the beneficiary be under age 65 when the trust is funded and that any remaining funds at the beneficiary’s death reimburse the state up to the amount of Medicaid benefits provided (42 U.S.C. § 1396p(d)(4)(A); see also POMS SI 01120.203). Since 2016, the individual beneficiary may establish this trust, as may a parent, grandparent, legal guardian, or a court.
• Third-party SNT. Funded with assets that never belonged to the beneficiary (for example, under a parent’s or grandparent’s estate plan). These trusts are commonly used to leave an inheritance without affecting benefits and, unlike first-party trusts, have no federal requirement to repay Medicaid at death, provided the trust is funded solely with third-party assets (POMS SI 01120.200; POMS SI 01120.201). Care is required to avoid adding the beneficiary’s own assets, which could change the analysis.

How SNTs Help Preserve Benefits

Means-tested programs evaluate countable resources and income. When assets are held in a properly drafted SNT and distributions are made for supplemental needs, trust assets are generally not treated as the beneficiary’s countable resources (POMS SI 01120.200). Trustees must also follow program rules on distributions: cash given directly to the beneficiary is income, and payments for food or shelter can reduce SSI as in-kind support and maintenance (POMS SI 01120.201).

Avoiding Probate with a Third-Party SNT

A third-party SNT is often created within a revocable living trust or as a standalone trust that becomes funded at the grantor’s death via beneficiary designations, pour-over provisions, or lifetime transfers. With proper titling and designations, assets can pass directly to the SNT and help avoid probate for those assets, streamlining administration and providing ongoing management. See the North Carolina Judicial Branch overview of estate administration for probate basics (NC Courts).

Trustee Responsibilities and Distribution Guidelines

The trustee must understand SSI and Medicaid rules, make distributions that supplement rather than replace benefits, and keep detailed records. Common permissible uses include education, transportation, therapies not covered by insurance, assistive technology, and certain housing-related expenses. Some payments—especially cash to the beneficiary or payments for food or shelter—can affect SSI. Trustees should review program guidance before discretionary distributions (POMS SI 01120.201; POMS SI 01120.203).

Pooled Special Needs Trusts

A pooled special needs trust is managed by a nonprofit that maintains separate sub-accounts for multiple beneficiaries while pooling assets for investment. Pooled trusts can be an option when a private trustee is unavailable or when a smaller fund needs professional administration. For first-party pooled trusts, federal law provides an exception similar to other first-party SNTs (42 U.S.C. § 1396p(d)(4)(C)); nonprofits set terms by joinder agreement, so review is essential.

Coordinating Your Estate Plan

• Update wills and revocable trusts to route any inheritance into a third-party SNT rather than outright to the beneficiary.
• Review beneficiary designations on life insurance, retirement accounts, and payable-on-death accounts to direct assets to the SNT consistent with tax and plan rules.
• Consider letters of intent or care plans to guide future trustees on the beneficiary’s preferences, routines, and providers.
• Align powers of attorney and health care directives so trusted agents can coordinate benefits and communicate with agencies.

Practical Tips for North Carolina Families

Setup Checklist

FAQ

Will a special needs trust affect SSI payments?

Properly drafted trusts generally keep assets from counting as resources, but certain distributions, especially for food or shelter or cash to the beneficiary, can reduce SSI.

Do third-party SNTs have to repay Medicaid?

Typically no, if funded solely with third-party assets and properly structured. First-party SNTs usually require Medicaid payback at the beneficiary’s death.

Can retirement accounts name an SNT as beneficiary?

Often yes, but coordinate with tax advisers and plan rules to avoid unintended tax results and ensure the designation is accepted.

What if we already left assets outright in a will?

You can amend your plan to route gifts to a third-party SNT and adjust beneficiary designations to avoid probate and protect benefits.

Getting Started

An attorney experienced with North Carolina special needs planning can help determine whether a first-party or third-party SNT fits your situation, draft compliant provisions, and coordinate titling and beneficiary designations to avoid probate where possible. Professional trustees or pooled trust programs can provide administration and recordkeeping support. Because rules and agency guidance can change, periodic reviews help keep the plan up to date. Reach out to our team to get started.

Key references

• 42 U.S.C. § 1396p(d)(4)
• SSA POMS SI 01120.200 (Trusts, General)
• SSA POMS SI 01120.201 (Trust Policy/Definitions; effects of disbursements)
• SSA POMS SI 01120.203 (Trusts with assets of the individual)
• SSA Spotlight: Special Needs Trusts
• NC Medicaid Estate Recovery
• NC Courts: Estate Administration

Disclaimer (North Carolina): This post is general information, not legal advice, and does not create an attorney–client relationship. SSI/Medicaid eligibility and trust rules are governed by federal law and North Carolina policies and may change. Consult a licensed North Carolina attorney about your specific facts.

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