Special Needs Trust and Inheritance in NC: Protecting Benefits

Specific Situations 10 min read

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When an Inheritance Can Hurt More Than It Helps

For families with a disabled loved one, leaving an inheritance feels like the right thing to do. But without proper planning, that inheritance can do exactly the opposite of what was intended. It can disqualify the beneficiary from the government benefits they depend on for daily care, housing, and medical coverage.

North Carolina families dealing with this situation need to understand two things: how public benefits eligibility works, and how special needs trusts (SNTs) can protect that eligibility while still allowing the disabled person to benefit from inherited wealth.

This is not a niche issue. Millions of Americans receive Supplemental Security Income (SSI) and Medicaid, and both programs have strict asset limits. A single inheritance, if handled incorrectly, can disrupt that support overnight.

The Asset Limits That Change Everything

SSI (Supplemental Security Income) and Medicaid, particularly long-term care Medicaid, have strict asset limits:

SSI: A recipient may not have more than $2,000 in countable assets ($3,000 for a couple). This limit has not been updated in decades.
NC Medicaid (long-term care): Generally requires countable assets below $2,000 for a single individual.

“Countable assets” include cash, bank accounts, stocks, bonds, and most other property. There are exclusions (a primary home, one vehicle, personal property), but a direct inheritance of even $5,000 in cash can put someone over the limit.

When a beneficiary exceeds the asset limit, their SSI payments stop and their Medicaid coverage is suspended. They must spend down assets to below the limit before benefits resume. For someone who relies on Medicaid to cover nursing home care or in-home support services, losing this coverage, even temporarily, can be devastating.

Two Types of Special Needs Trusts in NC

Special needs trusts (also called supplemental needs trusts) are legal tools designed to hold assets for a disabled person without those assets counting toward public benefits eligibility. NC recognizes two main types:

First-Party Special Needs Trusts (Self-Settled SNTs)

A first-party SNT is funded with the disabled person’s own assets. These arise when a disabled individual receives an inheritance directly, wins a personal injury lawsuit, or otherwise comes into money. Because the assets belong to the beneficiary, federal law requires these trusts to comply with specific rules under 42 U.S.C. Section 1396p(d)(4)(A).

Key characteristics of first-party SNTs:

The beneficiary must be under age 65 when the trust is established
The trust must be established by the beneficiary, a parent, grandparent, legal guardian, or a court
Upon the beneficiary’s death, the trust must include a “payback provision” that repays Medicaid for benefits paid during the beneficiary’s lifetime before any remaining funds pass to other heirs
While the beneficiary is alive, the assets in the trust do not count toward SSI or Medicaid asset limits

The payback provision is significant. First-party SNTs are not a way to avoid Medicaid estate recovery entirely; they defer and limit it while the beneficiary lives, and then require repayment at death.

Third-Party Special Needs Trusts

A third-party SNT is funded with assets belonging to someone other than the disabled beneficiary, typically a parent, grandparent, or other relative. This is the most common planning tool for families who want to leave money to a disabled loved one without disrupting benefits.

Key characteristics of third-party SNTs:

No age restriction for when the trust is established
Can be created during the grantor’s lifetime (inter vivos) or through a will (testamentary)
No Medicaid payback provision is required at the beneficiary’s death
Remaining assets at the beneficiary’s death pass to other named beneficiaries (siblings, other family members)
The assets in the trust do not count toward the beneficiary’s SSI or Medicaid asset limits

Because there is no payback requirement, third-party SNTs are generally more flexible and beneficial for families than first-party SNTs. If your family is planning ahead, a third-party SNT is typically the preferred vehicle.

What Can an SNT Pay For?

A special needs trust can pay for goods and services that supplement (not replace) public benefits. The goal is to enhance the beneficiary’s quality of life without reducing their benefits.

Allowable uses typically include:

Education and vocational training
Recreation, entertainment, and travel
Technology (computers, tablets, communication devices)
Personal care items not covered by Medicaid
Transportation and vehicle expenses
Home furnishings and personal belongings
Legal and financial management fees

What an SNT generally should NOT pay for directly:

Cash to the beneficiary (can reduce SSI dollar for dollar)
Food or shelter (in-kind support that can reduce SSI payments)
Items that duplicate Medicaid benefits

The trustee of an SNT must understand these rules carefully. Distributions made incorrectly can reduce or eliminate SSI payments.

What If a Disabled Person Inherits Directly?

If a disabled person receives a direct inheritance and it puts them over the asset limit, they have limited options:

Option 1: Spend down the inheritance. The beneficiary can spend the excess assets on allowable purchases (home improvements, vehicles, prepaid funeral plans, items for personal use) to bring countable assets back below the limit. This must be done carefully with attention to what is and is not countable.

Option 2: Establish a first-party SNT. If the beneficiary is under 65, the inherited funds can be transferred into a first-party SNT. The funds are then no longer countable assets, and benefits can resume or be maintained. Remember that Medicaid payback will apply at death.

Option 3: Disclaim the inheritance. If the disabled person does not need the inheritance and another beneficiary would receive it (such as a sibling who could hold it informally or establish a third-party SNT for the disabled person’s benefit), the disabled person may be able to disclaim (refuse) the inheritance. However, disclaiming must be done within nine months of the decedent’s death, and there are strict rules under NC law. An improper disclaimer can still be treated as a transfer of assets for Medicaid purposes.

Option 4: Establish an ABLE Account. See below.

ABLE Accounts: A Simpler Alternative for Smaller Amounts

North Carolina is one of 47 states (including DC) with an ABLE program, allowing eligible disabled individuals to open tax-advantaged savings accounts (NC ABLE accounts) that do not count against SSI asset limits, up to a certain threshold.

Key features of NC ABLE accounts:

Available to individuals with a disability that began before age 26
Annual contribution limit: $18,000 (2024, subject to inflation adjustments)
SSI asset exclusion: up to $100,000 in the ABLE account does not count toward the SSI $2,000 limit
Medicaid: ABLE account funds generally do not affect Medicaid eligibility
At the beneficiary’s death, remaining ABLE funds are subject to a Medicaid payback requirement (similar to first-party SNTs)

ABLE accounts are simpler and less expensive to establish than SNTs. For smaller inheritances or ongoing contributions, they can be an effective alternative. However, the annual contribution limits and payback requirements mean they are not a complete substitute for a well-designed SNT.

Disclaimer Trusts: Planning Through a Will

For estate planners and families thinking ahead, a “disclaimer trust” provision in a will or living trust can provide a safety net. Here is how it works:

A will leaves an inheritance to a disabled beneficiary outright. However, if the beneficiary (or their guardian) decides to disclaim part or all of the inheritance within nine months of death, the disclaimed portion flows into a special needs trust that was established in advance.

This approach provides flexibility: if the beneficiary’s circumstances change (for example, they no longer receive SSI by the time the estate is settled), they can accept the inheritance directly. If they are still receiving benefits, they can disclaim into the trust.

For NC families with a disabled member, discussing a disclaimer trust provision with an estate planning attorney is highly recommended.

How Afterpath Supports Complex Estate Situations

When an estate includes a beneficiary with special needs, the executor’s responsibilities become more complex. Pathfinder, Afterpath’s NC estate guide, can help you understand the implications of distributing assets to a disabled beneficiary and flag the questions you need to discuss with an attorney before making any distributions.

Afterpath’s document vault is essential for storing SNT documents, ABLE account information, disability certifications, and correspondence with benefits agencies. Having all this documentation organized and accessible is critical when benefits questions arise.

The task management system tracks the nine-month disclaimer deadline and other time-sensitive steps specific to estates with disabled beneficiaries. The NC compliance engine ensures you are meeting NC probate requirements while also being aware of federal benefits rules that intersect with the estate administration process.

Afterpath’s professional marketplace can help you connect with NC elder law attorneys and special needs planning specialists who can advise on SNT establishment and administration.

Frequently Asked Questions

Q: My will leaves money equally to my two children, one of whom has a disability and receives SSI. What should I do?

A: You should update your will to leave your disabled child’s share to a third-party special needs trust rather than to them directly. This requires creating the trust document (with an attorney) and referencing it in your will. If you do nothing, your disabled child may inherit money that disqualifies them from SSI and Medicaid, and those funds will likely be spent down on care that Medicaid would have covered anyway.

Q: My sister just inherited $30,000 and she receives SSI. What can she do?

A: She has approximately 90 days from the date she receives the funds before SSI considers them countable. During that time, she (or her guardian) should consult an elder law attorney about establishing a first-party SNT, contributing to an ABLE account, or spending down appropriately. Acting quickly is essential.

Q: Does the special needs trust have to be set up in NC?

A: Not necessarily, but it is generally advisable to work with an NC attorney familiar with both NC trust law and federal benefits rules. The trust must comply with federal requirements to preserve SSI and Medicaid eligibility, and the trustee will be dealing with NC government agencies.

Q: Can a family member serve as trustee of a special needs trust?

A: Yes, a family member can serve as trustee. However, the trustee has significant legal responsibilities, including understanding what distributions are and are not permissible, keeping accurate records, and filing required reports. Many families choose a professional trustee (a bank trust department or professional trustee company) for SNTs to reduce the risk of inadvertent errors that could affect benefits.

Q: Can Afterpath help me manage an estate with a disabled beneficiary?

A: Yes. Afterpath’s Pathfinder provides guidance on the specific issues that arise in these situations, and the task management and document vault tools help you stay organized. For SNT establishment and benefits-specific questions, Afterpath’s professional marketplace can connect you with qualified NC specialists. Join the waitlist at /waitlist/ to get early access.

Planning Now Protects Your Loved One Later

Special needs planning is one of the most important things a family can do for a disabled loved one. The rules around SSI, Medicaid, and SNTs are complex, but the consequences of ignoring them are severe: a lost inheritance, disrupted benefits, and a family left scrambling to undo a preventable mistake.

Whether you are planning ahead or currently administering an estate that includes a disabled beneficiary, Afterpath is here to help. Pathfinder guides you through NC-specific requirements, the task management system keeps you on track, and the document vault keeps everything organized.

Join the Afterpath waitlist at /waitlist/ and protect the people who matter most.

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