How to Set Up a Special Needs Trust in North Carolina
Planning for a loved one with a disability can feel heavy, especially when you want to protect benefits like Medicaid or SSI while still giving them a full life. You want comfort, safety, and choices that last.
At Trusts and Estates Law Group (of North Carolina), we focus on thoughtful planning and compassionate advocacy for North Carolina families. In this guide, we walk through how a special needs trust works and the steps to create one under North Carolina law.
Special Needs Trusts: An Overview
A special needs trust, often called an SNT, is a legal arrangement that holds assets for a person with disabilities without affecting needs-based benefits such as Medicaid and Supplemental Security Income. The trust pays for extras that improve quality of life, while public benefits pay for basic support. Used correctly, the trust protects eligibility for those benefits.
SNTs are meant to supplement public benefits, not replace them. That means the trust often covers things like therapies, technology, and life enrichment that Medicaid or SSI does not fully cover.
Every trust has three roles. The grantor or settlor creates and funds the trust, the trustee manages and distributes assets, and the beneficiary is the person with a disability who receives the benefit of the trust. North Carolina Gen. Stat. § 36C-4-401 recognizes that a trust is created by a written instrument that shows intent, has a definite beneficiary, and has property placed in it.
Types of Special Needs Trusts in North Carolina
In North Carolina, most families choose between two main types of SNTs. The best fit depends on whose money funds the trust and what rules apply.
Third-Party Special Needs Trust
This type is set up and funded by someone other than the beneficiary, such as a parent, grandparent, or sibling. It is often used in an estate plan, for example, through a will or living trust, or by naming the SNT as a beneficiary on life insurance or retirement accounts.
There is no age limit for the beneficiary. When the beneficiary passes away, there is no Medicaid payback requirement, so the remaining funds can go to other family members or a charity named in the trust.
Families like this option for long-term planning that spans generations. It tends to be flexible and can be funded during life or at death.
Next, here is how a self-settled trust works and why the rules are tighter.
Self-Settled (First-Party) Special Needs Trust
A self-settled SNT is funded with the beneficiary’s own money, such as a personal injury settlement, back benefits, or an inheritance received outright. Federal law permits this structure, but only if the beneficiary is under age 65 at establishment and the trust meets certain requirements.
It must be established by a parent, grandparent, legal guardian, or a court. If the person is a minor or is found incompetent, court involvement is usually required under North Carolina Gen. Stat. § 35A-1121.
When the beneficiary dies, the trust must reimburse the state Medicaid program for benefits paid on the beneficiary’s behalf. Only after Medicaid is paid can any remaining funds go to other heirs.
The chart below highlights the biggest differences between these two options.
| Feature | Third-Party SNT | Self-Settled SNT |
| Who funds it | Family or friends | The beneficiary’s own assets |
| Who can establish | Any third party | Parent, grandparent, guardian, or court |
| Age limit | No age limit | The beneficiary must be under 65 at creation |
| Medicaid payback | No payback | Payback required at death |
| Court involvement | Not typical | Often required for minors or incompetent adults |
| Common uses | Parents’ funding for a child’s lifetime care | Settlement or inheritance received by the beneficiary |
Step-by-Step Guide to Setting Up a Special Needs Trust
Setting up an SNT is a careful process, but it follows a clear path. Many families start with a high-level checklist, then move into the details that fit their loved one’s needs.
Here is a simple sequence you can use to frame your plan:
- Pick the type of trust that fits the source of funds.
- Choose a trustee who can handle money, records, and distributions.
- Draft a trust document that complies with North Carolina and federal rules.
- Fund the trust through transfers and updated beneficiary designations.
- Get court approval when required, and give Medicaid notice.
- Administer the trust carefully, with strong records and timely reports.
Each step matters. The sections below add context and practical pointers.
Determine the Appropriate Type of Trust
Choose between a third-party SNT and a self-settled SNT based on where the money comes from. Family funds point to a third-party trust, while the beneficiary’s own assets call for a first-party trust with payback language.
Select a Trustee
Pick a responsible trustee who is organized, fair, and ready to follow benefit rules. The trustee cannot be the beneficiary, and a trusted relative, a professional, or a corporate trustee can all work.
If a court is involved, a bond or ongoing reporting could be required under North Carolina Gen. Stat. § 36C-7-702. Think through a backup trustee plan in case the first choice cannot serve later.
Draft the Trust Document
The trust agreement has to meet North Carolina law and federal benefit requirements. To protect eligibility, the trustee should have full discretion, and the document should make clear that distributions are supplemental.
Helpful drafting features often include:
- Fully discretionary distribution language that avoids any mandatory payments.
- A spendthrift clause that limits creditor reach and assignments.
- Clear instructions on what the trustee can pay for and what the trustee should avoid.
- Successor trustee provisions and a practical trustee removal and appointment process.
- For first-party SNTs, a Medicaid payback clause that states the order of reimbursement at death.
North Carolina Gen. Stat. § 36C-4-401 supports creation by a written instrument, so get the agreement signed and dated, and follow any notarization steps described by your drafting attorney.
Fund the Trust
Funding can come from savings, investments, life insurance, a home, or other property. Title assets to the trust or name the trust as the beneficiary, depending on the asset type.
Update beneficiary designations on life insurance, investment accounts, and retirement accounts to the SNT where appropriate. Decide whether to deed real property to the trust, and outline how housing support will be provided without harming SSI.
Seek Court Approval (If Necessary)
For first-party SNTs created for a minor or an incompetent adult, court approval is required. File the petition and proposed trust, and be ready to comply with any conditions the court sets.
Give written notice to the North Carolina Medicaid agency before funding. Keeping the agency informed helps avoid delays and questions later.
Administer and Maintain the Trust
The trustee manages investments, pays bills, and makes distributions that keep benefits intact. Good administration means aligning spending with program rules so the beneficiary keeps Medicaid and SSI.
Under North Carolina Gen. Stat. § 36C-8-813, trustees must keep records and report to qualified beneficiaries. Follow any court-ordered conditions, such as a bond or periodic accountings filed with the clerk.
How Can the Funds in a Special Needs Trust Be Used?
SNT funds are designed to improve daily life and cover needs not met by public programs. The trustee pays vendors directly, and purchases should be for the sole benefit of the beneficiary.
- Housing-related costs, home modifications, or accessibility equipment, mindful of SSI rules on in-kind support.
- Transportation, such as a vehicle purchase, insurance, fuel, ride shares, or paratransit.
- Medical and dental care not covered by Medicaid, therapies, counseling, or assistive technology.
- Education, training, internet, phone, and devices that support communication.
- Recreation, hobbies, travel companions when needed, and personal care items.
Only the beneficiary should benefit from trust dollars. The trustee cannot use funds for personal gain or to gift money to others unless the trust expressly allows a limited feature like a funeral arrangement.
The Role of ABLE Accounts
ABLE accounts give eligible individuals a tax-advantaged way to save and spend without losing public benefits. An SNT can distribute funds to an ABLE account, which can then pay for food or shelter with fewer SSI reductions than direct SNT payments often trigger.
Contributions must fit within the annual IRS limit and other program caps. NC ABLE accounts are subject to Medicaid recovery at the beneficiary’s death, but funds are first used to pay outstanding qualified disability expenses, including funeral and burial expenses.
Contact Trusts and Estates Law Group for Assistance
If you are weighing a special needs trust for someone you love, our firm at Trusts and Estates Law Group (of North Carolina) can help you set it up the right way. We guide trustees on daily administration and coordinate with benefits professionals when needed.
Feel free to call us at 919-782-3500 or reach us through our Contact Us page. We are committed to thoughtful planning and compassionate advocacy for you and your family.