Special Needs Trust Spending Rules in NC

Understanding how to properly manage a Special Needs Trust in North Carolina is crucial for ensuring the long-term well-being of a loved one with special needs. This type of trust serves as a financial safety net, but it has its own spending guidelines that must be followed. Failure to adhere to special needs trust spending rules can jeopardize the beneficiary’s eligibility for essential government benefits.

In this blog, we’ll delve into what you can and cannot do with the funds in a Special Needs Trust in North Carolina.

What is a Special Needs Trust?

A Special Needs Trust is a financial tool designed to provide for the needs of an individual with a disability without affecting their eligibility for government benefits like Medicaid and Supplemental Security Income (SSI).

The trust acts as a separate entity that holds and manages assets for the benefit of the individual. In North Carolina, these trusts benefit families who want to ensure the long-term financial stability of their loved ones with special needs.

Different Types of Special Needs Trust Funds

There are different types of Special Needs Trusts, each with its own set of rules and purposes. The most common types are:

First-Party Special Needs Trusts: Funded with assets that belong to the individual with special needs.
Third-Party Special Needs Trusts: Funded with assets from family members or other third parties.
Pooled Trusts: Managed by non-profit organizations and funded by multiple families.

Understanding the type of Special Needs Trust you’re dealing with is the first step in navigating the spending rules effectively. This knowledge is crucial for both the trustee, who manages the trust, and the beneficiary, who receives the benefits.

In the following sections, we’ll explore the eligibility criteria for beneficiaries, the role of the trustee, and the specific guidelines on what trust funds can and cannot be used for.

Eligibility Criteria for Special Needs Trusts

Understanding the eligibility criteria for a Special Needs Trust in North Carolina is crucial for both the trustee and the beneficiary.

These criteria ensure the trust serves its intended purpose—providing financial support to the beneficiary without affecting their eligibility for government benefits like Medicaid and Supplemental Security Income (SSI).

Who Can Be a Beneficiary?

The primary qualification for being a beneficiary is having a recognized disability. Special Needs Trusts provide financial support that complements, rather than replaces, government benefits.

Role of the Trustee

In North Carolina, the trustee must be at least 18 years old and should not be the beneficiary of the trust. The trustee is responsible for managing the trust’s assets and must adhere to the guidelines outlined in the trust document.

Failure to legally handle trust assets and funds according to the trust structure could jeopardize the beneficiary’s eligibility for government benefits.

Government Benefits at Stake

An experienced attorney should structure the trust in a way that does not disqualify the beneficiary from receiving government benefits. This is crucial, as the trust beneficiary often relies on these benefits for basic needs like housing, medical care, and transportation.

Types of Trusts and Their Implications

It’s important to note that there are different types of Special Needs Trusts, and the rules can vary.

For instance, in a First-Party Special Needs Trust (D4A Trust), any remaining funds after the beneficiary’s death (up to the amount spent by Medicaid) go to the State of North Carolina, not a successor beneficiary.

This is NOT the case for Third-Party Special Needs Trusts, where the remaining funds can go to other beneficiaries without any obligation to pay back the State of North Carolina.

By understanding and adhering to these eligibility criteria, you can ensure that the Special Needs Trust serves its intended purpose effectively and legally.

What Can the Special Needs Trust Pay For?

Special Needs Trusts in North Carolina allow only specific types of expenditures. These rules ensure that the trust complements, rather than replaces, government benefits like Medicaid and Supplemental Security Income (SSI).

Understanding the rules for allowable expenditures is crucial for effectively managing a Special Needs Trust in North Carolina. The State has specific laws governing each type of trust.

Next, let’s explore what’s allowed and NOT allowed for each trust fund type.

Third-Party Special Needs Trust

In a Third-Party Special Needs Trust, family members or friends typically contribute funds to the trust.

These third-party trusts provide additional financial support to the beneficiary without affecting their eligibility for other government assistance or benefits.

Allowable Expenditures for a Third-Party Trust

According to North Carolina law, a Third-Party Special Needs Trust may authorize the expenditure of funds for:

Goods or services that promote well-being
Recreational services
Educational expenses
Medical and dental care not covered by other sources
Personal care services
Assistive technology and devices

Non-Allowable Expenditures for a Third-Party Trust

However, the trustee usually avoids using the trust for:

Goods or services of comparable quality available through governmental or charitable programs
Items or services covered by insurance
Expenses that government benefits should cover

Spending funds on things that are meant to be covered by government benefits would usually affect the beneficiary’s eligibility for those programs.

First-Party Special Needs Trust Spending Rules

A person with disabilities under age 65 can set up a self-settled or 1st party trust. The individual transfers assets into the trust that would otherwise have disqualified them for future public benefits.

In a First-Party Special Needs Trust, also called a D4A Trust, the funds can also come from various sources, such as:

Settlements from personal injury lawsuits
Inherited money
Savings
Other assets that belong to the individual with special needs

However, according to North Carolina law, these trusts are often subject to “payback” provisions, meaning that upon the beneficiary’s death, any remaining funds in the trust may be used to reimburse the State for Medicaid benefits provided to the beneficiary during their lifetime.

Allowable Expenditures

The allowable expenditures for a First-Party Special Needs Trust are generally similar to those of other types of Special Needs Trusts. However, they are more strictly regulated due to the payback requirements.

Expenditures may include:
Medical and dental expenses not covered by Medicaid
Rehabilitation and physical therapy services
Assistive technology and devices
Transportation costs, including vehicle modifications for accessibility
Education and job training
Personal care services
Recreational and cultural experiences

Expenditures Which May Affect Eligibility

Direct cash distributions to the beneficiary, as this could affect eligibility for means-tested government benefits
Expenses that are already covered by government programs like Medicaid or Supplemental Security Income, such as basic medical care
Payments for basic living expenses like food and shelter, as these could reduce the beneficiary’s SSI benefits
Luxury items that could be considered countable assets to determine eligibility for government benefits
Any expenditures that would violate the terms of the trust or the guidelines set forth by state and federal laws

It’s crucial for the trustee to maintain detailed records of all expenditures to ensure they comply with federal and State laws.

By understanding the specific allowable expenditures for each type of Special Needs Trust, trustees can manage the funds effectively while ensuring compliance with North Carolina law.

Pooled Income Trust

A Medicaid Pooled Trust can also authorize the expenditure of funds for goods or services that promote well-being and are for the beneficiary’s sole benefit.

Similar to Third Party Special Needs Trusts, Medicaid Pooled Trusts cannot expend funds for goods or services available through other sources.

Additionally, upon the beneficiary’s death, the State will receive all amounts of medical costs remaining in the beneficiary’s account up to the total amount of medical assistance paid on behalf of the beneficiary through Medicaid programs.

Allowable Expenditures for a Pooled Income Trust:

Medical and dental expenses not covered by Medicaid or other insurance
Assistive technology and devices
Transportation costs, including vehicle modifications for accessibility
Education and job training expenses
Personal care services
Recreational and cultural experiences that improve the quality of life for the beneficiary

Non-Allowable Expenditures for a Pooled Income Trust:

Direct cash distributions to the beneficiary
Expenses already covered by government programs like Medicaid or Supplemental Security Income
Payments for basic living expenses like food and shelter
Luxury items that could be considered countable assets affecting eligibility for government benefits

By understanding these categories, trustees can manage the Pooled Income Trust effectively while ensuring compliance with applicable laws.

Common Mistakes to Avoid

Managing a Special Needs Trust can be complex, and mistakes can have serious consequences. Here, we’ll discuss common errors for each type of trust—Third-Party, First-Party, and Pooled Trusts—and provide real-life examples to illustrate the pitfalls.

Third-Party Special Needs Trust Mistakes

Co-Mingling of Funds: What if, as the trustee of a Third-Party Special Needs Trust, you also use the trust account to pay for other family expenses? This co-mingling of funds can jeopardize the integrity of the trust.
Paying for Government-Covered Expenses: What if you use the trust to pay for a beneficiary’s basic medical care, which Medicaid already covers? This may affect eligibility for benefits.
Poor Record-Keeping: Consider what would happen if you failed to keep receipts or document expenditures. A lack of proper documentation can make it difficult to prove that you are managing the trust correctly.

First-Party Special Needs Trust Mistakes

Direct Cash Payments to Beneficiary: Imagine giving the beneficiary cash to go shopping. This could disqualify the beneficiary from receiving means-tested government benefits like SSI.
Ignoring Payback Requirements: If you are unaware that the trust must reimburse the State for Medicaid benefits upon the beneficiary’s death, you could spend the remaining funds. You could then face severe legal repercussions for spending that money.
Failure to Monitor Asset Limits: Suppose the trust provides too much for the beneficiary and the beneficiary does not spend enough of their own money, pushing their assets over the limit for government benefits. This could result in lost benefits.

Pooled Trust Mistakes

Not Understanding the Pooled Structure: A family member might mistakenly believe they can manage a pooled subaccount independently, making investment decisions that are actually the purview of the non-profit organization.
Using Funds for Non-Allowable Expenditures: Imagine a trustee who uses the Pooled Trust to pay the beneficiary’s rent, which is already covered by a government housing program. This would be a non-allowable expenditure.
Failure to Update the Trust: If a beneficiary’s needs change or if there are changes in the law, the trust agreement may need updating. Neglecting to do this can result in the trust not serving the beneficiary’s current needs.

By being aware of these common mistakes and how to avoid them, you can manage any Special Needs Trust more effectively and ensure the well-being of the beneficiary.

Our Experienced Special Needs Trust Attorneys Can Help

At Hopler, Wilms, and Hanna, we understand the intricacies involved in setting up and managing Special Needs Trusts. Our dedicated attorneys are well-versed in federal and North Carolina state laws governing these trusts.

We offer personalized guidance tailored to your unique situation, whether you’re establishing a new trust or updating an existing one.

We take the time to understand your needs and goals, providing you with the tools and knowledge needed to make informed decisions. From explaining allowable and non-allowable expenditures to helping you navigate the complexities of trust rules, we can walk you through each step.

Don’t navigate the complicated landscape of Special Needs Trusts alone. Let the experienced attorneys at Hopler, Wilms, and Hanna assist you in ensuring the financial security and well-being of your loved one.