Special needs planning in North Carolina is an important estate planning consideration for any family with disabled or elderly members. The most prominent tool used in special needs planning is the Special Needs Trust (“SNT”). An SNT is designed to preserve assets for a beneficiary without jeopardizing their eligibility for means-tested government programs such as Medicaid and Social Security Disability. The trustee of an SNT has the discretion to distribute income and principal for needs not covered by government programs but is prohibited from making distributions that supplant the services covered by those programs. This allows the SNT to supplement the beneficiary’s basic needs without disqualifying them from the benefits provided by these means-tested programs. Properly drafted SNTs ensure that trust assets do not count toward the maximum resources a person can have while remaining eligible for government benefits, allowing these assets to be used for supplemental items like education, travel, and alternative therapies.
SNTs fall into two categories: a first-person SNT, which is established with the assets of the special needs person, and a third-person SNT, which is established with the assets of a family member of the special needs person (or other third-party), often through a will or other testamentary document, but sometimes via lifetime gifts to a third-person SNT. The manner in which these two types of SNTs operate is critical and detailed below.
First Person versus Third Person Special Needs Trust
A first-person SNT is established with the assets of the beneficiary who has a disability. This type of trust is typically used when the beneficiary receives a significant amount of money, such as from a personal injury settlement or inheritance from a family member who did not establish a third-person SNT in their planning. The trust must be established by a parent, grandparent, legal guardian, or a court, and it must be for the sole benefit of the disabled individual.
In contrast, a third-person SNT is funded with assets belonging to someone other than the special needs person. This type of trust is often created as part of an estate plan to provide for a disabled or elderly loved one without jeopardizing their eligibility for governmental benefits. You never want a gift of property to create negative consequences for a loved one, such as disqualifying them for benefits. A third-person SNT ensures this will not be the case.
Both a first-person and third-person special needs trust aim to preserve the beneficiary’s eligibility for governmental benefits while providing for their supplemental needs, but they differ in the source of the trust’s funding. It is critical to note that first-person SNTs require a “Medicaid payback” provision, meaning the government may recoup funds from the trust after the special needs person’s death. Third-person SNTs do not have this requirement; however, third person SNTs cannot be created after the fact. In other words, if a person does not include third-person SNT provisions in their estate plan, it is too late once such person has passed away. The inheritance of the special needs person will be subject to the Medicaid payback provisions of a first-person SNT or ABLE account (discussed below).
Promotion of Special Needs Planning as a Policy
In North Carolina, the legal framework for special needs planning also includes various statutes and regulations aimed at supporting individuals with disabilities. For instance, N.C.G.S. § 122C-2 outlines the state’s policy to assist individuals with mental health, developmental disabilities, and substance abuse services in a manner that maximizes their quality of life and ensures services are provided in the least restrictive, most appropriate setting. Additionally, N.C.G.S. § 143-683 empowers a commission to study the needs of children with special health care needs and develop guidelines for case management and quality assurance measures. Lastly, regulations surrounding inherited qualified retirement accounts and North Carolina’s trust decanting laws have specific provisions aimed at protecting special needs individuals and promoting SNTs.
Powers of Attorney and Guardianship
Powers of attorney and guardianship are other important topics in special needs planning. While guardianship is typically a last resort in the estate planning of a competent adult, for individuals with disabilities manifesting prior to the age of 18, a power of attorney may never be an option if the disability creates diminished mental capacity to such a degree that the person does not have the requisite capacity necessary to execute a power of attorney at 18. However, when it is an option, a power of attorney is always the best option for incapacity planning.
For individuals with a severe cognitive disability manifesting prior to the age of 18, they may never acquire assets through employment necessitating the appointment of a general guardian or a guardian of the estate for managing assets. Any acquired assets from inheritance or personal injury settlement can be managed through the establishment of an SNT. However, a guardian of the person (akin to a health care power of attorney) may be needed to direct health care providers.
ABLE Accounts
ABLE accounts are a new alternative to the first-person SNT. ABLE accounts are savings accounts established for eligible individuals with disabilities to help them save for disability-related expenses without jeopardizing their eligibility for means-tested benefits. The account owner or an authorized representative can establish an ABLE account by making an initial contribution, signing an application form, and naming the designated beneficiary. Contributions to the account can be made by any person and must adhere to the maximum contribution limits set by the federal ABLE Act.
ABLE accounts are not considered resources for state means-tested benefits, and distributions for qualified disability expenses are not considered income for state benefits eligibility programs. However, upon the death of the special needs person, the state may claim repayment from the ABLE account for the total medical assistance paid for the beneficiary after the account was established.
There is an annual account contribution limit of $18,000 from all contribution sources, and after that, no further contributions can be made until the start of the next calendar year. Up to $100,000 can be saved, and the account holder can still participate in SSI and SSDI without a reduction in these benefits. The special needs person can maintain Medicaid eligibility regardless of the account value; however, as stated above, the account is subject to Medicaid payback upon the death of the special needs person. There is a $540,000 lifetime balance limit over the entire span of the account.
In summary, special needs planning in North Carolina involves a combination of legal tools and state policies designed to protect and enhance the quality of life for individuals with disabilities.