Medicaid Planning: Promissory Notes
The Deficit Reduction Act of 2005 (“DRA”) significantly modified the eligibility criteria for the Medicaid medical assistance program. However, the DRA does permit an applicant to utilize a promissory note strategy when seeking to gain eligibility for institutional Medicaid. This memorandum will explain the benefits and requirements of purchasing a DRA-Compliant Promissory Note should a long term health care crisis occur.
In order for this strategy to be successful, careful attention must be paid to the legal details. For example, the DRA outlines the following requirements for a Promissory Note:
♦ Has a repayment term that is actuarially sound pursuant to tables published by the Office of the Chief Actuary of the Social Security Administration;
♦ Provides for payments to be made in equal amounts during the term of the loan, with no deferral and no balloon payments; and
♦ Prohibits cancellation of the balance upon the death of the lender.
If all of the above requirements have been satisfied, the note will be considered a “DRA-Compliant Note.” In addition, state and federal Medicaid regulations require that the promissory note be non-negotiable, non-assignable, and non-transferrable for the DRA-Compliant Note to avoid being deemed an available resource to the applicant that must be spent prior to Medicaid eligibility.
As with any promissory note, a sum of money must be loaned from one person to another with specific written repayment terms detailing, for example, the interest rate, the amount of principal and interest to be paid each month and the term of the note in either months or years.
This loan must be made in conjunction with a non-exempt transfer or gift of assets which causes a period of ineligibility (“penalty period”) for that person. The stream of income created by the purchase of the DRA-Compliant Promissory Note must be carefully calculated so as cause sufficient payments (when combined with other income) to satisfy the nursing home’s monthly costs. Assuming that a client follows the proper procedures and that other eligibility requirements are met, the Medicaid applicant should be eligible to receive institutional Medicaid benefits upon the expiration of the term of the DRA-Compliant Note and the penalty period.
The procedures that must be followed are significant:
♦ The monthly note payment must be made by issuing a personal check from the borrower’s individual bank account;
♦ That payment must be deposited into the applicant’s individual checking account. It is important that the repayment checks be payable to the applicant directly; do not make the payments to the nursing home since the nursing home is not a party to the DRA-Compliant Note;
♦ Once the payment check clears, the applicant can then use the funds to pay any outstanding nursing home care bill;
♦ Adequate records of this repayment and the payment to the nursing home must be maintained and provided to the elder law firm handling the application for benefits; and
♦ This procedure must be repeated each month until the DRA-Compliant Note is satisfied.
If the Promissory Note is properly drafted and the payments are made as required by the terms of the note, Medicaid eligibility should occur at the expiration of the penalty period and promissory note.
This Memorandum is based on current law and is for informational purposes only. It is important that you discuss all legal options and consequences with a qualified elder law attorney prior to any action. Should you wish to discuss your situation with us, please call (631) 424-2800 for a consultation. For additional Memoranda, please call or visit our website at www.elderlaw.pro.