Tips On The Use Of Promissory Notes / Loans In Estate Planning To Accelerate Medicaid Eligibility

Elder law attorneys who attended the National Academy of Elder Law Attorneys’ program in Jersey City, New Jersey, on Nov. 5-8, 2009, offered some tips on the use of promissory notes / loans as an estate planning strategy to accelerate eligibility for Medicaid benefits.

The promissory note / loan strategy involves the client making an uncompensated transfer that will incur a penalty period, and then using the remaining assets to make a loan using a promissory note. The income from the note is then used to pay the nursing home during the penalty period.

The promissory note payments plus any other income must total less than the nursing home’s private pay amount, not the Medicaid rate, for the month in which the Medicaid application is made. If this is not the case, the Medicaid applicant will not be “otherwise eligible” for Medicaid but for the transfer and, as a result, the transfer penalty will not begin. (Note: the promissory note strategy is not available in all states and may have to be applied differently in some states.) In income cap states, the income from the promissory notes above the cap would be placed in a Miller Trust so as not to jeopardize Medicaid eligibility, and the income would be paid from the trust to the nursing home.

Those who use promissory note planning must understand the importance of leaving a “cushion” in the promissory note payment to ensure that that the payment plus other income will not exceed the nursing home’s private pay rate. The applicant must have nursing home bills pending that exceed his or her ability to pay. $300 per month is a reasonable shortfall.

The shortfall does not appear to be required for every month of the promissory note’s payments in order for the penalty period to continue running. As long as the applicant is otherwise eligible in the promissory note’s first month, nothing in the statute indicates that it will stop later. Similarly, it does not appear that the applicant must remain in the nursing home during the entire repayment term of the promissory note.

Some elder law attorneys believe that families should not be involved as borrowers. Instead, promissory note proceeds are deposited with a local bank and retained in CDs insured by the Federal Deposit Insurance Corporation.

Conference attendees were cautioned not to go “too big” on promissory notes and loans, such as $1 million or $2 million, “because then [the State] will just change the law.”

Source: ElderLawAnswers