Using a Note Payable to Qualify for Medicaid – Gift and Loan Strategy

There is a five-year look back when it comes to the transfer of assets. This means that the best time to plan for Nursing Home Medicaid is five years before you need it. Most people, however, only start panning for Medicaid when they are already on the nursing home steps. A gift and loan strategy involving the use of a Promissory Note (Note Payable) is a way to preserve at least half of the Medicaid recipient’s assets.

The look-back period starts on the day of Medicaid eligibility. What this means is that, if there was a transfer of assets, such as a house, to a family member with no compensation, that full amount would be used to determine a period of Medicaid not paying for nursing home expenses. The main purpose of this is so people do not make last-minute transfers of their assets when it appears that they are going into a nursing home in the hopes of getting Medicaid eligibility to have their expenses paid for.

There are a few exceptions to this rule, however. One is that transfers made to a loved one in exchange for health care that keeps you out of a nursing home would most likely not result in a penalty period. Also, a strategy called gift and loan can be very effective. It works by transferring assets in exchange for a promissory note that meets very specific criteria would also help protect some assets, resulting in more property going to a family member.

For example, if you transfer a $300,000 family home to your child, with $150,000 of it being a loan with a Promissory Note (Note Payable) with payments that would be used to pay nursing home expenses and the rest being a gift transfer, the result could be that there is only a penalty period on the gift part of the transfer of the entire transfer is done correctly with the assistance of a New York Medicaid attorney. The key is making sure that the Promissory Note (Note Payable) meets all the DRA qualifications.

Specifically, for a promissory note to work in a way where it does not result in a penalty period for the Medicaid applicant, the following criteria must be met:

• The repayment term must be actuarially sound (not last longer than the life of the lender)
• Payments must be made in equal amounts, meaning no balloon payments or deferrals
• The loan must not be canceled upon the death of the lender.

If these criteria are met, the promissory note is a valid way under the DRA to avoid as much of a penalty. In the example above, the penalty would only be based on the gift part of the transfer, with the promissory note payments taking care of the nursing home expenses during that part of the nursing-home stay. The result is that much of the home’s value would end up going to the child who the transfer was made to, rather than the nursing home.

When the Debt Reduction Act of 2005 was passed, the world of Medicaid planning was somewhat shaken up, especially when it came to the look-back period and how the penalty period was determined when it came to nursing home eligibility. Medicaid planning is confusing at the best of times, and making a mistake can cost you dearly. However, by using strategies such as using DRA qualified promissory notes, one can hope to preserve some of their assets for their loved ones, while still ensuring that they have the funds needed to cover a potential nursing-home stay. Medicaid planning is complex and should not be undertaken alone. It is important to contact a New York Medicaid planning attorney who can help you plan your Medicaid future.

Call the Law Offices of Albert Goodwin at (212) 233-1233, and make an appointment to discuss your gift and loan strategy.