Emergency Medicaid Planning
Elder law attorneys are frequently sought out at a moment of crisis; when a person has just entered a nursing home and wants to preserve assets.
The penalty period does not begin until three conditions are met:
a gift is made, the applicant is in need of long term care services and is determined “otherwise eligible.” “Otherwise eligible” means that the Medicaid application would have been approved except for the uncompensated transfer. This requires that the applicant’s countable resources be less than $13,200 and the monthly private pay cost of the nursing home exceeds the applicant’s income. The applicant is required to file an application and have it rejected on the sole basis of the uncompensated transfer. When the penalty period is over, the applicant is required to file a second application. The promissory note permits the protection of assets for individuals who are currently in nursing homes. The applicant makes a gift of half of his or her assets. Simultaneously, the applicant lends the excess resources (those above $14,800) pursuant to a promissory note which will produce an income stream for the applicant.
The applicant is now eligible in all respects, other than the gift. The individual files a Medicaid application that is denied on the sole basis of the transfer. Ironically, the denial is good news because it serves as formal notification that the penalty period has commenced.
The monthly repayments under the note are used to pay for the cost of the nursing home during the penalty period. When the penalty period expires, the applicant can file a second Medicaid application that should be approved. The DRA allows the use of the promissory note but requires that it:
- Be actuarially sound.
- Provide for equal payments with no balloon payments.
- Prohibit the cancellation of the note upon the death of the maker.
- Be non-negotiable.
There is no provision regarding the rate of interest that the note carries. Actuarial soundness is a restriction on a repayment period beyond the life expectancy of the lender. Actuarial soundness can only be breached by a repayment period that is too long, not by a shorter term.
A promissory note is normally given in return for a loan and it is simply a promise to repay the amount. Classifying transfers as loans rather than gifts is useful because it allows parents to “lend” assets to their children and still maintain Medicaid eligibility. In order for a loan to not be treated as a transfer for less than fair market value it must satisfy three standards:
- The term of the loan must not last longer than the anticipated life of the lender.
- Payments must be made in equal amounts during the term of the loan with no deferral of payments and no balloon payments.
- The debt cannot be cancelled at the death of the lender.
If these three standards are not met, the outstanding balance on the promissory note, loan, or mortgage will be considered a transfer and used to assess a Medicaid penalty period.
The Erie County, New York Department of Social Services approved two Medicaid applications in June 2008 that used a Promissory Note as a Medicaid planning technique. The applicants were able to preserve approximately one-half of their assets.
Medicaid Application # 1: $153,775 was gifted in February 2008 and $167,700 was exchanged in return for a promissory note dated February 29, 2008 payable over a period of twenty-three months at an interest rate of 6%. The $153,775 gift resulted in an ineligibility period of 21.76 months, with eligibility established as of 12/1/09
Medicaid Application # 2: $32,094.61 was gifted in January 2008; $34,700 was exchanged in return for a promissory note dated January 30, 2008 payable over a five month period at an interest rate of 6%. The $32,094.61 gift resulted in a period of ineligibility of 4.54 months, with eligibility established as of June 1, 2008.