Promissory Notes and Medicaid

Before Congress enacted the Deficit Reduction Act (DRA) in 2006, a Medicaid applicant could show that a transaction was a loan to another person rather than gift by presenting promissory notes, loans, or mortgages at the time of the Medicaid application. The loan would not be counted as part of the applicant’s assets, so Congress considered this to be an abusive planning strategy, so the DRA imposed restrictions on their use.

In order for a loan to not be treated as a transfer for less than fair market value (and therefore not to interfere with Medicaid eligibility) 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; and
• 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.

See Chambliss, Bahner & Stophel, P.C., Promissory Notes and Medicaid, Elder Law Answers for Attorneys, August 21, 2018.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.