Medicaid Policy: Potential Change Will Impact Undocumented Loans

A Medicaid policy change that could impact many families is proposed to take effect on July 1, 2019.  Here is the scenario.  Mom and dad have three children.  One child has fallen on hard times and needs financial assistance to get back on his feet.  Mom and dad are on a fixed income and have some savings but feel they can help their son through this difficult time.  The son is very grateful that his parents can help, and he verbally promises to pay them back.  After a year, he begins making payments to his parents as often as he can.  He can’t pay the full loan all at once but is making progress in reducing the balance owed.  One year later, dad requires skilled nursing home care and mom sees an elder law attorney to understand how they will pay for such care with limited income and assets. Here is what they find out.

Prior to the Medicaid policy change, their son could have signed a promissory note before filing for benefits for the balance still owed to his parents.  This note would have indicated his promise to repay the balance over a period that doesn’t exceed their life expectancies. It would have provided for interest and equal monthly payments to be made.  This arrangement would not impact eligibility for Medicaid benefits as it would have satisfied the rules. 

But if this proposed change happens, they are told something completely different.  They are told that because of the July 1, 2019 change they can’t do a promissory note.  The loan to their son is going to be treated as divestment.  Divestment is another word for a gift and results in a penalty for transactions that occur within 5 years of applying for benefits.  This penalty means that they will have to pay for nursing home care (even if they don’t have enough to pay) for a certain period before Medicaid benefits will start.  In a situation with a couple and depending on the amount of the loan, they might have money to pay.  If this happened to a single person who was already down to $2,000 in assets the results would be much more severe.   

Here is why this couple will have to pay a penalty.  The new rule states that a promissory note is not a true loan unless the note arrangement was in effect at the time of the loan transaction.  This removes the ability for someone who was unaware of the rule to have their child sign a promissory note when Medicaid is needed. This means that for this couple, they will have to pay for the husband’s care in an amount up to and maybe even exceeding the amount that their son owes them.  They can’t go back to properly document the transaction. It must be documented at the time the loan was made to not be treated as divestment and follow other rules set forth in Medicaid policy. 

This is an unfair result for families who loan or make gifts to their children in advance of even thinking about how the Medicaid rules might treat that loan or gift.  It was always such a relief to those in need of benefits that the promissory note would help them through this issue. But now, families will have to be told that either they must pay a penalty, or they will have to see if their child can pay them back to cure the divestment penalty.

We will continue to monitor this potential change and can answer any questions you may have about this change.

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