Promissory Notes Losing Value in Medicaid Planning

The Department of Health and Human Services (“DHHS”) that processes applications for those who need assistance paying for assisted living or nursing home care has changed the treatment of promissory notes. Formerly, Medicaid-compliant promissory notes were non-countable assets that did not really impact eligibility for benefits.  But now, promissory notes are always going to be: 1) a divestment for which a period of ineligibility for benefits will be imposed; or 2) an asset.  How does this impact families? 

  1. Note treated as divestment.  Let’s say a parent loaned money to a child.  That child signed a promissory note promising to pay back the parent.  That parent, whether single or married, now needs nursing home care.  A Medicaid application is filed within five years of making the loan and the promissory note is disclosed to the DHHS. If that note meets certain requirements, then it will be treated as a gift even though the loan clearly states the intent to pay the person back.  This means that for every $8,469 (2019 figure) loaned the parent will have to pay for 1 month of nursing home care, even if they don’t have the money, before Medicaid benefits will help with the cost of the care. That one month of care could exceed $8,469, further penalizing a parent who was helping their child. The only way to really solve the problem in this scenario is to have the child pay the parent back before filing for Medicaid benefits.  But that isn’t always possible.
  2. Note treated as an asset.  In the scenario above, if the note meets other requirements, it might be treated as a countable asset. When a single person needs help paying for nursing home care, they must spend down all countable assets to $2,000 or less.  If a parent (single person) is owed $4,000 by a child, then they cannot qualify for Medicaid even if they have $0 in their bank account – as the value of the note is $4,000, which exceeds the $2,000 limit.  In this scenario, the child needs to pay all the money back to the parent so they can spend it down and file for benefits once their countable assets are less than $2,000.

Let’s review this same scenario for a married couple who has loaned $20,000 to a child in exchange for a signed promissory note from that child.  A married couple gets to keep more than $2,000 in countable assets for the support of the spouse who doesn’t need nursing home care.  This is called the Community Spouse Resource Allowance.  When filing for Medicaid, the couple must report that they made a $20,000 loan within the five year look back period.   If this couple can keep $40,000 in assets, it means they can only keep $20,000 of countable assets (let’s say cash in their bank account), as the promissory note will be treated as having a value of $20,000 for a total of $40,000 – their countable asset limit. 

As you can tell, there are several nuances to consider and a variety of scenarios in which this becomes an issue for families.  It is now more important than ever to stay informed about changes like this in the event you or a loved one finds that they cannot pay for their care.  We would be happy to discuss any concerns you have about this now so that you can later avoid hardship. 

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