What is Medicaid?
Nursing homes in Pennsylvania typically cost $150,000 – $180,000 a year. Medicare and health insurance don’t pay. Medicaid does, without any dollar caps or time limits. But you must first go broke in order to qualify and, if you’re married, your spouse could forfeit a substantial part of his or her estate as well. Poverty is the price of admission into the Medicaid program. But with proper planning your hard-earned money can be protected for spouse and family without forfeiting benefits eligibility. The Medicaid law is complex and confusing. Nevertheless, legal measures exist, even for persons already in a nursing home, to achieve benefits eligibility while preserving their estate for loved ones. Using a Medicaid-compliant Promissory Note is one such measure.
Promissory Notes that meet specified requirements provide a means for protecting assets of Medicaid applicants. It is what elder law attorneys refer to as a “crisis” planning tool, meaning it can be used by someone already in a nursing home. George Vasiliadis, an attorney with the law firm of Vasiliadis Pappas Associates observes that, “Promissory Notes are an important weapon in the arsenal of elder law attorneys who are knowledgeable and experienced in Medicaid planning.”
What Are Promissory Notes?
A Promissory Note is a legally binding document that outlines the terms of a loan agreement between two parties: the lender (creditor) and the borrower (debtor). It includes details such as the loan amount, interest rate, repayment schedule, and any other relevant terms and conditions. Promissory Notes are commonly used in various financial transactions, including loans between individuals, businesses, and financial institutions.
How Do Promissory Notes Work in Medicaid Planning?
In the case of an unmarried Medicaid applicant, the Medicaid planner must take into account a transfer penalty that is imposed for gifting of assets in the form of a period of ineligibility for benefits. The larger the amount of money given away, the greater the penalty period. The attorney calculates the optimum amount that can be gifted which leaves remaining (ungifted) assets in an amount that is just enough to pay for the cost of care during the period of ineligibility arising from the gift. This remaining amount of ungifted assets is converted into cash, and except for a small reserve, is loaned to a family member or other trusted individual in exchange for a Promissory Note under terms and conditions that comply with the safe harbor requirements of the Medicaid law. The gift calculation is based upon the applicant’s income and expenses, basically the cost of care.
Essentially, the loan must be repaid in full in equal periodic installments of principal and interest over a period of time not longer than the lender-applicant’s actuarial life expectancy. Any remaining unpaid balance on the loan when the lender dies is not cancellable. The loan can be unsecured but must provide for a fair rate of interest. After the loan is made, the borrower exercises his right, under the Promissory Note, to make prepayments and do so in an amount that results in the entire loan being paid off over a period of time roughly commensurate with the period of ineligibility arising out of the gift. The loan payments, together with the lender’s other income, provide the money needed to pay for the cost of nursing home care for the lender-applicant during the penalty period. Medicaid eligibility occurs when the penalty expires. In cases where the applicant’s estate is intended to pass to multiple beneficiaries, those beneficiaries enter into a Family Agreement to ensure that gifted assets ultimately pass in a manner desired by the applicant. Alternatively, the assets can be gifted to a Trust.
In the case of a married Medicaid applicant, a gift and consequent period of ineligibility is typically not necessary. Instead, the couple’s non-exempt assets are re-titled to the healthy “community spouse” (no penalty for transfer of assets between spouses), who converts these into cash and loans the cash to a family member or other trusted person in exchange for a Medicaid-compliant Promissory Note. One difference, however, from the unmarried applicant case, is that the loan term is not based upon a penalty period, because there is no penalty. Instead, payment can be made over any period of time desired by the community spouse-lender that is not greater than the lender’s actuarial life expectancy. Moreover, the loan can be pre-paid prior to expiration of the loan term. In the case of a married applicant, Medicaid eligibility is achieved the day after the gift and loan are made.
The attorneys at Vasiliadis Pappas have helped many families with “Gift & Loan”. If you have a loved one in a nursing home or know of someone else who is, Call us. We can help!
