by Jennifer B. Cona, Esq.
Asset protection planning via a promissory note has now been employed for several years in the Medicaid context. The technique has been modified over the years as the various county Departments of Social Services and the State Department of Health look for ways to challenge promissory notes. While the strategy is sound and is, in fact, the only way to preserve assets when advance planning has not been undertaken, there have been some unexpected consequences.
By way of background, with the passage of the Deficit Reduction Act of 2005 (“DRA”) (42 U.S.C. §1396p), the federal government sought to eliminate transfer of asset strategies just prior to or immediately after an individual’s placement in a long-term care facility. Under the DRA, the penalty period based on a transfer of assets does not begin until the facility resident is “otherwise eligible” for Medicaid benefits but for the asset transfer. 42 U.S.C. 1396p (c)(1)(D)(ii). In other words, a Medicaid applicant must be both residing in a long-term care facility and below the resource limit, currently $14,250, before the penalty period clock will begin to run. This means that the resident must spend-down all of his/her remaining assets (to below the applicable resource limit) before the penalty period will begin on any asset transfers made in the past five (5) years, regardless of when such transfers were actually made.
However, the federal law specifically permitted planning with a promissory note by outlining an exception. The DRA calls for the inclusion of funds used to purchase certain notes and loans as “assets” with respect to transfer of asset penalties unless the note or loan: 1) has a repayment term that is actuarially sound; 2) provides for payments to be made in equal amounts during the term of the loan, with no deferral or balloon payments; and 3) prohibits the cancellation of the balance upon the death of the lender. 42 U.S.C. 1396p(c)(1)(I). By following these specific requirements as well as the requirements set forth in the state Administrative Directive (06 OMM/ADM-5, III (3) and IV (6), the use of promissory notes became the only means by which assets could be preserved at such a late stage.
To illustrate: Mr. Jones transferred a total of $420,407.96 to his daughter on September 30, 2011 as a part-gift/part-loan transaction. The health care facility daily rate was $425 (a typical rate on Long Island) and Mr. Jones’ monthly income totaled $1,854. To determine the monthly loan re-payments, Mr. Jones calculated the actual monthly cost at the facility private pay rate for each month (30 or 31 days) less his monthly income. He then calculated the average of the monthly payments during the term of the penalty period (number of months) and factored in an interest rate of five percent (5%).
Here, the average monthly loan re-payment amount was $10,908.40 per month. This is the amount which Mr. Jones’ daughter pays back to him each month and which he then turns over to the long-term care facility. The term of the loan is twenty (20) months beginning in October 2011. As such, $208,907.96 will be the total loan amount and $211,500 will be the total gift made to Mr. Jones’ daughter, which amount is free and clear to her. After twenty (20) months, the loan will be re-paid, the gifted money will be protected and Mr. Jones will be eligible for Medicaid benefits.
A small detail but key to the asset protection strategy is that there must be a monthly shortfall in the amount paid to the long-term care facility each month. This is because the resident must have medical expenses greater than the Medicaid rate in order to be considered “otherwise eligible” for Medicaid benefits while also having medical expenses s/he is unable to meet in full. 42 U.S.C. 1396p (c)(1)(D)(ii).
As promissory note cases made their way through the system, the Department of Social Services (“DSS”) began to impose various hurdles. DSS began denying or ignoring promissory notes altogether, assessing a penalty period as if the entire transfer was a gift. DSS then created a multitude of other grounds for denial, from non-amortized interest calculations to modifications by written document to continued payments to the estate of a deceased lender/promissee. Many such cases resulted in Fair Hearing decisions issued by the Department of Health.
One such case, In the Matter of G.F. (FH #5013919Q), led to a series of promissory note challenges based on a particular fact in that case, that is, that the Medicaid applicant signed a promissory note after being admitted to a nursing home. DSS sought to use this as grounds to deny all notes signed after nursing home admission. However, promissory note planning only is engaged in when an applicant already is in a long-term care facility and is receiving services. Under the federal law, it is almost a condition precedent that a Medicaid applicant (the lender) be placed in a health care facility such that he or she can engage in promissory note planning because the applicant must be “otherwise eligible” for Medicaid, that is, both below the resource limit and in the facility receiving care, before a penalty period can commence. 42 U.S.C. 1396p (c)(1)(D)(ii).
Recently, in an unexpected turn, DSS has now swung the other way and has begun determining that all loans between parents and children are gifts and are made out of “love and affection” unless there is a written promissory note. It is often the case in today’s society that children lend their parents money. Typical of the boomer generation, the children have reached a higher socioeconomic level than their parents. That is, after all, one tenet of the “American Dream”. Further, as the parents retire with a “fixed income”, extraordinary expenses become difficult to manage, such as home repairs, a family vacation, etc. It is often the case that the children loan the parents money – sometimes a one-time lump sum, sometimes a monthly stream. Either scenario is problematic for Medicaid purposes unless the arrangement was reduced to writing, which is typically not the case.
This complete about-face is just the latest manifestation of push back at the state and county level in opposition to the promissory note asset protection strategy. And it most assuredly won’t be the last.
Jennifer B. Cona, Esq. is the managing partner of Cona Elder Law, LLP, located in Melville. Ms. Cona practices exclusively in the field of Elder Law, including asset protection planning, Medicaid planning, representation in Fair Hearings and Article 78 proceedings, estate planning, trust and estate administration, guardianships and estate litigation.