Protecting Assets in a Crisis With Promissory Note Planning

Federal laws passed in 2005 severely restricted Medicaid asset protection planning. The law was aimed at eliminating the transfer of asset strategies at the so-called “crisis” phase, that is, last-minute transfers of assets just prior to or immediately after an individual’s placement in a nursing home. However, the federal law left open one planning strategy in particular —planning via a promissory note.

How Promissory Note Planning Works

With the promissory note strategy, it is still possible to protect one-half of an individual’s assets, even if he or she is already in a nursing home. It works as follows: the nursing home resident transfers all of his/her funds (less the Medicaid-permissible resource allowance) to a family member of another individual. The person receiving the funds signs a note promising to pay back approximately one-half of the monies transferred (the loaned assets), plus interest, to the nursing home resident on a monthly basis. The monthly amount to be paid back to the resident is calculated using the nursing home’s daily rate less the resident’s monthly income. Upon payment of the monthly amount to the resident, the resident writes a check for the same amount to the nursing home. The note repayment amount, together with the resident’s income, covers payment to the nursing home during the penalty period (number of months) incurred by the transfer of the other one-half of the assets (the gifted assets). The loan payments are calculated to end at the same time that the penalty period on the gifted assets ends, thereby making the nursing home resident Medicaid eligible on that date. The family member(s) will keep one-half of the assets (the gifted assets) free and clear.

The following example will help illustrate: Mrs. Jones has $230,000 in assets. She transfers $220,000 to her daughter, $110,000 of which is a gift and $110,000 of which is a loan. Mrs. Jones’s daughter signs a promissory note for the loan of $110,000 stating that she will repay the loan at the rate of $11,000 per month. The penalty period based on the gifted assets of $110,000 will run for 10 months (calculated by dividing the amount gifted by the regional rate in the county where the nursing home is located). The $110,000 loan will be repaid to Mrs. Jones over the 10-month period at $11,000 per month, which Mrs. Jones will use to pay for the nursing home during that period of time, along with her other monthly income (Social Security and pension). After 10 months, the loan will be repaid, the gifted money will be protected and Mrs. Jones will be eligible for Medicaid benefits.

Speak With an Experienced Long Island Elder Law Attorney

Promissory note planning is a complex strategy and every detail must be carefully calculated and followed for the strategy to work. Be sure to consult with an experienced elder law attorney like the attorneys at Cona Elder Law to ensure your plan is properly implemented. Planning in advance is always recommended, but clients can take comfort in the fact that not all will be lost if a loved one has not planned ahead.