Promissory notes can be a valuable tool in Medicaid planning, as illustrated by a recent federal district court case.
When it comes to ensuring proper care for your elderly loved ones, Medicaid (called "Medi-Cal in California) can mean a world of difference … especially when your loved ones are running out of assets. So when their key remaining "countable" asset is illiquid, what options do they have short of draining it or risking an illegal transfer?
As you may well know, Medicaid is the source of nursing home care for many indigent Americans. Still others are caught in a netherworld of being above the minimum asset threshold for qualification, but having too few assets to realistically pay for their care. It’s a sticky situation.
A promissory note may be one alternative to explore, as noted in a recent article at ElderLawAnswers.com titled "How Can Promissory Notes Be Used in Medicaid Planning?"
The focus of the article is a recent federal case out of Oklahoma, but the basics apply generally. Essentially, an elderly woman transferred her farm and accounts to her son in exchange for a promissory note. A note is a legally binding contract to repay as fixed sum and so it clears the Medicaid hurdle in question.
In this instance, this approach indeed saved the farm and the elderly woman received her nursing home care through Medicaid. Nevertheless, a promissory note is not a full-proof plan. For one, many states reject the idea and refuse to recognize promissory notes. For another, the plan can only work because promissory notes are legally binding contracts, and so if the note cannot be repaid there are potential tax burdens that may be triggered.
The article also points out there are several tools, like the promissory note, that can prove useful when seeking legitimate Medicaid qualification. This especially is true if you plan well in advance.
Danger! The Medicaid qualification rules vary from state to state. For example, in California transferring a farm and accounts in exchange for a promissory note will not necessarily cause a person to be eligible for Medi-Cal plus depending on how the promissory note is drafted, there could be a Medi-Cal recovery issue after the elderly person passes away.
This is not a self-help project, as you may find yourself (and your elderly loved one) in a tricky financial and legal purgatory if you make any missteps. You should contact an elder law attorney who is well versed and experienced in the area of Medicaid (or Medi-Cal) Long Term Care Planning.
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Reference: ElderLawAnswers (May 15, 2013) "How Can Promissory Notes Be Used in Medicaid Planning?"