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How Are Promissory Notes Used in Medicaid Planning?

Have you ever heard of the “5-year lookback” and wondered what people are talking about? If you have, you are not alone.
June 3, 2021
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Have you ever heard of the “5-year lookback” and wondered what people are talking about?  If you have, you are not alone.  The lookback concept is one that governs the conversation surrounding Chronic Medicaid, the New York State program that covers long term care services in a nursing facility.  To financially qualify for Chronic Medicaid, an individual must show they have countable resources of less than $15,900 (2021 figure that changes annually).  When applying for Chronic Medicaid, the applicant and spouse must show that they did not gift or transfer assets within the 5 years prior to needing Medicaid to cover the cost of the facility.  Any such transfers result in a “penalty period.”

If you or a loved one find yourself in a position where you have resources in excess of that amount, planning will be necessary in order to protect any of your assets.  There are certain assets that are not considered a resource for the purposes of eligibility.  Additionally, certain transfers are exempt and do not result in the imposition of the penalty. But, for those that have assets that do not fall within these exempt categories, promissory note planning can come into play.  First of all, do not try this at home.

Medicaid Compliant Promissory Notes

Promissory note planning for Medicaid eligibility should only be done in consultation with an attorney with experience in this type of Medicaid planning.  A mistake in the terms of the note or the process of transferring the assets can create unintended Medicaid penalties or periods of ineligibility.

Take an individual with assets that are $300,000 above the $15,900 limit.  One option would be to spend all of the assets on the cost of the facility and when they were spent down to $15,900, an application could be made to Medicaid to cover the cost of care.

Alternatively, that same person could protect assets by gifting a portion, thereby creating a penalty period, and giving a separate portion as a loan to a trusted friend or family member pursuant to a promissory note to be paid back on a monthly basis.  The promissory note payments would be income to the individual which would be added to the Social Security, pension, and other pieces of income to be used to pay the cost of the facility during the penalty period.  While this technique is an offshoot of “half loaf” planning, the amount of assets saved as the gift is not actually half.  The exact amount of the $300,000 that would be protected would depend on the exact amount of the other sources of income and the private pay rate at the facility in which the individual is receiving care.  The promissory note must be actuarially sound and follow certain criteria for this plan to work.

Protect Your Assets with Experienced Medicaid Planning

The important take away is that it is (almost) never too late to do Medicaid planning.  The 5-year lookback is a rule that impacts how your plan can unfold but speaking with a Medicaid planning attorney about your particular situation could result in the safeguarding of funds.