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21st Century Promissory Notes

by Ira M. Leff, Esq.

February 23, 2010

For many years, Elder Law Attorneys in Georgia used promissory notes as a simple way to convert countable assets into exempt resources. Unfortunately, these rules changed effective October 1, 2006. Under the revised rules, notes are either going to count as resources, or will be treated as transfers.

However, there is one notable exception to this rule. An unsecured note that is: actuarially sound; paid in equal monthly amounts with no prepayment option; and is not cancelable on the death of the lender, is neither a resource nor a transfer. The payments, however, are treated as income to the recipient. MEDICAID MANUAL § 2313. In effect, these rules describe a private annuity which is an alternative to using an insurance company to convert excess assets into income.

APPLICATION 1: Charlie and Donna have combined assets of $250,000. Charlie's monthly income is $2,500 and Donna's is $1,750. Donna has entered a nursing home and would like Medicaid assistance with the cost. Charlie could loan $150,000 to their children. The payments that he receives would count as income to him which would reduce or eliminate his spousal needs allowance since his income,including the loan payments, is over $2,739 per month. Donna qualifies for immediate Medicaid benefits since their combined resources are now under $111,560. She pays no more than $1,750 per month for her care.

APPLICATION 2: Barbara is a widow with two adult children. She was just admitted to a nursing home. She wants to give her children her excess assets ($100,000) but wants to make sure that they support her during the penalty period. So she gives the children $50,000 and loans them $50,000. Barbara uses the loan payments to pay the nursing home during the penalty period.

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