Over the past few years promissory notes (loans) have been utilized in complex Medicaid planning cases to assist in paying through an ineligibility period caused by a gift of resources. At the time excess resources are gifted, some of the remaining resources are loaned to a child. The promissory note provides for a return of the loaned funds in equal payments over a term coinciding with the ineligibility period. The payments from the loan are then used to pay the nursing home during the period of ineligibility for Medicaid.
Doubt has now been cast on this planning strategy. In Sable v. Velez (U.S. Ct. App., 3rd Cir., No. 10-4647, July 12, 2011), the United States Third Circuit Court of Appeals has ruled that an intra-family promissory note entered into for the purpose of attaining Medicaid eligibility can be treated as a disqualifying resource. The Third Circuit decision is based on its analysis of the provisions of the Social Security Administration’s Program Operations Manual System (“POMS”). Federal law specifies that a state Medicaid program generally may not use eligibility rules that are more restrictive than those used by the SSI program as set forth in the POMS.
The decision upheld a lower court ruling that the notes in the case were not “bona fide” under the POMS because they were entered into with the purpose of attaining Medicaid eligibility rather than to make a good faith loan to a child. This meant that the note could be treated as a “trust like device” which makes it an available resource to the applicant who is therefore not eligible for Medicaid.
Although the case is non-precedential and arises out of New Jersey, it does interpret Federal law and could have a persuasive impact on other states, including Pennsylvania. Many Certified Elder Law Attorneys are shifting to the use of annuities as substitutes for promissory notes. Annuities are subject to a different set of rules which should allow them to be used in Medicaid planning cases involving gifts. Here is a link to some examples of gift planning using annuities.