Promissory Notes. By Susan I. Jean. The Heritage Law Group. York County, Williamsburg, Gloucester and Poquoson

Transcription

1 Prmissry Ntes By Susan I. Jean The Heritage Law Grup Yrk Cunty, Williamsburg, Glucester and Pqusn What is a Medicaid Cmpliant Prmissry Nte? A lan is a transfer f a resurce frm a lender t a brrwer, in exchange fr the brrwer s prmise t repay. A Medicaid-cmpliant Prmissry Nte is a written prmise t repay a lan that cntains specific terms that will prevent it frm being evaluated by the Department f Scial Services as a cuntable resurce. What makes a Prmissry Nte Medicaid Cmpliant? Accrding t the Virginia Medicaid Manual, Sectins M (B) and S : The nte must be actuarially sund The Nte must be paid ut ver a time that des nt exceed the Medicaiddetermined life expectancy f the lender. The nte must be irrevcable and unamendable The Nte may nt be revked r amended during the term f the Nte. The nte must be nn-transferable and nn-assignable Mst Prmissry Ntes can be sld, r used as security fr a lan, r the right t the incme frm the Nte can be assigned t anther persn in exchange fr cash. As a 1

2 result, the resurce has a value assigned t it. Hwever, if the Nte specifies that it cannt be sld r assigned r used as security fr a lan, it des nt have a value assigned t it. The nte must be repaid in equal installments with n deferral and n balln payments The lan cannt be cancelled n death If the lender passes away befre the term f the Prmissry Nte is up, the payments are payable t the estate f the lender. Fr married cuples using this strategy, if the estate planning dcuments are prperly structured, the remaining payments will be distributed t a testamentary trust fr the benefit f the institutinalized spuse created in the lender s Will, r directly t ther beneficiaries. Why is a Prmissry Nte nt treated as a gift under Medicaid rules? A lan is nt a gift because there is a legal requirement that the lan be repaid. A Medicaid cmpliant nte must be paid ut in an actuarially sund fashin, in equal installments, and the lan cannt be cancelled n death. An actuarially sund lan must pay ut ver a time that des nt exceed yur Medicaid-determined life expectancy. A nte that meets these requirements, by statute, is nt a gift and is nt subject t the five year lk-back requirement. Hw des it wrk, in practical terms? 2

3 A particular spend-dwn amunt is laned t smene, usually a family member. The lender and the brrwer each sign the Prmissry Nte, which sets the terms under which the lan is made and the funds will be repaid. The lender wns the nte and receives the repayments. If written crrectly, the Prmissry Nte desn t cunt as a resurce because the lender has n right t sell it fr cash. The nte cnverts resurces which wuld therwise be cuntable int an incme stream. A prperly designed Medicaid-cmpliant Prmissry Nte is nt assigned a value by Medicaid because yu cannt recver the mney yu have invested, except as repayments f the lan. If yu culd demand yur investment back, the Nte wuld be a resurce fr Medicaid purpses. One reasn a Medicaid-cmpliant Prmissry Nte is s useful is because it des nt need t be executed until abut ne mnth befre yu want the institutinalized individual t qualify fr Medicaid. Because fr Medicaid purpses this is cnsidered a transfer fr fair value, there is n need t buy it befre Medicaid qualificatin is actually desired. Yu can wait until a mnth befre yu actually want the individual t qualify, lan the mney in exchange fr a Medicaid-cmpliant Prmissry Nte, and the applicant can qualify fr Medicaid in the next mnth. Althugh the lender cannt demand that the brrwer repay early, r in full, the brrwer has the right t repay the full amunt f the lan after Medicaid qualificatin is achieved. In the case f a married cuple, since the cmmunity spuse s assets cannt be reviewed again by the Department f Human Services, it will nt cause the resurces t exceed the CSRA limits. 3

4 What are the drawbacks f using prmissry ntes in Medicaid Planning? The interest earned n the lan will cunt as incme (and thus will be subject t incme tax) In additin, fr a cmmunity spuse with an entitlement t an allwance frm the institutinal spuse, the interest cunts as incme and will reduce the amunt f the allwance. There are legal fees assciated with a Medicaid-cmpliant Prmissry Nte. Challenges by DMAS t the use f prmissry ntes There have been several instances f Virginia Departments f Human / Scial Services acrss the state denying Medicaid eligibility fr individuals wh have used Prmissry Ntes t reduce their resurces t eligibility levels. Generally, DHS psitin has been t analyze the purpse f the prmissry nte; if it appeared the nte was being dne fr the purpse f attaining eligibility fr Medicaid, DSS was treating the nte as an uncmpensated transfer. Transmittal #99, dated 1/1/14, cntains a revisin t M (B) which may be useful t add t arguments when appealing Medicaid denials based n the use f prmissry ntes. M (B) has been revised t remve the prvisin that transactins in which the Medicaid applicant made an asset unavailable wuld be cnsidered t have been made with the intent f becming r remaining eligible fr Medicaid payment f LTC services and wuld be regarded as uncmpensated transfers. The sectin nw states that transfers fr less than fair market value will 4

5 result in a penalty perid, but the institutinalized individual must be given the pprtunity t rebut this assumptin. Authrity which Supprts Prmissry Ntes are Exempt Assets and are als nt transfers subject t the five-year lkback The fllwing authrities can be used t supprt a Medicaid appeal in the event f a denial due t a Prmissry Nte: M Funds used t purchase a prmissry nte are nt uncmpensated transfers when the nte has an actuarially sund repayment term; prvides fr payments in equal installments during the terms f the nte with n deferral and n balln payments; and prhibits cancellatin f balance upn death f lender Medicaid Manual S Prmissry ntes prperly drafted are bna fide, nn-negtiable ntes, and payment against principal are incme, nt cnversin f a resurce. 12VAC Prmissry ntes must be actuarially sund, with payments in equal installments and with n deferral r balln payments and cannt be cancelled upn death f lender. If the Prmissry Nte desn t satisfy these requirements, the nte is treated as an asset, and the 5

6 utstanding balance due as f the date f the Medicaid applicatin is used as the value f the asset. See als Defecit Reductin Act f 2005, Sectin 6016 (c) and 42 U.S.C. 1396p(c)(1)(I). 6