U.S. Court Rules Promissory Notes Are "Valid Form of Medicaid Planning"

A Medicaid applicant who transferred property in exchange for a promissory note is eligible for coverage because the note is not a resource or a trust-like device and does not subject the applicant to a transfer penalty, according to a U.S. district court, which finds that a promissory note "is a valid form of Medicaid planning."  Lemmons v. Lake (U.S. Dist. Ct., W.D. Okla., No. CIV–12–1075–C, March 21, 2013).

Juanita Lemmons sold her farm and her investment account to her son, Gary Lemmons, in exchange for a promissory note. The promissory note contained an anti-assignment clause that prevented Ms. Lemmon from selling the note. Ms. Lemmons filed for Medicaid benefits 12 days after executing the note. Oklahoma denied her benefits, finding that the promissory note was either a transfer of resources or a trust-like device.

Ms. Lemmons sued in federal court, arguing that the promissory note was not a resource. Both parties asked for summary judgment. Among other things, the state argued the promissory note was worthless, so the transfer of the farm was for less than fair market value, and Ms. Lemmons should incur a transfer penalty.

The U.S. District Court for the Western District of Oklahoma grants summary judgment to Ms. Lemmons, holding that the promissory note was not a resource or a trust-like device. According to the court, the promissory note was not a resource because its anti-assignment clause meant that it was not negotiable. In addition, the court rules that the note was not a trust-like device because Mr. Lemmons held the farm for his own benefit. Finally, the court rules that the fact the note could not be sold on the secondary market did not make it worthless, so no transfer penalty was necessary. The court remarks that using a promissory note is a "valid form of Medicaid planning" and the state cannot "penalize [Ms. Lemmons] for taking advantage of a lawful loophole that Congress has not foreclosed."

ElderLawAnswers member Craig Riffel of the firm Mitchel, Gaston, Riffel & Riffel, P.L.L.C., in Enid, OK, was one of the attorneys for Ms. Lemmons.

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