Elder law attorneys who are litigating federal cases involving "half a loaf" gifting and spousal planning under the DRA offered some tips on the use of DRA-compliant promissory notes at the National Academy of Elder Law Attorneys' program in Jersey City, New Jersey, Nov. 5-8.
The promissory note strategy involves the client making an uncompensated transfer that will incur a penalty period, and then using the remaining assets to make a loan using a promissory note. The income from the note is then used to pay the nursing home during the penalty period.
New York attorney Aytan Bellin said that the promissory note payments plus any other income must total less than the nursing home's private pay amount, not the Medicaid rate, for the month in which the Medicaid application is made. If this is not the case, the Medicaid applicant will not be "otherwise eligible" for Medicaid but for the transfer. (Note that the promissory note strategy is not available in all states and may have to be applied differently in some states.) In income cap states, the income from the promissory notes above the cap would be placed in a Miller Trust so as not to jeopardize Medicaid eligibility, and the income would be paid from the trust to the nursing home.
Bellin reminded his listeners of the importance of leaving a "cushion" in the promissory note payment to ensure that that the payment plus other income will not exceed the nursing home's private pay rate. The applicant needs to have bills pending that exceed her ability to pay. Bellin suggested that $300 is a reasonable shortfall.
Bellin said that this shortfall does not appear to be required for every month of the promissory note's payments in order for the penalty period to continue running. As long as the applicant is otherwise eligible in the promissory note's first month, nothing in the statute indicates that it will stop later. Similarly, Bellin said the applicant does not appear to need to remain in the nursing home the entire length of the promissory note.
Ohio ElderLawAnswers member attorney William J. Browning said that as the result of a promissory note test case currently before the 6th Circuit Court of Appeals, Immel v. Lumpkin (S.D. Ohio, No. 2:07-cv-1214, Jan. 23, 2009), his firm takes the position that families should not be involved as borrowers. Instead, promissory note proceeds are deposited with a local bank and retained in FDIC-protected CDs.
New Jersey attorney John W. Callinan cautioned attendees not to go "too big" on annuities and promissory notes, such as $1 million or $2 million, "because then they'll just change the law."
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