Using a Promissory Note in Medicaid Planning

By: Dale M. Krause

The use of promissory notes in crisis Medicaid planning is becoming increasingly unpopular throughout the nation. In Arkansas, they are treated as trust-like devices, thus determined to be countable resources. The same is found in Colorado, New Jersey, North Carolina, and Oregon. In Ohio, if the terms of the promissory note prohibit or prevent the sale of the note, the assets given in exchange for the note must be considered improperly transferred. If the terms of the note do not prohibit or prevent the sale of the note, the assets given in exchange for the note are considered a countable resource, according to Ohio Administrative Code 5101:1-39.

The most recent issue surrounding promissory notes is occurring in Michigan. Michigan caseworkers have been processing promissory notes as "partial cures" of gifts, which is not an allowable practice in Michigan.

I'm often asked to answer the question, "Is a Medicaid Compliant Annuity a better Medicaid planning tool than a promissory note?" Depending on the facts of the case, my answer could be different. For example, if the individual or community spouse only has cash assets, it makes better sense to use the Medicaid Compliant Annuity rather than a promissory note, in that the Medicaid Compliant Annuity will be controlled by the insurance company. The insurance company will guarantee that the monthly payments go out as scheduled, and the individual can rely on the income. On the other hand, if the individuals or community spouse has illiquid assets, such as a cottage - which is intended to remain in the family, the promissory note may make better sense than the Medicaid Compliant Annuity, in that there is no liquidity in which to fund the Medicaid Compliant Annuity.

In light of the increasing irregularities being found in the use of promissory notes throughout the nation, my recommendation of their use is limited to cases involving extenuating circumstances only.

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Dale M. Krause, J.D., LL.M., has provided Medicaid Compliant Annuities to elder law attorneys, and their clients, throughout the United States. As a result of his practice, Mr. Krause has been labeled "The Pioneer of Medicaid Compliant Annuities."

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