In a typical Medicaid case involving a promissory note, the facts are clear. The Medicaid applicant transfers an asset to a family member, in exchange for a promissory note. In order for the promissory note to qualify as a viable Medicaid planning tool - which is intended to reduce or eliminate a spend-down amount, it must meet the requirements outlined in the Deficit Reduction Act (the "DRA").
The DRA states that if a promissory note is to be treated as a fully compensated transfer, whereby no divestment penalty would apply, the promissory note must have a repayment term that is actuarially sound. In other words, the Medicaid applicant must be able to show that he or she will get back his or her entire investment from the promissory note, including any required interest, within his or her Medicaid life expectancy. An individual's Medicaid life expectancy is determined by using life expectancy tables published by the Chief Actuary of the Social Security Administration, which can be found here.
Next, the Medicaid applicant must be able to show that all of the payments that he or she will receive from the promissory note will be in equal amounts, without any deferral. Thus, a monthly payment promissory note plan requires that each payment occur on the same date of each consecutive month.
Finally, in that the state Medicaid program will be looking to recover any remaining payments following the Medicaid applicant/beneficiary's death, as an offset of the Medicaid benefits paid, the promissory note cannot be self-canceling. In other words, following the Medicaid applicant/beneficiary's death, the payments must continue to his or her estate. The state Medicaid recovery unit will file a claim against the Medicaid applicant/beneficiary's probate estate.
In light of the above, a promissory note is easy to establish, but may be very difficult to administer. Will the family member protect the asset from his or her creditors, spouse and children, divorce, and bankruptcy? Will the family member make timely payments? Will the family member improperly invest the proceeds, losing some, or all, of the principal to downturns in the stock market? Will the family member inadvertently borrow from the proceeds, without being in the position to pay them back?
To avoid the aforementioned results, it might make a lot of sense for the family member to invest the proceeds into an immediate annuity as a means of re-insuring the promissory note. The immediate annuity would be structured to mirror the financial obligations reflected in the promissory note.
At Krause Financial Services, we currently offer immediate annuities throughout the nation, with period certain ranging from two months to 360 months.
