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Is it Too Late When you are Already in a Nursing Home — promissory notes

This edition of the Koldin Report E-Newsletter continues a series that answers the question, “Is it too late to protect any of your life savings when you are already in a Nursing Home?” This edition reviews the option of gifting and lending with a promissory note. All prior newsletters are saved on our website. You can read them by clicking here.

Under the Medicaid Laws in New York State, the community spouse (healthy spouse) is entitled to retain one-half of the couple’s combined life savings, but not less than $74,820 and not more than $119,220. The community spouse is also entitled to retain $2,980.50 of the couple’s combined income. A single individual in a nursing home is entitled to retain $14,850 of his/her life savings and $50 per month of income.

If the couple’s or single person’s resources exceed the resource allowance, then the excess normally must be spent on the cost of care before Medicaid eligibility can be established.

Example: Mary, a widow, enters a nursing home. She has $150,000 in savings. She is allowed to keep $14,850. She will be told that she must spend $135,150 towards the cost of her nursing home bill before she will be eligible for Medicaid. The nursing home costs $10,000 per month. Her income from Social Security and pension is $1,000 per month. This means that her life savings will be depleted at the nursing home at a rate of about $9,000 per month. Therefore, in approximately 15 months she will have depleted her entire life savings towards the cost of her care.

If Mary were to transfer her $135,150 to her son, she would be ineligible for Medicaid as a result of a transfer penalty being imposed. Under the Medicaid law, any transfers made within 5 years prior to the date of application is presumed to be for the purpose of depleting your life savings in order to qualify for Medicaid.

Because of this 5 year lookback period regarding transfers, people like Mary incorrectly assume that it is too late to protect any of their life savings. Although Mary cannot in this example transfer all of her life savings to her son, she could use a promissory note as a method to save part of her life savings.

Mary can transfer part of her savings to her son as a loan to be repaid under the terms of a promissory note. The balance of her life savings can be transferred to her son as a gift.

A transfer penalty on the gift portion will be assessed by the Medicaid Agency causing a period of ineligibility. The period of ineligibility is determined by the value of the gift and the monthly transfer penalty. The transfer penalty depends on the applicant’s county of residence. (A detailed discussion of how transfer penalties are computed is discussed in another newsletter(link)).

The promissory note portion of the transfer will generate monthly income for Mary and will be subject to the Medicaid income contribution rules.

During this transfer penalty time period, Mary must pay privately toward the cost of care at the nursing home. The promissory note income, Mary’s other income such as from Social Security, IRAs, Pension, and funds from Mary’s $14,850 exempt allowance, and sometimes a partial return of gifts, can be used to pay the nursing home bill during the transfer penalty imposed as a result of the gifted money.

The amount of savings to be gifted and the amount to fund the promissory note is a complex calculation. These calculations include the monthly income, the transfer penalty and the cost of Nursing home care and all are subject to change during the penalty period. Also, if there is an at-home spouse (Community Spouse), then the spouse’s resource allowance and income would also be taken into account.

In summary, promissory note planning involves lending and gifting excess resources that would otherwise have to be spent towards the cost of care. The loan portion would ultimately be spent towards the cost of care, but a large portion of the gift would be protected.

Using the promissory note option to protect a substantial portion of your life savings is complex and is not a “do it yourself” project. Ongoing legal advice is needed for this method to be successful.

When the Koldin Law Center, P.C. handles a Medicaid case, we not only handle the entire application process, but we also review asset protection options with our clients including options for gifting and lending with a promissory note. We review with our clients who are already in a Nursing Home options to protect some or all of their assets beyond merely establishing Medicaid eligibility.

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