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Proposed Policy Promises Problems for Planners

This is a post about Medicaid long term care planning. The topic is a proposed policy change related to the use of promissory notes in Medicaid planning.  If adopted, the new policy would take effect July 1, 2019.

The proposed policy says:

In order for a promissory note to be a bona fide loan:

  • The loan must be enforceable under Michigan law;
  • The note agreement must be in effect at the time of the loan transaction;
  • The borrower must acknowledge the obligation to repay the loan;
  • There must be a plan to repay in the loan document; and
  • The repayment plan must be feasible.

Medicaid planners use private promissory notes in a couple important contexts, both in relation to divestment. [Divestment is the term used by the Michigan Department of Health and Human Services to mean non-exempt asset transfers for less than fair market value that occur during the five year “look back” period. Divestments result in penalties.]

Promissory notes are sometimes used as alternatives to commercial annuities in “half loaf” divestment planning.  And promissory notes are used to “cure” divestments that clients come in the door with (i.e., divestments done before they met with an attorney).

The primary impact of these proposed changes would seem to be the elimination of promissory notes as a tool to cure preexisting divestments. Specifically, the second bullet above which would require that the note be “in effect” when the funds are transferred to the borrower, would be hard to work around in the typical situation in which a client comes to the lawyer having already made penalizing divestments.

The other bullet points in this notice seem to be directed at the integrity of the arrangement. While ominous, these bullets appear to be less clearly impactful on current planning approaches.

Like annuities, promissory notes, have become a target of MDHHS policy writers. Hope that the new administration in Lansing might be less antagonistic toward Medicaid planning concepts may be misplaced.