It is not unusual for parents to lend money to their adult children in times of need. Often the funds are simply given to the younger family member with the understanding that the recipient will return the funds when his or her situation improves.
For seniors, lending money in this way could be a recipe for disaster. If a parent loans money to a child, or to any other person, without documenting such loan with a promissory note, such loan may foreclose the opportunity for such parent to obtain Medical Assistance if future nursing home care should be required.
Even if the loan is memorialized with a promissory note, Medicaid ineligibility still may arise. This is because the Medicaid rules impose strict requirements on the structure of a loan and on the form of a promissory note in order for the note holder to obtain Medical Assistance.
An example of how this might affect a married couple is instructive. Jenny, a single mother with two small children, suffered a reduction in hours at work and needed help with her house payment. Jenny’s parents, Bob and Mary, helped Jenny by loaning her $10,000 to tide things over until she could find another job. Two years later, while Jenny is now able to make her mortgage payments, she has not been able to save enough money to repay the loan.
Bob and Mary have fallen on lean times themselves. They own a house and $20,000 in the bank. Bob has a stroke and now must reside in a nursing home for the remainder of his life. Under the Medicaid rules, Bob and Mary can keep about $20,000. They also can make home improvements and can prepay their burial costs. If you count the loan to Jenny as one of their assets, Bob and Mary have $30,000 in assets, $10,000 of which they can use to improve their house or prepay their burials. Or Mary can use an annuity to save the entire amount. After making such payments, Bob would meet the financial eligibility requirements for Medicaid so that his nursing home costs could be paid by the state.
As long as the loan to Jenny is properly documented, Medicaid would be allowed. If it is not, however, then the $10,000 transferred to Jenny two years ago will be treated as a gift causing Bob to be ineligible to receive Medicaid benefits for one and a half months. The tragedy of the situation is that Bob and Mary will be required in that instance to spend about $12,000 of their saved funds to pay the nursing home for that one and a half month period thereby substantially depleting their meager savings.
The way to avoid such dire consequences is to structure the loan so that it complies with the Medicaid rules. Such loan must be “actuarially sound”. While that word as used in the Medicaid rules is somewhat nebulous, it presently is applied so as to require that the term of the loan must allow for full repayment within the life expectancy of the lender. Life expectancy is determined by using standardized life expectancy tables set forth in the Medicaid rules.
In addition, such loan must provide for equal, regular, periodic payments, and there must be no deferral of payments. Also, the promissory note must specifically state that the loan is not cancellable at death. Unfortunately, most promissory notes prepared by lawyers and most preprinted promissory note forms do not prohibit cancellation at death. Indeed, under general commercial law, a valid promissory note, even if it does not expressly prohibit cancellation at death, would nevertheless survive the death of the borrower. In other words, there would not be an automatic cancellation of the note. This legal principle, however, is not sufficient to salvage a promissory note in the eyes of the Medicaid rule makers who will look to see whether the promissory note specifically prohibits cancellation.
As is the case in many areas of life, when seniors enter into financial arrangements with family members or others, great care must be taken to ensure that such arrangements do not have unintended adverse consequences or prevent future eligibility for public benefit programs.