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Shielding assets for Medicaid: the note and loan strategy.

The Deficit Reduction Act (DRA DRA Delta Regional Authority
DRA Developmental Reading Assessment (educational test)
DRA Division of Ratepayer Advocates (California)
DRA Data Research Associates
DRA Directory and Resource Administrator
) of 2005, signed into law by President George W. Bush on February 8, 2006, is a federal law designed to severely restrict Medicaid eligibility by radically changing the transfer of asset rules. More particularly, the law seeks to eliminate altogether transfer of asset strategies at the so-called "crisis" phase, that is, last-minute transfers of assets just prior to or immediately after placement in a long-term care long-term care (LTC),
n the provision of medical, social, and personal care services on a recurring or continuing basis to persons with chronic physical or mental disorders.
lieutenant colonel
) facility. However, the federal law left open one planning strategy in particular: planning via a "note and loan."

In this climate of ever more stringent Medicaid eligibility rules eligibility rules, the conditions that define who may be entitled to dental benefits, when persons first become entitled to such benefits, and any provisions that determine how long an individual remains entitled to benefits.
, it is critical for facilities to understand the asset protection/Medicaid planning techniques employed by facility residents and prospective residents as a means of gauging the risk they might pose to the facility's bottom line.

The most draconian dra·co·ni·an  
Exceedingly harsh; very severe: a draconian legal code; draconian budget cuts.

[After Draco.
 change wrought by the DRA is the change to the start date of a penalty period associated with a transfer of assets The conveyance of something of value from one person, place, or situation to another.

The law recognizes that persons are generally entitled to transfer their assets to whomever they wish and for whatever reason. The most common means of transfer are wills, trusts, and gifts.
. Under the prior law, the penalty period based on a transfer of assets commenced on the first day of the month following the date of the asset transfer. As such, an LTC facility resident could transfer approximately one-half of his assets; the half of the assets transferred incurred a penalty period of a certain number of months (varying based upon the amount transferred) beginning the month following the transfer, while the other half of the assets was used to pay the healthcare facility privately during the penalty period assessed on the transferred assets. Under this calculation, both the private-pay funds and the penalty period were exhausted at the same time, allowing the resident to secure Medicaid eligibility on that date.

Under the DRA, however, the penalty period based on a transfer of assets does not begin until the facility resident is "otherwise eligible" for Medicaid benefits but for the asset transfer. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently
, a Medicaid applicant must be both residing in an LTC facility and below the resource limit before the penalty period clock will begin to run. What this means is that the resident must spend-down all of her remaining assets (down to the resource limit set by the state) before the penalty period will begin on any asset transfers made in the past five years, regardless of when they were made. The goal, of course, is to prohibit last-minute transfers of assets.

However, rather than curtailing such "crisis" asset protection planning altogether, the DRA, by default, made available planning via a "note and loan." The DRA calls for the inclusion of funds used to purchase certain notes and loans as "assets" with respect to transfer of asset penalties unless the note or loan: (1) has a repayment term that is actuarially sound; (2) provides for payments to be made in equal amounts during the term of the loan, with no deferral or balloon payments; and (3) prohibits the cancellation of the balance upon the death of the lender. By taking these enumerated This term is often used in law as equivalent to mentioned specifically, designated, or expressly named or granted; as in speaking of enumerated governmental powers, items of property, or articles in a tariff schedule.  requirements into consideration, the planning technique of asset preservation via a note and loan was born.

How it works

So, what is a promissory note promissory note, unconditional written promise to pay a certain sum of money at a definite time to bearer or to a specified person on his order. Promissory notes are generally used as evidence of debt.  and how does the strategy work? To begin with, a promissory note is a contract wherein the maker of the note makes an unconditional promise in writing to pay a sum of money to the payee The person who is to receive the stated amount of money on a check, bill, or note.

payee n. the one named on a check or promissory note to receive payment.

PAYEE. The person in whose favor a bill of exchange is made payable.
 either at a fixed or determinable Liable to come to an end upon the happening of a certain contingency. Susceptible of being determined, found out, definitely decided upon, or settled.

determinable adj.
 future time or on demand of the payee. In healthcare it works as follows: the healthcare facility resident transfers all of her funds (less the state permissible resource allowance) to an individual (typically a family member). The person receiving the funds signs a note promising to pay back approximately one-half of the monies transferred (the loaned assets), plus interest, to the resident on a monthly basis. The monthly amount to be paid back to the resident is calculated using the LTC facility's daily rate less the resident's income. Upon payment of the monthly amount to the resident, the resident writes a check for the same amount to the facility. The note repayment amount covers payment to the facility during the penalty period incurred by the transfer of the other one-half of the assets (the gifted assets).

To illustrate: Mr. White transfers a total of $420,407.96 to his daughter on September 30, 2008, as a part-gift/part-loan transaction. The healthcare facility's daily rate is $425 (a typical rate in the New York metro For the region, see .

Metro New York is a free daily newspaper in New York City started in 2004. Its main competition is AM New York, with which it practices many of the same distribution and marketing strategies.
 area) and Mr. White's monthly income totals $1,854. To determine the monthly loan repayments, Mr. White calculates the actual monthly cost at the facility private-pay rate for each month (30 or 31 days) less his monthly income. He then calculates the average of the monthly payments during the term of the penalty period (number of months) and factors in an interest rate (typically 5%). The average monthly loan repayment amount works out to $10,908.40 per month--the amount that Mr. White's daughter will pay back to him each month and which he will then turn over to the LTC facility. The term of the loan will be 20 months beginning in October 2008. As such, $208,907.96 will be the total loan amount and $211,500 will be the total gift made to Mr. White's daughter, which amount is free and clear to her. After 20 months, the loan will be repaid, the gifted money will be protected, and Mr. White will be eligible for Medicaid benefits. The facility will have secured 20 months of private payment and a seamless transition to Medicaid as the third-party payer at the end of the term.

It is important to note that in order for the strategy to work, there must be a monthly shortfall in the amount paid to the facility each month. This is because the resident must have medical expenses greater than the Medicaid rate in order to be considered "otherwise eligible" for Medicaid benefits while also having medical expenses she or he is unable to meet in full. This shortfall needs to be made up at the end of the loan period from the gifted portion of the assets, and this can present a problem for the long-term care facility long-term care facility
See skilled nursing facility.
. However, if the facility and the family are working together (as they should, since they have a common goal), they may have a disclosure arrangement or escrow escrow

Instrument, such as a deed, money, or property, that constitutes evidence of obligations between two or more parties and is held by a third party. It is delivered by the third party only upon fulfillment of some condition.
 arrangement to address the monthly shortfall.

Details, details ...

The strategy, albeit basic in concept, is very particular in the details. While facility staff cannot be charged with knowing the minutiae mi·nu·ti·a  
n. pl. mi·nu·ti·ae
A small or trivial detail: "the minutiae of experimental and mathematical procedure" Frederick Turner.
 of such a note and loan strategy, it is important that admissions and business office personnel understand the general strategy and be able to identify whether a potential resident's plan meets all the criteria. In this way, an LTC facility can make an educated decision whether to admit the potential resident, and can work with the family to ensure that the plan is appropriately carried out to all parties' mutual benefit.

At a glance ...

Medicaid applicants forced to spend-down remaining monies, thereby prohibiting last-minute asset transfers to families, should pursue an alternative planning strategy. A combination of a loan and promissory note can protect savings transactions from government penalty.

by Jennifer B. Cona, Esq.

Jennifer B. Cona, Esq., is a partner with Genser Dubow Genser & Cona, LLP LLP - Lower Layer Protocol , an elder law As of the early 2000s a relatively new specialty devoted to the legal issues of Senior Citizens, including estate planning, health care,  firm located in Melville, Long Island. The firm provides a full range of elder law and healthcare facility representation services, including litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.

When a person begins a civil lawsuit, the person enters into a process called litigation.
, collections, Medicaid application processing and appeals, guardianships and discharge procedures. For further information, phone (631)390-5000 or visit

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Title Annotation:FINANCIAL FOCUS
Author:Cona, Jennifer B.
Publication:Long-Term Living
Date:May 1, 2009
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