Contribution by the Eldercounsel, Jill Roamer, J.D. and Marchesa Minium, J.D.

For a promissory note to be used successfully as a strategy for long-term care planning, it must meet certain requirements.

The Nebraska Court of Appeals filed a Memorandum Web Opinion March 26, 2019 regarding a failed attempt by a Medicaid applicant to use a promissory note to exclude a portion of her assets from eligibility considerations. Appellant argued that the promissory note in question should not have counted towards her Medicaid asset limit. The Court, however, found that the promissory note did not meet the requirements of 42 USC § 1396p(c)(1)(I) regarding acceptable or exempt transfers of assets for Medicaid purposes.

Applicant Lorena Freeman

Freeman entered into long-term care February 1, 2015. She applied for Medicaid benefits, with the help of her attorney, on March 31. Her income included Social Security payments and an annual income from her interest in a rental. On March 27, she had disposed of more than $12,000 and executed a promissory note, “FOR VALUE RECEIVED”, as a loan to her lawyer for an additional $5,547.08. She also had other limited resources less relevant to the court’s decision.

The Department of Health and Human Services denied her application for benefits. The Department did not impose a penalty period for the improper transfer; instead, her application was denied for excess resources. Following a series of administrative hearings, Freeman took her issue to the district court.

42 USC § 1396p: Liens, Adjustments and Recoveries, and Transfers of Assets

42 USC § 1396p(c)(1)(I) is the relevant code section in this case. A transfer of assets as a purchase of a promissory note requires three elements to be satisfied. Further, if the elements are not established, the value of the note at the time of the application for benefits is countable as an asset. The court opined that Freeman only established one of the elements and therefore could not exclude the promissory note as part of her assets.

First Element

42 USC § 1396p(c)(1)(I)(i) states that an excludable promissory note “has a repayment term that is actuarially sound”, as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration; hereafter “Office”.

The court stated that Freeman did not reference the actuarial publications proving that the promissory note was actuarially sound. In order for a promissory note to be actuarially sound, the life of the loan must not exceed the number of years left of the lenders lifetime, as determined by the Office’s life table. In other words, if the life table estimates that a lender has approximately 32.5 years left to live, and the promissory note is to be repaid in year 33, the promissory note is not actuarially sound – where if it were to be repaid in 30 years, it would be.

While Freeman’s life expectancy, based on the actuarial publications of the Office, was greater than the two month period of the promissory note, evidence of this qualification was necessary to prove the promissory note’s actuarial soundness. Thus, without the evidence that the two-month period of the promissory note was less than Freeman’s life expectancy, she could not satisfy her burden of proof to show actuarial soundness of the note.   Freeman’s lawyer produced no such evidence and so this element was not met.

Second Element

42 USC § 1396p(c)(1)(I)(ii) states that an excludable promissory note “provides for payments to be made in equal amounts during the term of the loan, with no deferral and no balloon payments made.”

The Court agreed with the lower court that in order for this element to be satisfied, at least two payments of equal value are required – the term “payments” in the code is plural; thus, more than one. The promissory note in this case was to be paid in two installments of unequal value.  Freeman argued that it is common for the final payment of an installment loan to be a different amount than the set payment amounts. After all, the mathematics of the calculation will usually dictate so.  The Court stated that even if that supposition was accepted, the ordinary meaning of the statute meant that at least two equal payments –plural – were necessary before the final unequal payment. Because there was only one payment prior to the final payment of a different amount, the element was not established.

Third Element

42 USC § 1396p(c)(1)(I)(iii) states that an excludable promissory note “prohibits the cancellation of the balance upon the death of the lender.”

The Court agreed with Freeman that this element was satisfied, because the promissory note’s terms stated that the note was “non-cancellable upon the death of [Freeman].”

Lawyer Misconduct

This case also raises issues of professional responsibility and reminds us of basic principles of lawyerly conduct. While a lawyer is always to be a strong advocate for their client, they cannot cross over ethical lines. Freeman’s initial lawyer enthusiastically assisted her in applying for Medicaid benefits – but he also crossed ethical boundaries by entering into the promissory with his client in order to qualify her for Medicaid services.  This lawyer admitted to the Court that he entered into the promissory note for the purpose of Medicaid eligibility. The result? The lawyer’s voluntary surrender of his license and subsequent disbarment.

Conclusion

A legitimate promissory note can be a useful strategy for elder law planning. Lawyers must remember the three primary elements to properly creating an excludable note – first, actuarial soundness; second, a minimum of two equal payments, which can more than likely be followed by a final, unequal, payment, and; third, the note cannot be cancellable upon the death of the lender. A lawyer must also familiarize themselves with the other related details included in the statute. Remembering and satisfying each of these elements properly is critical to creating a legitimately excludable asset. A lawyer’s meticulous preparation, and thorough foresight, can provide a sound outlook for clients’ planning for a future in long-term care.

Already an ElderCounsel member?  Then you have crucial help at your fingertips—as a part of our document drafting software, ElderDocx, we have tools to calculate and execute successful promissory notes.  We also have an annuity calculator, and other calculating software to help with other long-term planning for elder law and Veterans law.  For more information about ElderCounsel contact us or give us a call at 888.789.9908, option 3.