17.12 Promissory Notes

17.12.1 Promissory Notes Prior to January 1, 2009

It is divestment if an institutionalized person signs a promissory note prior to January 1, 2009, that has at least one of the following:

A provision that forgives a portion of the principal
A balloon payment
Interest payments only with no principal payments
An inadequate interest rate (relative to current market rates) at the time the promissory note was signed

17.12.2 Promissory Notes on or after January 1, 2009

The purchase of a promissory note, loan, land contract, or mortgage, on or after January 1, 2009, is a divestment unless such note, loan, land contract, or mortgage meets all of the following criteria:

Has a repayment term that is actuarially sound (paid out in the person’s life expectancy). The standards that must be used to decide whether or not a promissory note, loan, land contract, or mortgage is actuarially sound are those determined by the Office of the Chief Actuary of the SSA . The standards are found in the Period Life Table, which is available on the SSA website. Use this table to calculate the person’s life expectancy as of the date the promissory note, loan, and contract, or mortgage agreement was initiated. Determine if the lender was expected to live long enough so that he or she would receive payment in full during his or her lifetime.
Provides for payments to be made in equal amounts during the term of the loan with no deferral or balloon payments made. (Note: Voluntary prepayments that exceed the required regular monthly payment amount are not considered balloon payments.)
Does not allow cancellation of the promissory note, loan, land contract, or mortgage upon the death of the lender. Under Wisconsin law, the outstanding loan balance on these types of contracts is not automatically canceled upon the death of the lender. Cancellation of the loan balance can only occur if the contract contains specific language to this effect. If a promissory note, loan, land contract, or mortgage contains language to cancel the balance upon the death of the lender, the promissory note, loan, land contract, or mortgage can be amended to remove this language and avoid a divestment penalty.

If all of the criteria above are not met, the purchase of the promissory note, land contract, loan, or mortgage is a divestment. The divested amount is the value of the outstanding balance due on the promissory note, loan, land contract, or mortgage as of the date of application for Medicaid LTC services.

If all of the criteria above are met, the purchase of the promissory note, land contract, loan, or mortgage is not a divestment. This applies even if the promissory note, land contract, loan, or mortgage cannot be sold because it is not negotiable, assignable, enforceable, or otherwise marketable.

Example 1: On February 1, 2009, Mary gave her adult daughter $50,000 in exchange for a promissory note, which was expected to be paid back in full during her life expectancy. The terms of the note required Mary’s daughter to repay the loan within a 48-month period by making payments of $100 per month for the first 47 months and a $45,300 payment in the 48th month. Twelve months later, on February 1, 2010, Mary enters a nursing home and applies for Medicaid. She is otherwise eligible for Medicaid but acknowledges the promissory note transaction that occurred during her look-back period.

Since the terms of the promissory note contained a provision for a balloon payment, the purchase of the promissory note is a divestment. As of the date of Mary’s application for Medicaid LTC services (February 1, 2010), Mary’s daughter has repaid her mother only $1,200, and the outstanding balance on the note is $48,800. Mary’s divested amount is $48,800 which will be used to calculate a penalty period beginning February 1, 2010.

Example 2: John purchased a $60,000 promissory note from his brother Al on April 1, 2009. At that time, John was 80 years old, with a life expectancy of 7.62 years. The terms of the note required equal monthly payments over a 10-year period. Since John’s life expectancy was less than the repayment term, the note is not actuarially sound. Several years later, John enters a nursing home and applies for Medicaid. The outstanding balance on the promissory note on the date of John’s application for Medicaid LTC services is $40,000. The divested amount that will be used in calculating John’s divestment penalty period is $40,000.

Example 3: Jean gave her adult son $50,000 in exchange for a promissory note, which was expected to be paid back in full during her life expectancy with regular monthly payments. Later that year, Jean entered a nursing home and applied for Medicaid. Since the terms of the promissory note were actuarially sound (meeting all the conditions in Section 17.12.2 Promissory Notes on or After January 1, 2009), the transfer was not considered a divestment. As of the date of Jean’s application for Medicaid LTC services, her son had repaid her only $1,200, and the outstanding balance on the note was $48,800. The promissory note would be considered an available asset for Jean with an assumed value of $48,800.