Holding a Note and Medicaid Eligibility

A private note you hold can count toward Medicaid’s asset limits, and the payments it brings in can count as income, so a note matters if you or a spouse may need long-term care. How it is counted depends on federal rules and on your state, which applies them in its own way. This page is a general overview, not legal advice. Talk to an elder-law attorney before you sell, change or give away a note with Medicaid in view.

Many people who carry a note on a home or land they sold are in their sixties, seventies or older. When nursing home or home care costs come into the picture, a family often discovers the note in the middle of an application and is not sure what it is worth or how the agency will see it. What follows explains the questions a note raises, so the conversation with an attorney starts in the right place.

Why Medicaid looks at a note at all

Medicaid is a joint federal and state program. For long-term care, eligibility usually depends on both the applicant’s countable assets and their income, and each state sets out what counts and what the limits are. A note is a right to be paid money in the future, so an agency may treat it as an asset, its payments as income, or both.

Whether a note is counted as an asset often turns on whether it could be sold. A note that can be transferred has a market value, and that value may be treated as available to the applicant. Some states look at the note’s terms closely, others less so. Your attorney will know how your state approaches it.

Payments as income

The monthly payments you receive generally count toward income in the month they arrive. Interest and principal may be treated differently, and states differ on the details. For an applicant already over or near an income limit, a note’s payments can change the picture on their own.

Value: balance or market price?

The balance your payer owes and the price a buyer would pay for the note are different numbers. A buyer pays less than the balance, because they are paying today for payments that arrive over years and they carry the risk of the payer stopping. Depending on the state and the note, an agency may ask what the note is worth, not only what is owed on it.

As an illustrative example, a note with an $80,000 balance and twelve years left at a modest rate might draw offers somewhere below the balance, say $66,000 to $70,000. Those figures are made up for the example. If an agency or your attorney needs evidence of value, a written note appraisal or a set of real offers can supply it. You can request a quote on the note for that purpose without any commitment to sell, and keeping the note is an acceptable outcome.

The Deficit Reduction Act rules on notes

The Deficit Reduction Act of 2005 added federal rules on promissory notes, loans and mortgages in Medicaid. In general terms, a note acquired with an applicant’s funds may be treated as a transfer of assets for less than fair market value unless it meets conditions that include:

• a repayment term that is actuarially sound, meaning it does not run past the lender’s life expectancy under the tables the agency uses
• payments in equal amounts over the term, with no deferred payments and no balloon
• no clause cancelling the balance when the lender dies

These conditions were written mainly to stop notes being used to move money out of an applicant’s name. A note you took back when you sold a home years ago may be viewed differently from one created shortly before an application. How the rules apply to your note, and when it was created, are questions for your attorney. Many seller-financed notes end in a balloon, and that feature alone can matter here.

The look-back and transfers

Medicaid reviews transfers of assets made during a look-back period before the application, generally five years under federal law, though states apply it in their own way. Giving a note away, forgiving payments, cutting the balance for a relative, or selling the note to a family member for less than it is worth can each be treated as a transfer, and a transfer for less than fair value can lead to a penalty period during which Medicaid does not pay for long-term care.

An arm’s-length sale to an unrelated buyer at a market price is a different matter from a gift, because you receive value in return. The cash then becomes an asset in your name, though, and how it is counted is the same question in a new form. That is why the decision to sell, and the timing, belong in a planning conversation and not only in a price comparison.

Spouses, estates and recovery

Where one spouse needs care and the other remains at home, Medicaid has separate rules on how much each spouse may keep, and the note’s ownership can matter. A note held in both names, in one name or in a trust is treated differently, and states set their own allowances.

States also run estate recovery programs, which can seek repayment of Medicaid costs from a recipient’s estate after death. A note still in the recipient’s name can be part of that estate. Heirs dealing with a note after a parent’s care should read settling an estate that holds a note and speak with the estate’s attorney before selling.

Selling, partials and other choices

Holders in this position ask about the same options other holders weigh: keeping the note, selling all of it, selling a partial, or selling the note back to the payer. Each has a Medicaid side as well as a price side. A full sale turns the note into cash. A partial sells a set number of upcoming payments and the note returns to you afterwards, which leaves you holding both cash and a future interest. A discounted payoff to the payer ends the note early. The trade-offs on price are laid out in alternatives to selling your note, and the Medicaid effect of each is for your attorney.

Taxes come into it too. Selling a seller-financed note can bring forward gain you have been reporting a little at a time, as set out in taxes when you sell a note, and a tax bill reduces the cash available for care. An elder-law attorney and a CPA working from the same figures will give you a clearer answer than either one alone.

What to bring to an elder-law attorney

1. The note, the mortgage or deed of trust, and the closing statement from the property sale.
2. The date the note was created and who it was created with, including whether the payer is a relative.
3. A payment history and the current balance.
4. Any written offers or appraisal showing what the note would sell for.
5. Your recent tax returns, including any installment sale schedule.
6. Details of any changes made to the note, forgiven payments or transfers in the last several years.

Ask the attorney how your state counts the note today, how a sale or partial would be treated, and what to avoid while an application is pending. Rules on Medicaid differ from state to state and change over time, so treat any general article, this one included, as a reason to ask questions and not as the answer. If you are planning further ahead, the wider questions in selling a note before you retire are worth reading alongside the other situations holders face. Make no change to the note until the attorney has seen it.

Related questions