Medicaid Applicant’s Promissory Note is Considered Countable Resource

A U.S. district court rules that a Medicaid applicant whose son gave him a promissory note in exchange for rental property had excess resources.

Gragert v. Hendrick (U.S. Dist. Ct., W.D. Okla., No. CIV-11-984-C, May 24, 2012).

Facts.  George Gragert owned a rental property at the time he entered a nursing home and applied for Medicaid.  On May 1, 2011, Mr. Gragert’s son gave Mr. Gragert’s wife a promissory note in which he promised to pay $28,800 in 96 monthly installments of $330.28. One the same day, the Gragerts deeded the rental property, which was worth $22,800, to their son.  The state denied Mr. Gragert’s Medicaid application, finding that he had excess resources due to the promissory note.  Mr. Gragert sued the state in federal court, and both parties asked for summary judgment.

Court’s Decision.  The U.S. District Court for the Western District of Oklahoma granted summary judgment in favor of the state, holding that Mr. Gragert is not eligible for Medicaid. According to the court, a promissory note is typically considered an available resource, and Mr. Gragert offered no evidence to rebut this presumption.

Virginia Law.  In some situations and under certain state laws, it may be proper to implement a strategy structured around the preparation of a promissory note as a short-term planning tool to contribute toward the costs of long-term care during a Medicaid ineligibility penalty period.  In this scenario, the Medicaid applicant would transfer a portion of his or her estate as a gift (intentionally causing an ineligibility period), and then prepare a promissory note, as the maker, for the remaining portion of the estate.  The note would be structured to require monthly repayments in the amount needed to pay for long-term care for the duration of the ineligibility period, resulting in a completed gift upon the scheduled termination of the note.  However, even if a promissory note complies with the Deficit Reduction Act regulations, the note balance could still be deemed an available resource.

Unfortunately, the Virginia Medicaid Manual (S1140.300) provides an instruction to “[a]ssume that the value of a promissory note, loan or property agreement as a resource is its outstanding principal balance unless the individual furnishes reliable evidence that it has a CMV of less than the outstanding principal balance.”  Therefore, this strategy is not typically recommended in Virginia, as it is extremely risky and likely to trigger a lengthy penalty/ineligibility period that may extend well beyond what the applicant’s resources could sustain.