What Governor Walker’s Proposed Change to Promissory Notes Means

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Governor Walker’s 2015-2017 budget proposal contains a change to one particular area of Medicaid planning involving the use of promissory notes. While this is relatively minor compared to the chaos of the 2013-15 budget, it is worth a passing comment.

The proposed change adds language in two areas of the Medicaid law, and the revised language would prevent the use of promissory notes in Medicaid planning.

A promissory note is a loan. Under Federal law, a loan will be considered a “divestment” (see my explanation of divestments here) unless it:

(i) 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);

(ii) provides for payments to be made in equal amounts during the term of the loan, with no deferral and no balloon payments made; and

(iii) prohibits the cancellation of the balance upon the death of the lender.

Governor Walker’s proposal adds a fourth requirement: the loan may not be non-negotiable, non-assignable, or contain terms preventing its sale.

Then, the new budget proposal states, in another section, that a loan that is assignable and negotiable is a countable resource to the individual.

So….under the proposed new law, if you use a promissory note, it  will either be an available resource or it will be a divestment.

This proposal is illegal. A state cannot have rules that are more restrictive than federal law.

And, it is really a waste. As I explain to my clients, promissory notes are really just a stop gap measure to help curtail the bleeding of the private pay nursing home rate, over $10,000 per month in my area of the state. Promissory notes can reduce a person’s assets so that they qualify for Medicaid, and can purchase care at a much lower rate.   But the law requires that those notes be paid back, so when a payment comes in there are very limited options as to what a person, especially a single person, can do – many of my clients use the loan repayment to make a payback to estate recovery. The interest on the loan counts as income that must go to the nursing home as a cost share. Also, if the person dies before the loan is repaid, the outstanding balance may be available for estate recovery.

So the state is not really creating much of a benefit by curtailing the use of promissory notes, and is setting itself up for a legal battle. I wonder why this pettiness is such a priority for Governor Walker. He attacked promissory notes the  last time around and the provision ultimately did not remain. It’s BAAAACCCCKKK. (Well, he is going about it in a new way this time.)

Even if it passes, it  won’t prevent people from becoming eligible for Medicaid. An annuity meeting federal requirements would have the same benefit that a promissory note provides now.

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About Carol J. Wessels

I am an Elder Law Attorney practicing in Wisconsin. I am the owner of Wessels Law Office LLC in Mequon, WI. I handle Medicaid, Long Term Care planning, special needs trusts, guardianship, advance directives, elder abuse and other related issues for elderly and disabled clients and their families. My Mother Velma lived with Alzheimer's for fifteen years until she died on Jan. 24, 2015, which has given me a personal perspective on elder law issues as well.
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