The Elder Law Minute™ Good News for Promissory Notes BY RONALD A. FATOULLAH, ESQ. AND DEBBY ROSENFELD, ESQ A recent United States District Court ruled that a promissory note constitutes a valid form of Medicaid planning. In the case of Lemmons v. Lake, a Medicaid applicant who transferred property in exchange for a promissory note was deemed to be eligible for Medicaid because the note was not considered a resource or a trust-like device and therefore did not subject the applicant to a penalty period. The case addressed the issue of an Oklahoma resident and Medicaid applicant, Juanita Lemmons, who sold her farm and investment account to her son in exchange for a promissory note. A promissory note is a written promise to repay a loan or debt under specifi c terms - usually at a stated time, through a specifi ed series of payments, or upon demand. The note contained an antiassignment clause that prevented Ms. Lemmons from selling the note. Ms. Lemmons then fi led for Medicaid benefi ts 12 days later. The State denied her coverage, maintaining that the promissory note was either a transfer of resources or a trust-like device. The U.S. District Court held in favor of Ms. Lemmons, reasoning that the promissory note was neither a resource nor a trust-like device. According to the Court, the note was not a resource because its antiassignment clause meant that it was not negotiable. The Court also noted that using a promissory note is a “valid form of Medicaid planning,” and the State cannot penalize someone “for taking advantage of a lawful loophole that Congress has not foreclosed.” Perhaps the positive outcome of this case can serve as a springboard for a refresher course on promissory notes. The Defi cit Reduction Act of 2005 (the DRA) introduced promissory note planning to the Medicaid arena. The DRA provided that if funds are exchanged for a promissory note that is non-assignable, is actuarially sound, does not allow for early termination, and provides for uniform payments, the note will not be treated as an available asset by Medicaid. Accordingly, for an individual who needs nursing home care but is not eligible for Medicaid because he owns nonexempt assets, the promissory note option offers a reasonable way to salvage some resources. We calculate the individual’s assets and we simultaneously calculate the estimated cost of private care at the facility in which the applicant resides . The applicant then is advised to transfer a portion of his assets to a family member (or friend); such transfer will generate a defi nitive penalty period. The balance of the applicant’s assets is then loaned to the same individual. The loan is refl ected by a bona fi de promissory note whereby the lending party agrees to pay back the lender a specifi c sum each month for a set period of time. Good planning will ensure that the term of the promissory note coincides with the penalty period resulting from the gifted assets. Accordingly, during the penalty period, the monthly payments on the note received by the applicant will be applied toward the cost of the nursing home care. When the note is paid up, the applicant remains in the nursing home and automatically goes on Medicaid. Although Lemmons is not a New York case, the ruling is nonetheless helpful in confi rming that the use of promissory notes is sanctioned by Federal Courts. Clearly, the planning ELDER LAW is complicated and detailed and requires an attorney familiar with all the nuances of a promissory note plan to draft it properly and ensure it complies with the DRA’s requirements. Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law fi rm that exclusively concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts and wills. The fi rm has offi ces in Forest Hills, Great Neck, Manhattan, Brooklyn, and Cedarhurst, NY. This article was written with the assistance of Debby Rosenfeld, Esq., a senior staff attorney at the fi rm. Ronald Fatoullah & Associates can be reached by calling (718) 261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES. 26 North Shore Towers Courier n June 2013 RONALD FATOULLAH, ESQ, CELA* Pouran A NAME YOU CAN TRUST & Company We Welcome Our Newest Stylists Raymond Over 20 year’s experience in China, Manhattan & Queens as a stylist specializing in men & women “I’m so happy to bring my skills to the nice people at Pouran” Pouran would like to invite you to Experience our newest team member With a Haircut or Styling receive a FREE Manicure Experience our Salon, Spa & Boutique Services 272-84 Grand Central Pkwy • Floral Park • PLENTY OF FREE PARKING • Between Little Neck Pkwy & Lakeville Road Salon: 718.423.8800 MedSpa: 718.225.4100 Boutique: 718.423.8989 • www.pouranandco.com
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