Though neither federal or state law definitely addresses the issue, Ohio Medicaid takes the position that a promissory note given to a Medicaid recipient is considered an available resource for nursing home Medicaid if it can be sold: the value is the outstanding balance of the note. The applicant will be ineligible if the value of the note puts him over $1,500.
If the note cannot be sold, the note is deemed to reflect an improper transfer in the amount of the principle left unpaid. Any payments subsequently made can be used to reduce the period of restricted coverage, i.e., the period of time that the applicant is ineligible for Medicaid due to the deemed transfer.
Federal and state laws seem to provide that if the repayment term of a note is actuarially sound, (meaning the payment period does not exceed the recipient’s expected lifetime); provides for payments in equal amounts with no balloon payment; and prohibits cancellation on the lender/recipient’s death, then the note should not be considered an improper transfer.
Payments received by the individual are treated as income for Medicaid purposes.
Use of a promissory note combined with lifetime gifts is sometimes used in Medicaid planning. The payments on the promissory note are used to cover part of the period of ineligibility at which time the ineligibility period is recalculated by Medicaid due to the payment, resulting in shorter period of ineligibility and making the person immediately eligible for Medicaid assuming other resources are below $1,500.