In many states, executing a promissory note is a viable and attractive strategy when engaging in Medicaid-eligibility planning. This strategy is usually used in a crisis planning case, where the applicant needs to qualify for long-term Medicaid benefits soon.
This is how it works: A promissory note is executed between the Medicaid applicant and another party, usually a friend or family member of the applicant. There is also a gift and this transfer creates a penalty period, whereas the applicant will not be eligible for benefits for a certain amount of time. The income from the promissory note helps to pay the cost of care during the penalty period. The gifted portion of the transferred funds is protected and does not have to be paid towards the applicant’s cost of care. But can the promissory note be construed as a trust-like device under applicable rules? And what makes such transaction bona fide? These issues were recently litigated in the United States Court of Appeals for the Tenth Circuit.