Seniors Should Avoid Medicaid Penalties When Making Loans, Executing Land Contracts or Mortgages

A 2006 federal law requires loans made by the Medicaid applicant to be actuarially sound to avoid having them be considered "available resources" when determining eligibility. While the law does not define "actuarially sound", it does require the "payments to be made in equal amounts during the term of the loan with no deferral and no balloon payments made." The Act also prohibits the cancellation of the balance of the note upon death (SCIN - Self Canceling Installment Note). It is presumed notes will be required to be paid out over the life expectancy of the applicant to be actuarially sound.

Michigan's Medicaid law mirrors the federal law in that it requires the loans to be paid back on an actuarially sound basis (over the life expectancy of the lender), in equal payments with no deferral or balloon payments and they must not be cancelable on the death of the lender.  However, Michigan's law goes beyond the federal law in that it includes land contracts and mortgages under this same requirement. Thus, if a person sells property on a land contract, the terms of that contract must meet the above requirements or the transfer could be considered a divestment and disqualify the seller from receiving Medicaid benefits.

Another important issue seniors should be aware of is that it is common in family situations to have transfers of money that are not clearly loans or gifts. Deciding what way to treat such transfers for reporting on a Medicaid application is an issue that needs to be handled carefully to avoid disqualification. Moreover, all loans should be reviewed for proper compliance prior to filing an application for Medicaid. For example, Mrs. Smith transferred $100,000 to her son four years ago. She intended this to be a loan. She is prepared to enter a nursing home. She reports it on the application, but does not have a promissory note with her son that meets the state and federal requirements. She is denied Medicaid because this is considered an "available resource" and hence she is over the asset limit. She cannot pay the nursing home bill because the money has long ago been transferred to her son. This problem could be resolved by her obtaining the proper legal document and repayment schedule and thus qualifying for Medicaid. In addition, land contracts by the elderly should be structured properly to avoid similar problems.

At Heritage Elder Law we are available to assist those who are grappling with these issues to implement effective, legal strategies.

Updated 2018

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