He Did Not Give His Son $35,000. He Lent It, Then Stopped Asking for It Back, and Medicaid Treats Those as the Same Thing

Imagine a son gets a call from his father’s nursing home. The business office says the state Medicaid agency denied coverage for months. The problem: the $35,000 his father lent him for a house down payment. Dad mentioned it twice, then told him to forget about it.

Medicaid can cover long-term nursing-home care once a person meets its financial and other eligibility rules. For an institutionalized applicant, the program generally looks back 60 months from the point when the person is both institutionalized and has applied for Medicaid. Gifts and other transfers for less than fair market value during that window can trigger a penalty.

Medicare covers short rehab stays after hospitalization. Long-term custodial care falls to family or Medicaid. When Medicaid imposes a penalty, the bill lands on whoever answers that phone.

Forgiveness Turns a $35,000 Loan Into a $35,000 Gift

A real loan gives the father an asset: the right to be paid back. When he tells his son to forget it, he gives that right away for nothing. The loan becomes a gift at forgiveness, and the conversion dates to the forgiveness rather than to the original advance.

That date trips up families who assume old money is safe. Suppose Dad wrote the check 4 years before applying and forgave the debt 18 months later. If it was a genuine loan to begin with, that later forgiveness is the transfer Medicaid will examine. The penalty itself generally doesn’t begin until Dad is otherwise eligible for long-term-care Medicaid but for the transfer.

What Makes a Loan a Loan in Medicaid’s Eyes

Caseworkers look for paperwork a bank would want: a written promissory note, stated repayment terms, bank records showing actual payments, and a debt that can actually be enforced. A handshake is just a gift nobody has marked.

Federal law sets a higher bar. Payments must come in equal amounts during the term of the loan with no deferral of payments and no balloon payments. The term can’t exceed the lender’s life expectancy, and the note must prohibit the cancellation of the balance upon the death of the lender. Additionally, not all states allow promissory notes in Medicaid planning.

The IRS allows a $19,000 annual gift-tax exclusion in 2026, but Medicaid’s transfer rules are separate. A gift under that amount can still count.

How the Penalty Divisor Converts Dollars Into Months

The state takes the amount transferred and divides it by what Medicaid determines to be the average private pay cost of a nursing home in your state. The answer is the number of months the applicant can’t get Medicaid. Every state sets its own divisor, so the same $35,000 buys a shorter penalty in a state with expensive nursing homes and a longer one where care costs less.

The penalty pushes back the date Medicaid coverage begins. A father who has already spent down to his state’s resource limit may have little money left to cover those months. The nursing home can bill him for the uncovered stay, but his children don’t automatically become personally responsible for that debt.

Returning the Money Can Erase the Penalty

Congress built in an escape hatch. If the son gives the full $35,000 back, the penalty can disappear. Some states also reduce the penalty when part of the money comes back, while others require the full amount to be returned first.

There’s one catch: once Dad gets the money back, it’s his asset again. If that puts him over his state’s limit, he’ll have to spend it down before Medicaid starts paying.

Paper the Loan the Day the Check Clears

A New Jersey case shows the risk of trying to prove an old family debt after the fact. In J.P. v. Division of Medical Assistance and Health Services, the applicant claimed that transfers to family members were repayments of earlier loans. The state found the evidence lacking because the note wasn’t created when the alleged loan was made, omitted basics such as a repayment date and interest rate, and went unenforced for 15 years. The Appellate Division upheld the transfer penalty.

Families that keep the loan status clean do the paperwork when the money changes hands: a signed note, a repayment schedule and payments that actually land in the father’s account. Caseworkers go through the bank statements. A note written after the stroke can’t fill in years of missing payments, and the son ends up holding a $35,000 gift that started as a loan.

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