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 several months. The reason: the $35,000 his father lent him for a house down payment. Dad brought it up 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 in a facility and has applied for Medicaid. Gifts and other transfers for less than fair market value during that window can trigger a penalty period of ineligibility.

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 a legal asset: the right to be repaid. When he tells his son to forget it, he surrenders that right for nothing. The loan becomes a gift at the moment of forgiveness, and the conversion date is the forgiveness, not the original advance.

That timing trips up families who assume old money is safe. Suppose Dad wrote the check four years before applying and forgave the debt 18 months later. If it was a genuine loan at the outset, that later forgiveness is the transfer Medicaid will scrutinize. The penalty itself does not 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 the paperwork a bank would require: a written promissory note, stated repayment terms, bank records showing actual payments, and a debt that can be legally enforced. A handshake arrangement is simply a gift that no one bothered to document.

Federal law under the Deficit Reduction Act of 2005 sets an additional bar. Payments must come in equal amounts throughout the loan term, with no deferral and no balloon payments. The term cannot exceed the lender’s actuarial life expectancy, and the note must prohibit cancellation of the remaining balance upon the lender’s death. Not all states permit promissory notes as a Medicaid planning tool, so rules vary depending on where the applicant lives.

The IRS allows a $19,000 annual gift-tax exclusion per recipient in 2026, but Medicaid’s transfer rules operate independently. A gift below that threshold can still trigger a Medicaid penalty.

How the Penalty Divisor Converts Dollars Into Months

The state divides the amount transferred by what it determines to be the average monthly private-pay cost of a nursing home in that state. The result is the number of months the applicant is ineligible for Medicaid. Every state sets its own divisor tied to local facility costs, so the same $35,000 produces a shorter penalty in a high-cost state and a longer one where care is cheaper.

To put this in concrete terms: the national median nursing-home cost runs about $9,581 per month for a semi-private room, according to 2025 Cost of Care survey data. At that median rate, a $35,000 transfer produces a penalty of roughly 3.6 months. But state figures vary widely, from about $5,627 per month in Texas to more than $27,000 per month in Alaska, so the same transfer could cost a Texas family nearly six months of ineligibility while an Alaskan family would see far less than one month.

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 cash left to cover those uncovered months. The nursing home can bill him directly for the gap, but his children do not automatically become personally responsible for that debt.

Returning the Money Can Erase the Penalty

Congress built in an escape hatch. If the son returns the full $35,000, the penalty can disappear entirely. Some states also reduce the penalty when part of the money comes back; others require the full amount before granting any relief.

There is one catch: once Dad gets the money back, it becomes his countable asset again. If the return pushes him over his state’s resource limit, he will need to spend down the excess before Medicaid begins paying.

Paper the Loan the Day the Check Clears

A New Jersey case illustrates 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 promissory note was not 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 maintain a clean loan record do the paperwork when the money changes hands: a signed note, a repayment schedule, and payments that actually land in the father’s bank account. Caseworkers go through those statements line by line. A note written after a stroke cannot fill in years of missing payment history, and the son ends up holding a $35,000 gift that started out as a loan.

One broader shift worth noting: California, which had operated without a nursing-home Medicaid look-back period for several years, reinstated its own version of the rule effective January 1, 2026. Families in that state who assumed past transfers were completely safe should verify how California’s phased look-back window applies to their specific situation with a qualified elder law attorney.

Editor’s note: This update added current 2026 nursing-home cost figures (national median of $9,581 per month for a semi-private room, with state examples ranging from about $5,627 in Texas to more than $27,000 in Alaska) to illustrate how the Medicaid penalty divisor translates a $35,000 transfer into months of ineligibility. It also notes that California reinstated its nursing-home Medicaid look-back period on January 1, 2026, after operating without one for several years.

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