He Will Lend His Daughter $90,000 the Month Before He Applies for Nursing Home Medicaid, With a Signed Note. Medicaid Won’t Automatically Treat It as a Gift, Because the Note Passes Three Tests Most Family Loans Fail

Imagine a widower whose daughter needs help buying a house, and whose own move into long-term care is weeks away. A month before he files for Medicaid, he wires her $90,000. Then they both sign a promissory note. His reasoning: it’s a loan, so Medicaid can’t call it a gift.

He’s half right. This joint federal-state program pays nursing home bills once savings run out. Medicare, for people 65 and older, covers only short rehab stays. Medicaid reviews the transfers an applicant made before applying, and money given to family for less than fair market value can trigger a penalty period with no Medicaid payment for nursing home care. A signed note changes that only if it passes three specific federal tests.

Medicaid’s Three-Part Promissory Note Test

Federal Medicaid law sets a special three-part test for promissory notes, loans and mortgages. Money put into one can be treated as a transferred asset unless the arrangement meets all three conditions:

1. Actuarially sound repayment term. The repayment period has to fit inside the lender’s life expectancy, measured by the life tables published by the Office of the Chief Actuary of the Social Security Administration.
2. Equal payments, no deferral, no balloon. The note has to require payments in equal amounts during the term of the loan, with no deferral and no balloon payments.
3. No cancellation at death. The note has to prohibit cancelling the balance when the lender dies.

If the note fails any one test, Medicaid values it at the outstanding balance due on the date of the application. Calling it a family loan and putting signatures on the bottom isn’t enough if the repayment terms fail the federal test.

How Dad’s $90,000 Note Clears Each Test

Start with the term. The note’s repayment schedule has to end before Dad’s life expectancy does under the federal tables. If it runs past that point, even slightly, it fails.

Next come the payments. The daughter pays the same amount on the same schedule from the first payment to the last. That rules out the classic family setup of “pay me back when the house sells” or “interest now, principal someday.” Both count as deferrals or balloons.

Then there’s the death clause. The note states that the balance survives Dad, so his estate can still collect from his daughter. Families tend to fight this clause hardest, because silently forgiving the debt at death is often the whole emotional point of loaning to a kid. Medicaid reads that forgiveness as a gift that’s simply been put off.

Passes the Gift Test Still Leaves a Countable Asset

Now for the second surprise. Passing the three tests can solve the transfer-penalty problem without necessarily solving Dad’s eligibility problem. The note itself may still count as something he owns.

Under federal resource rules, a bona fide note that can legally be sold is generally treated as a resource, initially valued at the outstanding principal balance unless Dad can show it is worth less. If the note legally can’t be sold, the treatment changes. That distinction matters because Medicaid programs can apply these rules differently from state to state.

The payments matter too. If the note is a countable resource, principal payments generally represent Dad getting part of that resource back, while interest is income. If the note legally can’t be sold and isn’t counted as a resource, the principal payments can be treated as income instead. Either way, the daughter’s monthly checks may affect how much Dad has to contribute toward his care.

Paperwork That Proves the Loan Is Real

Caseworkers judge the loan by its paper trail. Families that hold up well under review usually have:

• The executed note, signed when the money moved and not created later
• Bank records showing the $90,000 actually left Dad’s account and landed in his daughter’s
• A payment history proving she pays on schedule
• Written interest and repayment terms that match the note itself
• A copy of their state’s rules for valuing promissory notes

A note with no payments made against it looks like a gift with extra paperwork, and caseworkers have seen plenty of those.

Why a Family IOU Can Fail as a Spend-Down Plan

Families reach for the note because it seems to let them have it both ways: the daughter gets the cash, and Dad gets Medicaid. A properly written note can keep the transfer from being called a gift. It can also leave Dad holding a countable asset and collecting payments that go toward his care.

So before anyone signs, the family has to weigh two costs: the transfer penalty they’re trying to avoid, and the resource and income count the note may create. A specialist in elder law in the state where Dad will apply can run both sets of numbers before the money moves, which is the only time the choice is still open.

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