Passing Notes

In 2015, the State of Wisconsin passed 2015 Wisconsin Act 55 which created a rule requiring Promissory Notes to be negotiable, assignable, enforceable and marketable in order for them to not be considered a divestment. As a result, use of Promissory Notes as a divestment tool was essentially eliminated.

In July, the Federal Government officially informed the State that effective August 1, 2017, this policy was not allowed under federal law. This is a major development in divestment planning because Notes are extremely useful in that they are: simple, inexpensive and effective.

In order for a Promissory Note to be used correctly as a divestment tool, they must comply with the following requirements:

1) The note must have a repayment term that is actuarily sound (based on SSA life expectancy tables);
2) The note must have equal payments during term of note (no deferral or balloon); and
3) The note cannot be cancelled upon death.

If a note is done correctly, it’s important to note that payments received from a promissory note are income in the month they are received. However, the value of the note itself is not counted as an available asset provided it can’t be sold.

So how does a note work in real life? Take the following two examples:

Jane is a single person, 90 years old, has $100,000 of available assets, and is currently in a nursing home. She has income of $700/month of Social Security. Her nursing home bill is $9,000 per month.

Jane makes a gift of $50,000, and simultaneously borrows her son Dick $50,000 in return for a promissory note. The terms of the Note: 1.29% interest, payable in 6 equal monthly installments of $8,364.72.

Jane applies for Medicaid and is denied due to the gift, and assessed a penalty period of 179 days ($278.05/day/$50,000).

Result: Jane uses note payment and SS to cover cost during penalty period, successfully saved $50,000 cash.

Charles and Di are each 90-years old and married.

They borrow William $75,000. William signs a note at the applicable federal rate of of 1.93%, payable in 58 equal installments (there is a 4.85-year life expectancy for Di) of $1,355.39 per month.

Di applies for Medical Assistance. Amount remaining on note is unavailable, and no divestment is made, $1,355.39 per month is income which can be retained by Charles as part of his Spousal Income Allocation, assuming his other income doesn’t rise to the maximum level.

As you can see, notes can save a significant amount of money if used correctly, and should be a tool utilized in many situations.

Posted in Elder Law & Special Needs Planning.