Ronald Fatoullah & Associates - Elder Law

Promissory Note Planning & Gift Using POA Declared Void


Clients often engage in 'Promissory Note Planning' in order to preserve assets at the eleventh hour when Medicaid nursing home care is needed. One aspect of such a plan involves gifting a portion of the applicant's assets to a loved one, which creates a period of ineligibility for Medicaid. The remaining portion of the assets is loaned to a loved one, who signs a promissory note evidencing the loan. The terms of the promissory note must carefully comply with the Deficit Reduction Act of 2005, including satisfying the requirements that the note be non-assignable and non-transferrable. The monthly loan repayments are used to cover the cost of the nursing home for the penalty period.

In Peterson v. Lake, a recently decided U.S. District Court case, Ray Peterson, an Oklahoma nursing home resident, deeded his property to his daughter in exchange for $5,000 and a promissory note in the mount of $57,500. Upon application the State denied Medicaid benefits, finding that the transfer was not for fair market value and that the note was an available resource. The Court ruled in favor of Mr. Peterson, stating that because the promissory note cannot be converted to cash, it is not an available resource. This ruling is certainly beneficial for those wishing to engage in promissory note planning.

Nursing home residents may not be aware of the opportunity to engage in such planning, which benefits both the resident and the facility. The facility receives private payment during the penalty period and the resident is able to preserve a part of his or her life savings.

We often see errors in promissory note planning. It is important that an experienced attorney draft the note with great care and in accordance with local rules, or else the note may be deeded an available asset.

Gift Using POA Void

When engaging in Medicaid planning, it is often necessary to use a Statutory Power of Attorney ("POA") and Statutory Gifts Rider. If these documents are drafted properly, the agent can engage in Medicaid planning that involves a gift/promissory note plan. However, not all documents are created equal.

The Estate of Ramirez is a recent NY case involving the use of a Power of Attorney. Luisa Gonzalez was the decedent's long-time girlfriend, and Alberto was her son. Using a POA, Luisa transferred a building valued at $1.85 million from the decedent to Alberto. However, the gift-giving power in the POA did not authorize Luisa to transfer the building to Alberto, as he was not included on the document in the list of permissible transferees. Further, the gift exceeded $12,000, the gift amount that was permissible in the POA.

The case demonstrates the importance of proper drafting when engaging in advance planning. One's full intentions should be reflected in the POA and Statutory Gifts Rider. Without adding the proper provisions, transactions undertaken using the POA may be undone.

Another important point highlighted by the case is that a deed gifted using a POA may initially appear valid, but a court or a title company may declare the deed invalid at a future point. A title company may review the POA that is recorded with the deed and ultimately determine that title was not legally transferred to the recipient because the POA did not contain needed provisions. An experienced attorney can ascertain in advance whether there will be title issues in the future.

Both of the above cases highlight the importance of consulting with a knowledgeable elder law attorney before engaging in long term planning/gifting.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that exclusively concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Yan Lian Kuang-Maoga, Esq. is an elder law attorney at the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also the co-founder of JR Wealth Advisors, LLC. The wealth management firm can be reached at 516-466-3300 or 800-353-3775.

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