Last week, a federal district court in Oklahoma decided a case that I found very interesting.  For several years, I litigated a case in federal court involving the use of promissory notes as a Medicaid planning technique.  Ultimately, I did not prevail in my case.  I can’t say that I lost, because my case was never resolved one way or the other after a trial, but I certainly didn’t prevail either.

Medicaid is a federal and state cooperative health insurance program for needy individuals.  In order to qualify for Medicaid, an individual must have insufficient income with which to pay for his care and he must have a very limited amount of assets.  Unlike most health insurance programs, Medicaid will pay for long-term care costs, such as care in a nursing home or assisted living residence.

Many people consult with me in order to qualify themselves or a family member for Medicaid sooner than the individual would qualify for Medicaid without planning.  This type of service is known as Medicaid planning.  Through Medicaid planning, a lawyer is assisting an individual with preserving a portion of his estate for himself or his family by qualifying him for Medicaid benefits sooner than he would qualify without planning.

Since long-term care can cost anywhere from $5,000 to $12,000 a month, many individual who never thought they would need to qualify for Medicaid find themselves eager to qualify.  Most of my Medicaid-planning clients are people who worked their entire lives, lived frugal lives, and never thought they would need Medicaid benefits.  Of course, they never counted on spending $12,000 a month for a nursing home.

In 2006, the federal government changed the laws governing the Medicaid program.  Part of those changes involved promissory notes.  A promissory note is simply an I-owe-you, a document through which one person, the borrower, promise to pay to another individual, the lender, a certain sum of money.  For instance, “Mom, I owe you $50,000” is a promissory note.

Before the federal government changed the Medicaid Act, I had never used promissory notes as a Medicaid planning technique.  After the federal government changed the Medicaid program, I began to use promissory notes extensively as a Medicaid planning technique.

In short, and without confusing you too much, this is how I used promissory notes:  Mrs. Smith is in a nursing home costing her $10,000 a month.  Mrs. Smith has total assets of $100,000, consisting of a checking account.  She has monthly income of $3,000 a month, consisting of Social Security and a pension.  Her monthly deficit is, therefore, $7,000 ($10,000 – $3,000 = $7,000).  Mrs. Smith has one son, Joe Smith.

Mrs. Smith gifts $50,000 to her son, Joe.  Mrs. Smith lends Joe $50,000.  Joe agrees to pay Mrs. Smith the $50,000 back over a period of seven months at the rate of approximately $7,000 a month.

The gift of $50,000 causes Mrs. Smith to be ineligible for Medicaid benefits for a period of seven months.  During that seven-month period of time, Mrs. Smith uses her income ($3,000) and the $7,000 monthly payment from the promissory note to pay her $10,000 a month nursing home bill.  At the end of the seven-month period, Mrs. Smith is eligible for Medicaid benefits and Joe Smith retains the $50,000 that was gifted to him.  Joe can now use the $50,000 to supplement Mrs. Smith’s care.

Now, there is a good deal of federal court case law that says planning is not illegal and is, in fact, something that many people engage in doing.  For instance, few people in this country would begrudge someone who plans to pay less in income tax.  Similarly, courts do not look down on people simply because they plan to qualify for Medicaid benefits.  Or, at least, courts shouldn’t.

In my case, I initially received a good decision from three federal judges sitting on a federal appeals court panel, which supported my position.  Later, that same court, with three different judges, rendered a decision that contradicted the court’s first decision.  If that’s confusing to you, you’re not alone because it was/is confusing to me.

But a recent decision of a federal district court in Oklahoma supports the use of promissory notes as a Medicaid planning technique.  Looking at the law, not at the goodness or badness of Medicaid planning, the court held that the promissory note was valid, meaning that the technique discussed above would work.  I colleague of mine is currently litigating a promissory note case in federal court in New Jersey.  Time will tell if the Oklahoma case will have any power to persuade a New Jersey federal judge.

Legal decisions have a way of traveling beyond state lines, especially when they address issues courts around the country are already wrestling with. A case that begins hundreds of miles away can eventually influence how similar disputes are argued, decided, and interpreted closer to home.