Since enactment of the Deficit Reduction Act of 2005, some elder law attorneys have promoted promissory notes as a way to accelerate Medicaid eligibility and preserve funds when a family member requires long term care. I and other elder law attorneys have been concerned that Medicaid authorities might attack such notes as trust like devices. On July 12, 2011, the United States Court of Appeals for the Third Circuit ruled that the kinds of promissory notes typically used in Medicaid planning are Medicaid disqualifying trust like devices. Sable v. Velez https://www.casemine.com/judgement/us/59146358add7b049342642f9. The court noted was suspicious of Medicaid planning promissory notes because they typically are repaid from the loaned funds rather than having an independent feasible repayment plan, are not arms-length transactions, are between family members not in the business of lending money, and loan timing and amounts are tied to qualifying for Medicaid.
While it is too early to determine the long term impact of Sable, it now seems quite risky to engage in Medicaid planning involving promissory notes. Nevertheless, various other techniques remain available to preserve assets when a loved one may need long term care. Further information is available at the elder law Q&A tab http://www.specialneedsnj.com/elder_law.php and the elder law articles tab http://www.specialneedsnj.com/elder_law_articles.php.