Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.
In crisis Medicaid planning, Medicaid Compliant Annuities and promissory notes are two of the most common products used to convert excess assets into income and accelerate eligibility for benefits. However, both strategies come with strict guidelines, and promissory notes are only viable in some states. If you have the option between these two spend-down tools, it’s important to consider how they compare.
What is a Medicaid Compliant Annuity?
A Medicaid Compliant Annuity (MCA) is a single premium immediate annuity with added restrictions to comply with the Deficit Reduction Act of 2005. In order to be Medicaid compliant, the annuity must meet the following requirements:
- Irrevocable
- Non-assignable
- Actuarially sound
- Equal monthly payments
- State Medicaid agency as primary beneficiary
MCAs are often used in Medicaid planning to protect assets and accelerate Medicaid eligibility by converting excess countable resources into an income stream with no cash value.
Read more: How to Know When a Client is a Good Fit for an MCA
What is a Promissory Note?
A promissory note, on the other hand, is a contract made between an individual and a family member or other loved on. The lender lends money to the maker, who must then repay the funds according to the terms of the contract. In most cases, a promissory note must meet the following requirements:
- Non-transferrable
- Valid through lender’s death
- Payments continue to lender’s estate
Like MCAs, promissory notes are used in crisis planning to convert excess assets into an income stream. However, rather than establishing the contract with an insurance carrier, a promissory note is typically between family members or loved ones.
Which Medicaid Spend-Down Product is Best?
Every case is different, so it’s important to choose the strategy that works best for your client’s specific situation. However, a Medicaid Compliant Annuity is typically the more advantageous product. While promissory notes may be an option in some states, they are considered either a countable resource or a divestment in many states.
Additionally, since promissory notes are typically controlled by a loved one, the funds are less secure. If the individual undergoes a disruptive financial event, such as death, divorce, or bankruptcy, the money may be subject to seizure by another party.
On the other hand, a promissory note, if viable in your state, may be beneficial to use in cases involving an illiquid asset, such as a vacation home or piece of land that is intended to remain in the family. In these cases, the asset cannot be liquidated or transferred to an MCA.
If you have questions about a specific case or would like to learn more about these crisis planning products, reach out to our team at The Krause Agency.
