A promissory note to a family member can protect Medicaid eligibility only when federal Deficit Reduction Act rules are met. The note must be actuarially sound, require equal periodic payments with no deferral or balloon, and prohibit cancellation of the debt when the lender dies. If any test fails, Medicaid treats the outstanding balance on your application date as an uncompensated transfer and applies penalty months. Compliant notes remain countable assets whose present value counts toward the resource limit.
Congress closed a popular spend-down loophole in the Deficit Reduction Act of 2005. Before February 8, 2006, parents could lend large sums to adult children, hold a promissory note, and argue the cash left their countable resources. States now apply three federal tests from 42 U.S.C. § 1396p(c)(1)(I) before they treat a note as a fair-market exchange instead of a gift.
Test one is actuarial soundness. The repayment schedule must end on or before the lender's life expectancy. CMS guidance in SMD 06-018 points workers to the SSA Period Life Table. A 78-year-old woman in Tampa lending $180,000 cannot stretch payments across 20 years when SSA tables give her roughly nine years of life expectancy.
Test two bans balloon payments and payment deferrals. Every installment must be equal. A $100,000 note with 60 monthly payments of $500 and a final $70,000 balloon fails even though 59 checks looked identical. Workers treat the entire structure as a transfer, not just the balloon portion.
Test three requires the note to prohibit cancellation at the lender's death. The document must say the debt survives the lender and passes to the estate or heirs. A note that forgives the balance when Dad dies converts the loan into a disguised gift the day he signs.
Our Medicaid look-back period guide covers how penalty months start and how the 60-month window interacts with other transfers. This post focuses on note drafting and the asset-vs-penalty fork.
Common mistake:Families download a generic loan template from the internet and skip the Medicaid clauses. A standard bank form often includes acceleration clauses and death forgiveness language that fail federal review. Have an elder law attorney add DRA-compliant language before anyone signs.
Medicaid sorts promissory notes into two buckets. Compliant notes are countable resources. The agency values the note at present fair market value, which may be less than the outstanding principal if the borrower lacks collateral or has missed payments. Defective notes are uncompensated transfers. The transfer amount equals the outstanding balance due on the application date for long-term care services.
George in Allegheny County lent his son $95,000 in March 2022 with a handwritten IOU and no interest. When George filed Pennsylvania nursing-home Medicaid in January 2026, the County Assistance Office found no actuarial schedule, no equal-payment math, and no anti-cancellation clause. The entire $62,000 still owed counted as a transfer on the application date, not on the 2022 loan date.
The penalty clock follows the same Deficit Reduction Act rule as cash gifts. Pennsylvania divided $62,000 by the $421.20 daily divisor for 2026 applications to set 147 days of ineligibility ($62,000 ÷ $421.20 = 147.2, rounded down). George was otherwise eligible in January 2026, so the penalty started that month.
If George's note had passed all three tests, the $62,000 balance would still count toward Pennsylvania's $2,000 resource limit unless an appraiser discounted it for collection risk. George would spend down or collect payments until countable assets dropped below the cap. No transfer penalty would apply.
| Note status | Medicaid treatment | Transfer date | Dollar amount used |
|---|---|---|---|
| Passes all three DRA tests | Countable resource (FMV of note) | No transfer penalty | Present value, often less than principal |
| Fails actuarial, balloon, or cancellation test | Uncompensated transfer | Date of LTC application | Outstanding principal on application date |
| Loan exceeds note FMV at creation | Partial uncompensated transfer | Date note was purchased or funded | Amount loaned minus FMV at creation |
| Undocumented family loan | Gift (no note recognized) | Date money left the account | Full amount wired or withdrawn |
Actuarial soundness ties the note term to biology, not tax planning. CMS tells states to use SSA life expectancy tables. A lender who is 72 years old cannot sign a 15-year note. Workers multiply the monthly payment by the number of months within life expectancy and compare that total to the principal plus contracted interest.
Interest is allowed but the payment stream must stay level. A $120,000 note at 3% simple interest with 84 equal monthly payments of about $1,597 can pass for an 80-year-old lender with a nine-year life expectancy. The same principal with interest-only payments for seven years and a principal payoff in year eight fails the no-deferral rule.
Patricia in Columbus, Ohio lent her daughter $88,000 in 2023 through a note drafted by a local attorney. The schedule ran 96 months at $1,100 per month. Patricia was 81 when she entered a Franklin County nursing home in April 2026. Ohio Department of Medicaid measured her SSA life expectancy at roughly 8.5 years (102 months). The 96-month term passed the actuarial test.
Ohio still counted the note's present value as a resource while payments continued. Each $1,100 deposit into Patricia's account reduced countable assets. When the balance hit $2,000, she met Ohio's resource test. The note did not create a transfer penalty because the structure complied with federal law.
Florida DCF applies federal note rules during Institutional Care Program (ICP) transfer reviews. The 2026 penalty divisor is $10,645 per month statewide per AHCA. A defective note uses the outstanding balance on the ICP application date, then divides by that divisor to set penalty months.
Harold in Lee County sold his boat for $45,000 in 2024 and lent the cash to his son Mark with a two-page note. The note called for five years of interest-only payments and a $45,000 balloon in 2029. Harold entered a Fort Myers skilled nursing facility and filed ICP on March 3, 2026 with $1,800 in countable assets.
DCF treated the $38,000 still outstanding as an uncompensated transfer on March 3, 2026. Penalty math: $38,000 ÷ $10,645 = 3.566 months. Florida converts the fraction to days (0.566 × 30 = about 17 days). Harold faced roughly three months and 17 days of ineligibility starting when he was otherwise eligible in March 2026.
If Harold's attorney restructured the note in 2025 into 48 equal payments within Harold's life expectancy and added anti-cancellation language, DCF would have valued the note as a resource instead. Harold would collect payments until his countable assets dropped below Florida's $2,000 limit. No penalty would attach.
Model Harold's countable assets at /calculator/florida-medicaid-spend-down-calculator/ before lending new funds to relatives. The calculator flags gifts inside the look-back window but does not validate note compliance.
New York Chronic Care Medicaid applies the same federal note tests but uses seven regional penalty divisors. NY DOH GIS 25 MA/14 set 2026 rates effective January 1. New York City uses $15,282 per month. Western New York uses $13,765. Rochester uses $15,675.
Elena in Brooklyn lent her daughter $110,000 in June 2024 to buy a co-op. The note required 120 equal monthly payments of $917, well within Elena's SSA life expectancy at age 76. The document stated the debt would not be canceled at Elena's death. The note passed all three federal tests.
HRA valued the note at $94,000 present fair market value in January 2026 when Elena filed Chronic Care Medicaid with $30,000 in other countable assets. The note pushed her over the $33,038 resource limit until her daughter's payments and a partial spend-down brought the total below the cap. Elena avoided a transfer penalty but still had to spend down the note's counted value.
Contrast Elena with a defective note. If the same $110,000 loan had included a $50,000 balloon, HRA would have counted the $89,000 outstanding balance on the application date as a transfer. NYC penalty math: $89,000 ÷ $15,282 = 5.82 months. Western NY math on the same balance: $89,000 ÷ $13,765 = 6.46 months. Region matters when the note fails.
Compare borough and county figures at /calculator/new-york-medicaid-spend-down-calculator/. New York's higher resource ceiling does not forgive a defective family note.
Common mistake:Moving a parent from Brooklyn to Buffalo to lower the penalty divisor does not fix a bad note. HRA assigns the region based on established residence, not the nursing home address. Fix the note terms or return principal before filing.
Texas HHSC uses a daily penalty divisor of $262.37 for MEPD nursing facility cases effective September 1, 2025. A defective $55,000 note balance on application produces 209 days of ineligibility ($55,000 ÷ $262.37 = 209.6, rounded down). Texas workers apply the same federal three-test framework described in the Medicaid for the Elderly and People with Disabilities handbook.
Ruth in Harris County lent her brother $70,000 in 2023 with a note that forgave the debt if she entered a nursing home. That acceleration clause functioned as a cancellation trigger. HHSC counted the full $51,000 outstanding on her April 2026 application as a transfer. Ruth's son returned $30,000 before the final eligibility determination. HHSC recomputed on $21,000: 79 days of penalty instead of 194.
Pennsylvania County Assistance Offices apply a $421.20 daily divisor for 2026 applications. A non-compliant note with $48,000 outstanding creates 113 penalty days. Pennsylvania also scrutinizes whether the loan was below fair market value at creation. Lending $100,000 for a note an appraiser values at $72,000 creates a $28,000 transfer on the funding date.
Ohio Department of Medicaid uses a monthly average private pay rate of $7,787 effective September 1, 2024. A defective $40,000 note balance yields about 5.14 penalty months ($40,000 ÷ $7,787). Ohio prorates the first penalty month when eligibility starts mid-month, which adds complexity on top of the note math.
Test spend-down figures at /calculator/texas-medicaid-spend-down-calculator/, /calculator/pennsylvania-medicaid-spend-down-calculator/, and /calculator/ohio-medicaid-spend-down-calculator/. Pair those results with agency divisor tables and a NAELA consult before you fund a new family note.
Start before money moves. Draft the promissory note, amortization schedule, and security agreement (if any) with an elder law attorney who knows Deficit Reduction Act language. The note should name the lender, borrower, principal, interest rate, payment due dates, and the anti-cancellation clause in plain words.
Fund the loan with a traceable wire or check from the lender's account. Avoid cash. The borrower should deposit the proceeds and begin payments on the date the note specifies. Missed payments weaken the fair-market-value argument and give workers a reason to discount the note to zero.
Charge a market interest rate even for family. Zero-interest loans raise fair-market-value questions in Pennsylvania and New York. IRS Applicable Federal Rates give a floor many attorneys follow. A rate below AFR does not automatically fail Medicaid review, but it invites scrutiny on the note's present value.
Keep a payment log with check numbers, deposit dates, and running balances. When Linda in Orlando applied for ICP in 2026, DCF asked for 36 months of statements from both parties. Linda's daughter had paid from a personal checking account instead of the account named in the note. DCF delayed approval for six weeks while the family produced corrected records.
Compare note planning to other spend-down tools in our posts on annuity Medicaid spend-down and gift penalty calculation. Annuities face their own actuarial soundness rules under 42 U.S.C. § 1396p(c)(1)(F). Notes and annuities are not interchangeable even though both use SSA life tables.
A gift and a loan look identical on a bank statement. Medicaid separates them only when paper proves intent. A $25,000 wire to a son with no note, no repayment, and no interest is a gift on the transfer date. The penalty divisor math in our gift penalty post applies immediately when the applicant is otherwise eligible.
A compliant note moves the analysis to the resource column. The lender holds an asset (the note) instead of cash. Payments coming back reduce countable assets over time. The trade-off is paperwork burden and the risk that one defective clause converts the entire outstanding balance into a transfer at application.
Partial cures work for defective notes the same way they work for gifts. Returning outstanding principal to the lender before or after filing can shrink the penalty pool in Florida, Texas, and Pennsylvania. Get written confirmation from the eligibility worker before anyone spends returned funds.
Carol in Cuyahoga County gave her daughter $40,000 in 2025 without a note. Her elder law attorney recommended recharacterizing the transfer, but Ohio Medicaid does not allow retroactive note creation. Carol returned $40,000 from her daughter's account in March 2026 before filing. The penalty dropped to zero because the uncompensated transfer was cured.
Federal law sets the three compliance tests, but states differ on how they value compliant notes and how aggressively they audit family loans. Florida DCF and New York HRA routinely request both parties' bank statements. Texas HHSC focuses on the note language and payment history during MEPD reviews.
Penalty divisors vary by state and region. Florida uses one monthly statewide figure ($10,645 in 2026). New York splits seven regional monthly rates. Texas and Pennsylvania publish daily divisors ($262.37 and $421.20 in 2026). Ohio uses a biennial monthly rate ($7,787 effective September 2024).
Resource limits add a second hurdle. Compliant notes count toward the asset cap. Florida caps the applicant at $2,000. Ohio uses the same $2,000 figure for many nursing-home cases. New York allows $33,038 for many Chronic Care applicants in 2026. A valid note can still block approval if its present value keeps assets above the limit.
Read the full look-back timeline and penalty start rules in our Medicaid look-back period guide. Pair that guide with the gift penalty calculation post when a defective note triggers divisor math.
Common mistake:Filing Medicaid in the state where adult children live instead of where the parent resides will not change note rules. Medicaid uses the applicant's state of residence. A daughter in Dallas cannot file Texas MEPD for a father who still banks and votes in Oklahoma.
Our state calculators estimate how many countable dollars you still need to spend before you meet the posted asset limit. Enter marital status, joint account totals, and whether transfers occurred inside the look-back window.
The gift field flags risk when you report family transfers within 60 months. It does not validate promissory note compliance, compute present fair market value of a note, or project penalty months on a defective loan. Those steps require agency divisor tables and an elder law review.
Start at /calculator/, then open the page for your parent's residence. Florida families use /calculator/florida-medicaid-spend-down-calculator/. New York filings go through /calculator/new-york-medicaid-spend-down-calculator/. Texas, Pennsylvania, and Ohio applicants use /calculator/texas-medicaid-spend-down-calculator/, /calculator/pennsylvania-medicaid-spend-down-calculator/, and /calculator/ohio-medicaid-spend-down-calculator/ respectively.
Medicaid allows promissory notes only when they meet three federal tests: actuarially sound repayment within the lender's SSA life expectancy, equal payments with no balloon or deferral, and a clause prohibiting debt cancellation at the lender's death. Notes that fail any test are treated as uncompensated transfers based on the outstanding balance at application.
Actuarially sound means the note repayment term cannot exceed the lender's life expectancy from the SSA Period Life Table. A 79-year-old lender in Ohio with roughly 9 years of life expectancy cannot hold a 15-year family note. CMS guidance in SMD 06-018 directs states to use SSA actuarial publications.
A compliant promissory note is a countable asset valued at present fair market value, which may be less than the outstanding principal. Medicaid discounts notes when collection is uncertain. A defective note is not counted as an asset; instead the outstanding balance triggers transfer penalty months.
A balloon payment violates the equal-payment requirement in 42 U.S.C. § 1396p(c)(1)(I). Medicaid treats the entire note as a defective transfer, not just the balloon portion. The penalty uses the outstanding principal on the application date divided by the state penalty divisor.
Some notes can be restructured before filing if the new terms meet all three federal tests and payments restart with documentation. Notes cannot be backdated. Returning outstanding principal to the lender can also reduce or eliminate a penalty in many states, similar to curing a gift.
Florida divides the outstanding note balance on the ICP application date by the statewide monthly penalty divisor ($10,645 in 2026). A $42,580 balance produces four penalty months. Florida converts fractional months to days by multiplying the decimal by 30. See our gift penalty post for full divisor math.
