As a Rochester Medicaid attorney I spend a lot of time telling folks not to simply make gifts to their children and other family members. But what if there is a real need for cash and what if the recipient really does wish to pay back the funds? Well, if the loan is structured properly then there is no countable gift for Medicaid purposes. Fantastic, right? Absolutely, but let’s chat about what needs to happen for intra-family loan strategies to work.
First, set the loan term for a reasonable number of years. For my senior clients this means that loaning your son money to purchase a new home cannot be backed by a privately-held thirty-year mortgage. Why? Because your life expectancy is less than 30 years if you are in your 70s. (I am not putting an expiration date on you, just sharing what the life expectancy tables say.) The Medicaid program would take the position that you created a sham arrangement and penalize you for not creating a loan term tied to your life expectancy. So the loan can endure for your full life expectancy or any amount of time that is less than what is shown in the tables.
Second, use a fair market value interest rate. You can have a market rate that is less than the banks and credit unions near you and is still acceptable. You just need to pay attention to the current rates when the promissory note and mortgage are created. You will still be saving your child or other loved one all the fees they would have paid a bank or credit union, you will pay the attorney fees for creating the arrangement, and your loved ones will avoid paying for points like they often would with a commercial product. And if the funds you loan your child were sitting in a money market account or other cash arrangement you will actually make a little bit back on your loan investment; a real win-win situation for you and your loved ones.
Finally, while you and your children may love each other very much you still need to protect yourself so formalize the loan with a promissory note and recorded mortgage (if applicable).
Want to learn more? Call me at The Powers Law Firm today to set up your Family Wealth Planning session (585) 244-2170. And if your planning is already in place with us we can easily add on your intra-family loan work.