April Brings BEM Change on Promissory Notes

By Doug Chalgian on March 3, 2020

A “BEM Item” is a written rule used by the Michigan Department of Health and Human Services to determine eligibility for Medicaid benefits.   BEM Item 400 (aka “BEM 400”) is the primary source of rules relating to the availability of assets in determining eligibility for long term care Medicaid, and some other Medicaid programs.  BEM 400 is regularly tweaked by the DHHS. Some tweaks are more important than others. The change to BEM 400 discussed in this blog post is not especially dramatic, but worth noting, I think, for those who do this type of work.

As of April 1, 2020, the part of BEM 400 that deals with promissory notes will change.

The Rule Currently 

The BEM 400 policy on promissory notes now says:

A promissory note is a written promise to pay a certain sum of money to another person at a specified time. Promissory notes are loans. The promissory note may call for installment payments over a period of time (installment note) or a single payment on a specified date. The note is an asset to the lender. The value of the note is the outstanding balance due as of the date of application for long term care, home help, waiver services, or home health services.

All money used to purchase a promissory note or loan, are transfers of assets. They are a transfer of assets for less than fair market value unless the following are also true:

  • The repayment schedule is actuarially sound; and
  • The payments are made in equal monthly amounts during the term of the agreement with no deferral of payments and no balloon payments; and
  • The note must prohibit the cancellation of the balance upon the death of the lender.

See BEM 405, Uncompensated Value to determine the value of any promissory note or loan as a transfer for less than fair market value.

The New Rule

As of April 1, 2020, BEM 400 will say:

A promissory note is a written promise to pay a certain sum of money to another person at a specified time. Promissory notes are loans. The promissory note may call for installment payments over a period of time (installment note) or a single payment on a specified date. The note is an asset to the lender. The value of the note is the outstanding balance due as of the date of application for long term care, home help, waiver services, or home health services.

The purchase of a promissory note or loan, is a transfer of assets. The purchaser has transferred cash in exchange for a written promise to be paid back by the borrower. This transfer must be reviewed to determine if the purchaser has received fair market value. A note that cannot be sold or transferred to another party does not meet the definition of fair market value and must be reviewed as a divestment. See the glossary for definitions of fair market value and arm length transaction. In addition to the fair market value requirement the purchase of a promissory note is a transfer of assets for less than fair market value unless all the following are also true:

  • The repayment schedule is actuarially sound; and
  • The payments are made in equal monthly amounts during the term of the agreement with no deferral of payments and no balloon payments; and
  • The note must prohibit the cancellation of the balance upon the death of the lender.

See BEM 405, Uncompensated Value, to determine the value of any promissory note or loan as a transfer for less than fair market value.

Note: Life expectancy tables used to determine actuarial soundness are in BEM 405.

The changes (which are underlined) are to the second paragraph which offers an expanded explanation of how promissory notes will be evaluated as possible divestment; and the addition, at the very end, of a reference to the BEM Item 405 life expectancy tables. At a minimum the new language seems to direct that promissory notes that are non-assignable or non-salable are to be treated as divestment. The significance of the other new terms is less certain.

Those who practice Medicaid planning understand that this is not the first revision in recent years to policy related to promissory notes.  Other changes have been more dramatic, and have, for the most part, eliminated the usefulness of a tool once commonly used by some planners.

To read the new policy, click here.

mm By: Doug Chalgian
Doug Chalgian

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