When a client enters a nursing home and realizes they have excess countable assets that disqualify them from Medicaid, time is of the essence. As Medicaid planning professionals, we know that converting excess assets into a protected income stream is one of the most effective crisis planning strategies. Two common tools for accomplishing this are Medicaid Compliant Annuities (MCAs) and promissory notes. While both serve a similar purpose—turning excess resources into income—there are significant differences in how they work, their security, and their acceptability across different states.
Let’s break down each option, weigh the pros and cons, and explore why Medicaid Compliant Annuities are often the more secure choice.
What is a Medicaid Compliant Annuity?
A Medicaid Compliant Annuity (MCA) is a financial tool used in Medicaid Planning to convert excess countable assets into an income stream for an institutionalized individual or their spouse. The annuity is purchased from an insurance carrier and structured to meet strict Medicaid requirements:
Irrevocable and Non-Assignable – The contract cannot be changed, transferred, or cashed out.
Actuarially Sound – The annuity must pay out within the Annuitant’s life expectancy.
Equal Payments – It must provide equal monthly payments with no balloon or deferred payments.
State as Beneficiary – If the annuitant passes away before receiving the full payout, the state Medicaid agency must be named the primary beneficiary (up to the amount of benefits paid on the individual’s behalf).
Because MCAs are structured to comply with Medicaid rules, they provide a legally accepted method for repositioning assets while securing eligibility for Medicaid.
What is a Promissory Note?
A Promissory Note is another way to convert excess assets into an income stream, but instead of purchasing an annuity from an insurance carrier, the individual lends their excess assets to another part—typically a family member or loved one. The borrower then repays the loan in equal installments under a written agreement.
For Medicaid purposes, a promissory note must meet similar requirements:
Actuarially Sound – The repayment period must not exceed the lender’s life expectancy.
Equal Payments – No deferred or ballon payments.
Non-Cancellable – The note cannot be forgiven upon the lender’s death.
Promissory Notes are appealing because they keep the funds within the family rather than transferring them to an insurance carrier. However, not all states accept promissory notes in Medicaid planning, making them a riskier option.
Feature | Medicaid Compliant Annuity (MCA) | Promissory Note |
Availability | Accepted in all states | Not accepted in all states |
Issuer | Insurance Carrier | Private Individual (often family) |
Security of Funds | High – backed by an insurance carrier | Low – controlled by borrower, subject to personal financial risks |
Impact of Financial Events | No impact – funds are secured with an insurance carrier | At risk if borrower experiences bankruptcy, divorce, or death |
Medicaid acceptance | Designed to comply with Medicaid rules | More scrutiny from Medicaid caseworkers |
Ease of Use | Straightforward purchase and payout | Requires proper structuring and documentation |
Why Medicaid Compliant Annuities Are the More Secure Choice
While both tools serve the same general purpose, Medicaid Compliant Annuities (MCAs) offer superior security, predictability, and Medicaid acceptance compared to promissory notes. Backed by a regulated insurance carrier and specifically structured to comply with Medicaid requirements, MCAs provide greater reliability and peace of mind in crisis planning.
Promissory notes, on the other hand, come with significant risks:
Not all states allow them – Some Medicaid agencies reject promissory notes outright, resulting in denied applications and delays in eligibility.
Funds are less secure – If the borrower (often a family member) experiences divorce, bankruptcy, or death, the money may be subject to loss, leaving nothing for repayment.
Increased scrutiny – Medicaid caseworkers may challenge promissory notes more aggressively than annuities, requiring additional legal arguments and documentation.
For these reasons, Medicaid Compliant Annuities are often the preferred and safer option in crisis Medicaid planning. While promissory notes may work in some cases, they require more
careful planning and carry greater risks for the client and their family.
As Medicaid planning professionals, we must carefully evaluate which strategy best serves our clients’ needs. When converting excess assets into an income stream, Medicaid Compliant Annuities offer the most secure and widely accepted path to Medicaid eligibility. While promissory notes may seem like an attractive option, their limitations and risks make them a less reliable choice in many cases.
By understanding the key differences between these tools, we can better guide clients toward Medicaid eligibility while protecting their assets and financial security.
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