Long-term services and supports (LTSS) manual

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Promissory notes and loans

Revised Date: 
February 14, 2019

Purpose – Describe and clarify rules on how promissory notes and loans affect Medicaid eligibility.

Clarifying Information


When a person loans something of value (almost always cash), the promise to repay that loan is worth something. Generally, the value of the promise is the amount remaining to be paid on the loan.

The person who receives the loan and promises to repay is the grantor/payor of the promissory note. The grantee/payee of the loan is the person who owns the promissory note. Generally, the Medicaid client is the grantee/payee and the client owning the promissory note may have resource implications if resources are a part of Medicaid eligibility.

Example: Sam loans his daughter Erin $10,000. Erin creates and signs a promissory note to repay the $10,000 over 5 years. Erin is the grantor and Sam is the grantee. Sam no longer has the $10,000, but owns the note Erin created. After three years, Erin owes Sam $6,000. At this time, the value of Sam’s note is $6,000.

Sales contracts

Certain promissory notes exchanged for real property that was the client's (or spouse's) home are named "sales contracts" in WAC 182-512-0350. Before continuing here, review the promissory note to determine if it falls under any sales contract rules under WAC 182-512-0350 (3) through (10).


The assumed fair market value (FMV) of a note is the amount owing (the "principal"). If a note cannot be sold because of a legal barrier, the FMV is $0 (as opposed to being an excluded resource). However, under WAC 182-512-0250 (8), the value of a note (or any resource) is its FMV, less any encumbrances. Accept and consider evidence for the FMV of the note. Certain factors can value a note at less than the owed principal.

Examples: A few examples of where the FMV of a note may be less than the principal owed: The note is unsecured (the owner of the note does not have the ability to seize property to satisfy the note if the grantor defaults. The note bears no interest (a $10,000 note with $10,000 outstanding principal is worth much less than $10,000 if it is paid off over many years with no interest). No contract (there is no written agreement to pay, only an oral promise or an implied promise).


When a note has a FMV greater than $0, the periodic payment consists of interest 

and principal (though sometimes it may only be principal if the note is interest free). Because the note is a resource, the principal portion of a periodic payment is a resource conversion, and not income (i.e., a portion of the note is turned into cash). The interest portion, if any, is unearned income.

If the FMV of a note is $0, the entire periodic payment is unearned income.

Asset transfer

There are two tests for an asset transfer related to notes.

  • First, as with any resource, if the assets used to purchase the note (i.e., in most circumstances, the money loaned) exceed the FMV of the note, there is uncompensated value. The date of the purchase of the note is the transfer date. Factors that affect the present FMV of the note also affect the FMV of the note when it was created.
  • Second, there are objective tests that, if failed, make the entire note uncompensated. The transfer date for these tests is the date of application for long-term care (LTC); and the uncompensated value is the outstanding principal on the date of application for long-term care (LTC).
    • The note must explicitly prohibit note cancellation upon the death of the note owner. Mere silence on the ability to cancel is not enough, the note must state it cannot be cancelled on death. A note can be amended to conform with this.
    • The note must be paid out, in equal periodic amounts with no deferral and no balloon payments, over a term not greater than the actuarial life expectancy of that note owner. A note payment schedule can be restructured to conform with this.

Example: Sara loaned her sister Jamie $30,000 one year ago. The note is unsecured and bears no interest. The note has equal payments, no deferral or balloon payments, is paid off within Sara's life expectancy and is not cancellable on death. Today the outstanding principal is $29,000. Sara has tried to sell the note, but many potential buyers feel the note isn't worth much. One buyer valued the note at $1,000 and another valued it at $2,000. A reasonable FMV would be $1,500. Because Sara gave Jamie $29,000 (originally $30,000, but $1,000 has been paid back) in exchange for a note worth $1,500, Sara has an uncompensated transfer of $27,500.

Example: Same example as above, except the note is paid off beyond Sara's life expectancy. Sara applied for LTC today. The uncompensated value is $29,000.

If a note is a transfer under both tests (the FMV test and the objective test), then the uncompensated value is the greater of the two.

Worker Responsibilities

Review any notes that the client or their financially responsible AU member owns. Accept and consider evidence as to the FMV of the note. Document the FMV of the note and how you determined the FMV. Calculate and document any unearned income on a note. 

Related links

WAC 182-512-0350

WAC 182-513-1363