If you lend money to your adult child and later apply for nursing home Medicaid, that loan can count against you during the Medicaid look-back period unless it meets a specific federal test. The rule comes from the Deficit Reduction Act of 2005, and it requires the loan to have a repayment term no longer than your life expectancy, equal payments with no balloon or deferred amounts, and a promise that the balance cannot be canceled if you die. Miss any one of the three, and Medicaid treats the whole loan as a gift, not a repayment stream, which can delay your eligibility for coverage.
This is not a rare edge case. Parents in their late sixties and seventies routinely help adult children with a down payment, a business, or a divorce settlement, often without thinking about long-term care five years down the road. If you are that parent, or you are helping one plan, here is exactly what the look-back period checks, what a compliant promissory note has to include, and the catch that trips up families even when they do everything right.
What the Medicaid Look-Back Period Actually Checks
When you apply for Medicaid coverage of nursing home or long-term care, your state reviews every asset transfer you made in the 60 months (five years) before your application date. This is the federal look-back period established under the Deficit Reduction Act, and it exists to stop people from giving away money right before applying for benefits that taxpayers fund.
Any transfer for less than fair market value counts against you. That includes outright gifts, but it also includes a loan that was never really a loan, meaning no note, no fixed repayment schedule, and no expectation of being paid back. If Medicaid decides a transfer inside the look-back window was uncompensated, it imposes a penalty period: a stretch of time during which the state will not pay for your nursing home care, even though you otherwise qualify.
The penalty period length depends on the amount transferred divided by your state's average monthly private-pay rate for nursing home care. A larger "gift" produces a longer penalty. And the clock on the penalty period does not start on the date of the transfer. It starts on the date you would otherwise become eligible for Medicaid, which means a loan made carelessly five years ago can still cost you months of coverage today.
California is the exception worth knowing about. Medi-Cal suspended its asset test and look-back review between 2024 and 2025. That suspension ended: California reinstated a 30-month look-back period on January 1, 2026, though transfers made between January 1, 2024 and December 31, 2025 remain exempt from that review. If you are in California, do not assume the old "no look-back" rules from 2024 still apply.
Gift or Loan? Why Medicaid Cares About the Difference
A genuine loan is not a transfer for less than fair market value, because you are receiving something of equal worth in return: the borrower's enforceable promise to pay you back. A gift is not. Medicaid's rules give you a specific, three-part test to prove which one you actually made.
This test matters even if you never intended to defraud anyone. Most families who run into trouble did not try to hide assets. They lent a son or daughter $30,000 for a down payment with a handshake and an informal understanding, the same way they might have handled it in 1995. Medicaid does not evaluate intent. It evaluates paperwork.
| Informal "loan" (handshake) | DRA-compliant loan | |
|---|---|---|
| Written note | Usually none | Required |
| Repayment term | Open-ended or undefined | Capped at your life expectancy |
| Payment schedule | Whenever, if ever | Equal payments, no balloon or deferral |
| Interest rate | Often 0% | At or above the AFR |
| Cancelable at death | Often assumed, yes | Explicitly prohibited |
| Counts in the look-back? | Yes, treated as a gift | No, treated as an exchange of equal value |
This is not a technicality Medicaid applies loosely. A note missing even one row on the right side of that table gets evaluated as if it were a gift, in full, even if everyone involved always intended repayment.
The 3-Part Test for a Compliant Promissory Note
Under the Deficit Reduction Act, a promissory note, loan, or private mortgage between family members avoids being treated as a disqualifying transfer only if it meets all three of these conditions:
- The repayment term is actuarially sound. The loan cannot outlast your statistical life expectancy, as determined using the Social Security Administration's Period Life Table. If you are 78, your note cannot run longer than roughly your remaining life expectancy at that age.
- Payments are equal, with no deferral and no balloon payment. You cannot structure a note where the borrower pays nothing for the first five years and then owes a lump sum. Every scheduled payment has to be the same amount, starting close to when the loan is made.
- The balance cannot be canceled at your death. The note has to explicitly state that if you die before the loan is repaid, the remaining balance becomes a debt owed to your estate, not a debt that disappears.
There is a fourth requirement that trips people up even when they get the first three right: the interest rate has to be at or above the fair market rate, generally interpreted as at least the Applicable Federal Rate for the loan's term. A 0% "friendly" family loan, however well documented, is worth less than its face value. Medicaid can treat the discount, meaning the difference between what you handed over and what the note is actually worth at a market rate, as a partial gift.
A Worked Example
Robert is 78. His daughter Maya needs $50,000 toward a house down payment. Robert's remaining life expectancy under the SSA's 2023 Period Life Table is 9.61 years, so any note longer than 9 years fails the actuarial soundness test on its face.
Robert and Maya sign a written note for $50,000 at a fixed interest rate at least equal to the current mid-term AFR (Family Loan Tracker's AFR guide has the current rate), repaid in 108 equal monthly payments over 9 years, with no deferral period and no balloon payment at the end. The note explicitly states that if Robert dies before the loan is repaid, Maya's remaining balance is owed to his estate.
Structured this way, the $50,000 is not a transfer for Medicaid purposes. Robert exchanged cash for an asset of equal value: Maya's enforceable promissory note. If Robert applies for nursing home Medicaid two years later, this transaction should not generate a penalty period, assuming Maya has, in fact, been making the payments.
If the Note Fails the Test
If the note is missing any of the three DRA conditions, or the interest rate is below market, Medicaid does not just penalize the shortfall. It typically treats the entire outstanding balance as of the application date as an uncompensated transfer. A $50,000 loan that is unsecured, has no fixed schedule, or is cancelable at death can be counted as a full $50,000 gift, not a partial one.
From there, the penalty period is calculated by dividing the transferred amount by your state's average monthly private-pay nursing home rate, which varies widely by state and changes annually. A caseworker or elder law attorney in your state can tell you the current divisor; do not rely on a number from a different state or an old year.
The Catch Almost Nobody Mentions: Estate Recovery
Structuring the note correctly solves the look-back problem while you are alive. It does not make the debt disappear, and that surprises a lot of families.
Federal law, specifically 42 U.S.C. § 1396p(b) as added by the Omnibus Budget Reconciliation Act of 1993, requires every state to recover Medicaid's long-term care costs from a deceased recipient's estate. Because a DRA-compliant note explicitly bars cancellation at death, the outstanding balance becomes an asset of your estate the moment you die, and your state's Medicaid Estate Recovery Program can claim against it, the same way it can claim against your house or your bank account. Federal law does protect a surviving spouse and certain dependent or disabled children from this recovery, but an adult child who simply borrowed money is not automatically shielded.
In practice, a compliant promissory note trades one problem for a smaller, later one. It gets you past the look-back period, but the balance still needs to be resolved by your executor after you die. Our guide on what happens to a family loan when the lender dies covers the three ways executors typically handle that: collecting the balance, forgiving it through the will, or offsetting it against that child's share of the estate.
How to Structure This Correctly
- Put it in writing before any money changes hands. A verbal understanding cannot satisfy the DRA test no matter how sincere it was. Start from a written note, not a memory of a conversation. See our guide on what a promissory note needs to include, or build one with Family Loan Tracker's loan agreement generator.
- Set the term inside your life expectancy, using the SSA's Period Life Table for your exact age, not a rough guess.
- Charge interest at or above the Applicable Federal Rate. Below-market interest is the single most common way a technically valid note still gets treated as a partial gift. See our AFR explainer for how the rate is set.
- Keep payments equal and on schedule, and keep records that prove they were actually made, not just promised. Start tracking the loan from the first payment so you have a paper trail if Medicaid ever asks for one.
- Talk to an elder law attorney before you rely on this for Medicaid planning, especially if you are within five years of possibly needing long-term care. State Medicaid manuals differ on caseworker discretion, and some states apply exceptions, like the Caregiver Child Exemption, that change the calculus entirely.
This article explains the federal framework, but Medicaid is administered state by state, and your state's manual can add requirements or exceptions the federal rule does not mention. Nothing here is tax or legal advice. Confirm your state's specific rules and the current SSA life table figures for your age with a qualified elder law attorney before you sign anything.
One more distinction worth holding onto: the Medicaid look-back test and the IRS gift tax rules are separate regimes with separate thresholds. A transfer can clear the annual gift tax exclusion and still trigger a Medicaid penalty, or the reverse. If you are weighing whether to forgive the loan instead of collecting on it, our guide on how to forgive a family loan without a gift tax bill covers the IRS side; this article covers the Medicaid side. Check both before you decide.
The Bottom Line
A family loan and a disqualifying gift can look identical to Medicaid if the only thing separating them is an unwritten understanding. The Deficit Reduction Act's three-part test, an actuarially sound term, equal payments with no balloon, and no cancellation at death, plus a market interest rate, is what turns "I lent my daughter money" into a transaction Medicaid has to respect rather than penalize. Write it down, price it correctly, and track it, or the five-year look-back can turn a generous act into months of care you have to pay for out of pocket.
