3 Rules a TennCare Promissory Note Must Follow to Be Accepted

How Tennessee Families Use Promissory Notes to Qualify a Loved One for Long-Term Care

Key Takeaways: Key Takeaways: TennCare will generally honor a promissory note as a legitimate loan rather than a gift only if it meets three structural rules: the repayment term must be actuarially sound and generally must not exceed the lender’s life expectancy on the signing date, the payments must be made in equal amounts with no deferrals and no balloon payment, and the note must expressly prohibit cancellation of the balance at the lender’s death. A note that fails any one of these tests may have its outstanding balance as of the application date treated as an uncompensated transfer, potentially triggering a penalty period rather than simply being ignored. Because TennCare generally reviews financial activity during the 60-month look-back period, families should also document a reasonable interest rate, a written amortization schedule, and proof that payments were actually made on time. Since the unpaid balance generally must survive the lender and pass through the estate, the note should be coordinated with the broader estate plan, as a will alone generally does not avoid probate. Internet templates frequently contain death-cancellation or balloon clauses that may violate these criteria, and state rules differ outside Tennessee. Sawyer & Associates drafts these instruments as part of a complete eligibility plan for families in Tennessee, North Carolina, and South Carolina.

If your parent needs nursing home care now and family savings sit in a bank account, a properly drafted promissory note can sometimes convert those funds into an income stream instead of a countable resource. TennCare will generally respect the note only if it satisfies three rules: the term must be actuarially sound, the payments must be equal with no deferral and no balloon, and the note must prohibit cancellation at the lender’s death. Miss any one, and the outstanding balance may be treated as an uncompensated transfer that could trigger a penalty period.

Sawyer & Associates helps families across Tennessee, North Carolina, and South Carolina build lawful, well-documented plans when care is needed immediately. Call (803) 274-1095 for a free 30-minute consultation, or reach out to our team now. We also offer a discount for veterans and their families.

Why TennCare Scrutinizes Loans Between Family Members

TennCare reviews transfers because federal law generally requires it. When someone applies for long-term care coverage, the agency generally examines financial activity during the 60-month look-back period, and transfers made for less than fair market value during that window can result in a period of ineligibility. A loan to an adult child may look like a gift on a bank statement, so the burden generally falls on the family to prove otherwise.

Tennessee’s eligibility rules, consistent with federal Deficit Reduction Act of 2005 standards codified at 42 U.S.C. § 1396p(c)(1)(I), generally treat the purchase of a promissory note, loan, or mortgage as an uncompensated transfer unless the instrument meets specific structural requirements. Those requirements appear in Tenn. Comp. R. & Regs. 1200-13-20-.08, governing trusts, asset transfers, and related financial instruments for TennCare purposes. Eligibility determinations under Tenn. Code Ann. § 71-5-104 are generally made within the limits of available resources subject to federal financial participation, part of why the agency applies these criteria closely.

A note that fails the test may not simply be disregarded. Under the federal statute (42 U.S.C. § 1396p(c)(1)(I)) and parallel guidance in the Social Security Administration’s POMS SI 01730.046, if a note does not satisfy all applicable criteria, the outstanding balance as of the application date may be treated as a transfer for less than fair market value. The penalty may be calculated on the unpaid balance of the instrument, not merely on any missed payment, a distinction many families learn too late.

Rule One: The Repayment Term Must Be Actuarially Sound

The note’s repayment period generally cannot exceed the lender’s life expectancy as of the date the note is signed. This is the first of the DRA 2005 promissory note criteria, requiring a term that is actuarially sound based on the lender’s life expectancy. TennCare generally applies this standard through its own transfer-of-asset framework, and the same principle flows through the federal rules incorporated into Section.08.

How Life Expectancy Is Measured

Actuarial soundness is generally measured against published life expectancy tables, not a family’s estimate. A note signed by an 84-year-old parent will generally support a shorter term than one signed by a 68-year-old spouse. Because the tables may be updated periodically and the correct table depends on the program and date, this figure should be confirmed by counsel before the note is executed.

Why the Term Cannot Be Fixed Later

A note that is too long at signing generally cannot be reliably cured by amending it afterward. Agencies may review the instrument as it existed on the transfer date, and after-the-fact revisions can raise questions about whether the arrangement was genuine. Drafting the term correctly the first time is a practical safeguard.

Rule Two: Equal Payments, No Deferrals, No Balloon

Payments generally must be made in equal amounts during the term of the loan, with no deferral of payments and no balloon payments. This requirement, also drawn from the DRA criteria reflected in POMS SI 01730.046 and Tennessee’s transfer-of-asset framework, generally exists to prevent a family from structuring a “loan” that returns almost nothing until years later. Level amortization is generally what makes the note look and function like a real debt.

In practice, this rule trips up well-meaning families more than any other. A parent may want to give an adult child a year or two before payments start, or a child may prefer one lump payment when a house sells. Both structures may be inconsistent with the equal-payment requirement and can cause the outstanding balance to be treated as an uncompensated transfer. Interest should also be stated at a reasonable rate, and payments should actually be made and deposited on schedule.

Here is how the three requirements compare in plain terms:

Requirement	What It Means	Common Mistake
Actuarially sound term	Term does not exceed lender’s life expectancy	Using a standard 10 or 15-year term regardless of age
Equal payments	Level payments across the full term	Deferred start date or balloon at maturity
No death cancellation	Balance survives the lender and passes to the estate	“Forgiven at death” clause copied from a template

💡 Pro Tip: Keep a separate paper trail for every payment. Canceled checks, dated bank transfers, and an amortization schedule showing each payment applied to principal and interest often carry the day during review.

Rule Three: The Note Cannot Be Canceled at the Lender’s Death

The note should generally prohibit cancellation of the balance due upon the death of the lender. If the remaining balance is forgiven when the parent dies, the arrangement may be viewed as a gift with extra steps, generally what the rule is designed to prevent. Instead, the unpaid balance generally must remain collectible as an asset of the lender’s estate.

This is where Medicaid planning and estate planning intersect, and where families are often surprised. Because the note generally survives the lender, the balance may become part of the estate, and a deceased person’s debts and claims are generally resolved through the estate before heirs receive anything. Federal law also generally requires states, including Tennessee, to seek recovery from the estates of certain deceased Medicaid recipients for long-term care benefits paid, so the note’s post-death treatment deserves attention during drafting, not afterward.

Where the Will-Versus-Trust Misconception Comes In

Many families assume that having a will keeps the note out of probate. Generally, it does not. A will is a set of instructions for the probate court, meaning assets titled in the decedent’s name alone, including an outstanding note receivable, generally travel through probate. A revocable living trust may allow assets to pass outside of probate in Tennessee and the other states our firm serves, though funding a note into a trust has its own eligibility and transfer implications worth discussing before signing anything.

Building a Medicaid Compliant Promissory Note Tennessee Families Can Rely On

A Medicaid compliant promissory note Tennessee applicants can defend is generally a drafting project, not a form-filling exercise. Templates downloaded online routinely contain death-cancellation clauses, balloon provisions, or open-ended terms that may violate the TennCare note criteria above. Our Medicaid compliant promissory note Tennessee lawyer team drafts these instruments alongside the rest of the eligibility plan so the pieces work together.

A useful TennCare compliant note requirements checklist may include:

• A term at or under the lender’s documented life expectancy on the signing date

• Level, equal payments with no deferral period and no balloon at maturity

• Express language prohibiting cancellation of the balance at the lender’s death

• A stated, reasonable interest rate and a written amortization schedule

• Proof of actual payments made and received on schedule

• Clear identification of the borrower, with no side agreements altering the terms

Accuracy in the application itself matters just as much as the paperwork. Under Tenn. Code Ann. § 71-5-2601(a)(1)(A), a person (including an enrollee, recipient, or applicant) may commit an offense by knowingly obtaining or attempting to obtain TennCare benefits to which they are not entitled by means of a willfully false statement, representation, or impersonation, or by concealment of any material fact, or by any other fraudulent means. Meeting the DRA criteria is a lawful planning technique, but a note used to conceal or misrepresent a disqualifying gift would generally not be accepted and could create exposure well beyond a penalty period.

Tennessee law does provide a narrow carve-out worth knowing about. Under Tenn. Code Ann. § 71-5-106, a resource transferred for less than fair market value by someone holding a power of attorney may not be counted against the owner if statutory conditions are met, including that the power of attorney was not executed to establish or continue Medicaid eligibility and that the owner had neither actual nor constructive knowledge of the transfer, or was unable because of incapacity to prevent it. Carve-outs like this are fact-dependent, require proof by the applicant, and are generally construed narrowly, so no family should plan around one without counsel reviewing the specific circumstances. If you are still getting oriented, our overview of Medicaid crisis planning in Tennessee walks through how these tools fit together.

💡 Pro Tip: Gather five full years of statements for every account before your first meeting. Timing drives nearly every promissory note decision, and reconstructing old records later is usually harder than pulling them now.

Frequently Asked Questions

1. Can a promissory note be used after my parent is already in a nursing home?

In many cases, yes. Notes are frequently used in crisis situations precisely because a penalty period has already been triggered or funds exceed the resource limit. Whether a note is the right tool depends on the amount at issue, the applicant’s income, marital status, and the timing of prior transfers, so outcomes vary with the facts.

2. Does interest have to be charged on the note?

A stated, reasonable interest rate is generally expected because it may support the position that the transaction is a genuine loan rather than a gift, and it helps establish that the note was purchased for fair market value. A zero-interest note may invite additional scrutiny. The appropriate rate depends on current benchmarks, such as the applicable federal rate, at the time of signing.

3. What happens if TennCare rejects the note?

If the instrument does not meet the applicable criteria, the outstanding balance as of the application date may be treated as an uncompensated transfer, resulting in a period of ineligibility. Applicants generally have the right to request a fair hearing, and administrative review is generally separate from any later judicial review or civil action. Because appeal deadlines are short and procedures differ by posture, prompt legal review is important.

4. Do the same promissory note rules apply in North Carolina or South Carolina?

The federal DRA 2005 framework generally applies nationwide, but each state administers its own Medicaid program with distinct eligibility standards, resource limits, and documentation practices. A note drafted for TennCare should not be assumed valid in Charlotte, or Columbia without review under that state’s rules.

5. Can the borrower be a child who lives out of state?

Generally yes, but the borrower’s ability to make consistent, documented payments is often what matters most. Distance generally does not disqualify a loan; missed or irregular payments may undermine it.

Getting the Details Right Before You Sign

A promissory note can be a legitimate and powerful part of a Tennessee eligibility plan, but generally only when the term is actuarially sound, the payments are level with no deferral or balloon, and the balance survives the lender’s death. Each requirement generally traces back to federal standards incorporated into TennCare’s transfer-of-asset rules, and the note’s structure is generally evaluated as of the date it was signed, while any resulting transfer penalty is generally measured by the balance outstanding when the application is filed. Because results depend heavily on individual facts, no article can tell you whether a note is right for your family.

Sawyer & Associates offers clear language, customized plans, and practical guidance for families facing an urgent care decision. Call (803) 274-1095 for your free 30-minute consultation, learn more at Sawyer & Associates, or schedule your consultation today. Veterans and their spouses receive a discount on our services.

Disclaimer: This content is for informational purposes only and is not legal advice. Every case is unique, and results may vary. Consult an attorney about your specific circumstances.