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Life Estate
A life estate is a legal arrangement that allows an individual (the life-tenant) to use real or personal property for their lifetime. Although they do not own the property, the life estate provision itself has a property value.
The wording “life estate” is not essential to make it a Life Estate document. Other commonly used phrases in life estate document include:
- To person A for the term of his/her life.
- Person A reserves the possession or use of the property for the term of person A’s lifetime.
- To person A for the life of person X.
- To person A but on person A’s death to go to person B and his/her heirs.
A life estate is considered property for MC purposes and has a value as long as an individual owns a life estate interest, whether they currently use the property or not. The value must be considered when determining the property reserve for a MC applicant/recipient.
A life estate generally entitles the life tenant to make full use of the property for as long as he/she lives and the right to any income earned from the property. Life estates may, however, be restricted. Any restrictions must be identified in the life estate document. Examples of restrictions include:
- A requirement to actually reside on the property and to not rent the property.
- The beneficiary of the estate (remainderman), rather than the life tenant, may be entitled to any and all income generated from the property.
- A requirement for the beneficiary of the estate (remainderman) to pay part or all of the maintenance, taxes or other expenses related to the property rather than the life tenant.
Note: A Life Estate can be revocable or irrevocable.
Life Estate Interest in Real Property
Principal Residence
Life estate interest in an individual’s principal residence is exempt.
Other Real Property (ORP)
The life estate value of Other Real Property (ORP) over $6,000 must be included in the property reserve.
The $6,000 value of the life estate property must be utilized.
Verification
A copy of the legal document which created the nonexempt life estate is required. This is usually the grant deed.
When to Evaluate
The life estate value must be calculated as part of an eligibility determination when:
- The life estate is currently held nonexempt resource, or
- The nonexempt life estate was transferred and adequate consideration must be determined, or
- Nonexempt property was transferred with retention of the life estate and the life estate value is needed in order to determine the amount of consideration received for the property transfer.
Method of Evaluation
When determining the value of a life estate, first determine whether the life estate:
- Is revocable
- Is irrevocable
- Contains property that was owned by the individual when the title of the property was transferred and the life estate was established.
Revocable Life Estate
A revocable life estate is one in which ALL the following conditions exist:
- The life estate is revocable by someone in the MFBU or the community spouse, and
- The MFBU member or community spouse was the owner of the property when the life estate was established, and
- The MFBU member or community spouse is retaining a life estate interest in the property.
- Determine the current market value of the property (assessed value or appraised value).
- Deduct all encumbrances of record from the market value.
- Count the remainder in full as the net market value in determining the property reserve.
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Important: Do not use the Life Estate Value Table to determine the value of this type of Life Estate.
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Irrevocable/ Other Life Estates
Use the Life Estate Value Table when evaluating life estates that do not meet all the Revocable Life Estate requirements listed above. Some examples of when to use this method include a life estate that:
- Is irrevocable (a life estate is always considered irrevocable unless the life estate document specifically states it is revocable).
- Was established with property that was not owned by the MFBU member or community spouse.
- Is irrevocable, but not by anyone in the MFBU or the community spouse.
Follow the steps below to determine the net market value of irrevocable/other life estate.
- Determine the current market value of the property (assessed value or appraised value).
- Deduct all encumbrances of record from the market value to determine the net market value of the property.
- Use the Life Estate Value Table to determine the life estate value factor based upon the life tenant’s current age.
- Multiply the life estate value factor by the net market value found in Step 2. The result is the amount to be included in determining the property reserve.
Note: The appraised value from a qualified real estate appraiser may be used, if lower (real estate appraiser, bank, savings and loan association, credit union, licensed loan or mortgage broker).
Mrs. Smith was granted a life estate interest in the home of her deceased sister. It had been exempt as a principal residence.
She is now 85 years old and is entering an LTC facility. She declares no intention to return to her home. It is now considered Other Real Property (ORP). Evaluate for utilization.
The house is currently assessed at $20,000 and has no encumbrances. Per the “Life Estate Value Table”, Mrs. Smith’s life estate value factor is .35359. (20,000 x .35359 = 7071.80) The value of her life estate is determined to be $7071.80.
Since this is below the property limit of $2000 plus the Other Real Property (ORP) limit of $6000, she must be given 6 months to utilize the property. If utilized, the market value of the life estate in excess of $6000 will be included in the property reserve.
Determination of Past Value
Property transferred during the 30-month look-back period for LTC must be evaluated for a potential Period of Ineligibility (POI). Follow the steps below to determine the past value of a life estate.
- Determine the market value (assessed value or appraised value) at the time of the transfer.
- Deduct all encumbrances of record at the time of the transfer to determine the net market value of the property.
- Use the Life Estate Value Table to determine the life estate value factor based on the life tenant’s age at the time of the transfer.
- Multiply the life estate factor by the net market value (Step 2) to determine the value of the life estate.
- Subtract the value of the life estate from the net market value found in Step 2.
- Use the resulting amount to determine POI, if necessary.
Mr. Johnson, age 83, transferred his irrevocable nonexempt, second home (ORP) to his son one year ago, but retained a life estate interest. He is now applying for MC. To compute the value of the property transferred and determine the POI, the value of the life estate interest at the time the property was transferred must be determined. The period of ineligibility can then be determined.
The assessed value of the ORP at the time of the transfer was $19,000. Encumbrances of record at the time of the transfer totaled $4000. Therefore, the net market value was $15,000.
The life estate value factor for an 82-year-old is .40295. The value of Mr. Johnson’s life estate interest at the time of the transfer was $6,044.25 ($15,000 x .40295). The value of the life estate is subtracted from the net market value of the ORP transferred without receipt of adequate consideration ($15,000 - $6,044.25 = $8,955.75). The remaining amount, $8,955.75, is used to determine the period of ineligibility.
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