Life Estates

A life estate An interest in real property held only for the duration of a specified person’s life (usually for the life of the person or people who have the life estate interest). A life estate is a form of legal ownership that is usually created through a deed, will, or by operation of law. is an interest in real property that entitles the life estate owner (sometimes referred to as the life tenant) to the right to occupy, possess or otherwise use the property for the lifetime of one or more individuals (usually the lifetime of the person or persons who hold the life estate interest).  

A life estate owner The person with an interest in real property subject to the duration of a specified person's life. Unless the instrument establishing the life estate places restrictions on the rights of the life estate owner(s), the life estate owner has the right to possess, use and obtain profits from the property and to sell the life estate interest. The life estate owner cannot take any action concerning the interest of the remainderman. A life estate owner is also referred to as "life tenant" or "tenant for life." has the right to possess and use the property for the duration of the life estate. A remainderman The person or people entitled to the remainder interest of an estate after the termination of a life estate. has an ownership interest in the real property, but has no right to possess or use it until the life estate terminates.  

A life estate is generally created:

l  when a person with property rights in real property transfers a remainder interest A property right that passes to a specified person or people upon the termination of a life estate interest. Unless restricted by the instrument establishing the remainder interest, the remainderman is generally free to sell his or her interest in the physical property even before the life estate interest expires. In such cases, the market value of the remainder interest is likely to be reduced because such sale is subject to the life estate interest. in the property to another and retains a life estate interest in the property; or

l  when a person purchases a life estate interest in someone else’s property; or  

l  by operation of probate law.    

A life estate is generally terminated when the life estate owner, or another specified person, dies. Some life estates specify one or more other conditions, known as conditional limitations, which cause the life estate to be terminated, such as when the life estate owner leaves the home for six months or more. A life estate document specifies when the life estate terminates.

Rights and Responsibilities of the Life Estate Owner.

Remainderman.

Rights of the Remainderman.

Life Estate Evaluation.

Determining the Value of a Life Estate Interest.

Determining the Value of a Remainder Interest.

When the Remainder Interest Is Available to the Life Estate Owner.

Life Estate Transfers.

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Rights and Responsibilities of the Life Estate Owner

The life estate owner:

l  has the right to occupy, possess, or otherwise use the property until the life estate is terminated.

l  has the right to sell the life estate interest if not prohibited in the legal instrument establishing the life estate interest.

l  is entitled to all income and profits from the life estate interest, such as rent on the property.

Example:

Lupine owns a farm. He retained a life estate interest in the property and transferred a remainder interest in the property to his son. Lupine is the life estate owner and his son is the remainderman. Fifty acres of the property are rented.    

Action:

As the life estate owner for the property, Lupine is entitled to the rental income. The person renting the 50 acres is entitled to the profit from the crops. His son (the remainderman) is not entitled to the rental income.

l  cannot sell the property or the remainder interest.

l  is responsible for paying the mortgage, taxes and insurance on the property.

l  is responsible for the upkeep and repair of the property.

Example:

Alice, age 75, has a life estate in her home. Her daughter, Carol, is the remainderman. The furnace in the house is not working and cannot be repaired.

Action:

Alice is responsible for maintenance because she is the life estate owner. She must pay for the new furnace and can choose the type of furnace without Carol’s consent.

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Remainderman

The remainderman has an ownership interest in the property subject to the life estate interest. The remainderman does not have the right to occupy, possess or otherwise use the property until the life estate is terminated.

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Rights of the Remainderman

The remainderman can:

l  sell his or her interest in the property even before the life estate interest terminates if allowed by the legal instrument establishing the life estate interest. In such cases, the life estate owner retains the life estate interest until the life estate terminates.

l  sell the property with the permission of the life estate owner.   

Example:  

Michael is applying for health care coverage. His father, Jim, recently died. According to Jim’s will, his second wife and widow, Pam, received a life estate in the couple’s homestead. The will names Michael as the remainderman of the property. Michael does not have the right to possess the property until Pam dies.  

Action:

Treat Michael’s remainder interest as non-homestead real property.

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Life Estate Evaluation

Treat life estates as real property. Do not count the value of a life estate interest when the life estate interest is:

l  homestead real property.

l  unavailable. The value of a life estate interest is considered unavailable unless:

n  the remainderman purchases the life estate interest from the life estate owner.

n  the life estate owner and the remainderman sell both the life estate and the remainder interest in the property. Do not count the value of the life estate interest until the proceeds from the sale of the property are actually received.

Note:  Do not require the remainderman to sign a statement or otherwise verify intent to purchase the life estate interest or sell the property.

Count the value of the life estate interest:

l  As a countable asset in an asset assessment unless it is an excluded asset such as a homestead or an income producing self-support asset.

l  When the property is sold.

l  When the remainderman or someone else purchases the life estate interest.

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Determining the Value of a Life Estate Interest

Exclude the life estate interest as the person’s homestead if the life estate owner lives on the property.

Follow the steps below to determine the value of a life estate interest in non-homestead real property:

1. Determine the property’s equity The fair market value of real or personal property minus any encumbrances. by subtracting any encumbrances A legal claim against real or personal property payable when the property is sold. attached to the life estate interest from the fair market value The price an item would sell for on the open market in a local geographic area. of the property as of the date for which the value is being computed.

a. To determine the value of the life estate when it was created, use the equity value of the property on the date the life estate interest was established. Use the value of the property on the date the warranty deed, quit claim deed or contract was signed.

b. To determine the value of the life estate when it is terminated, use the equity value of the property on the termination date.

If the reason for the termination was:

m the death of the life estate owner, use the value on the date of death.

m due to a specific condition in the life estate contract, use the value on the date the specific condition occurred.

c. To determine the value of the life estate when the life estate interest or the property is sold, use the equity value of the property on the date of sale.

If there are two or more life estate owners:

l  Divide the equity value of the property by the number of owners to determine each owner’s share of the equity, unless the client provides evidence that shows the equity interests of the owners is not equal.

l  If one owner of a life estate held in joint tenancy Each owner has one and the same interest and must obtain the permission of the other joint owners in order to sell their share. dies, re-determine the life estate interest for the surviving owner(s) using the full equity value of the property.

l  If one owner of a life estate held in tenancy-in-common A form of property ownership in which each owner of real property has an undivided interest in the property and is able to sell their share of the property without obtaining the permission of the other owners. dies, the other life estate owners' interest does not change. There are no rights of survivorship in a tenancy-in-common, so when a person with a life estate interest held in the form of a tenancy-in-common dies, that person's interest in the real property may go to the person's heirs.

2. Consult the Life Estate Mortality Table to find the mortality figure that corresponds to the life estate owner’s age. Determine the age to use in the calculation by the reason for calculating the life estate interest.

a. To determine the value of the life estate when it was created, use the age of the life estate owner on the date the life estate interest was established.

b. To determine the value of the life estate when it is terminated, use the age of the life estate owner on the termination date.

c. To determine the value of the life estate when it is sold, use the age of the owner on the date of sale.

Identify the mortality figure that corresponds to each owner’s age if there are two or more life estate owners.

3. Multiply the property’s equity value as determined in Step 1 by the client's mortality figure as determined in Step 2.

If there are two or more life estate owners, multiply each owner’s share of the equity value by the mortality figure for that owner to compute each person’s share of the life estate interest unless the client provides evidence that shows the equity interests of the owners is not equal.

4. The result is the life estate owner’s life estate interest.

If there are two or more life estate owners, each life estate owner will have a different amount of life estate interest due to differences in the owners’ ages.

Example:

Gregory, age 64, applies for health care. He owns a life estate interest in real property. The current estimated market value of the property is $60,000. There is an $8,000 mortgage. Gregory created the life estate when he was 62 years old. At that time the estimated market value of the property was $54,000, and the mortgage balance was $10,000.

Action:

To determine the current life estate interest:

1. Determine the current equity value of the property. $60,000 EMV - $8,000 encumbrance = $52,000 equity value.

2. Find the corresponding Life Estate Mortality figure for Gregory’s current age of 64. The figure is .69352.

3. Multiply the current equity value by the mortality figure. $52,000 equity value X .69352 = $36,063.04.

4. $36,063.04 is the current value of Gregory’s life estate interest.

To determine the value of life estate interest at the time the life estate was created:

1. Determine the equity value of the property at the time the life estate was created. $54,000 EMV - $10,000 encumbrance = $44,000 equity value.

2. Find the corresponding Life Estate Mortality figure for Gregory’s age of 62 at the time the life estate was created. The figure is .72002.

3. Multiply the equity value by the mortality figure. $44,000 equity value X .72002 = $31,680.88. This is the value of the life estate at the time it was created.

Example:

Austin (age 70) and Alberta (age 67) are a married couple who both receive MA and who together retained a life estate for their home 12 years ago. They named their son Axel as the remainderman. Austin and Alberta are the life tenants, and their son owns the property as the remainderman. They sell the property for $70,000.

Action:

To determine the value of the life estate interest for Austin and Alberta on the date of sale:

1. Determine the equity value of the property for each life estate owner. The market value of $70,000 is the equity value of the property because there are no encumbrances.

Divide the equity by the number of life estate owners. $70,000 divided by 2 = $35,000 equity value for Austin and $35,000 equity value for Alberta.

2. Find the corresponding Life Estate Mortality figure for both life estate owners using their current ages of 70 and 67. The figures are .60522 for Austin and .65098 for Alberta.

3. Multiply the current equity value for each life estate owner by the mortality figure. For Albert, $35,000 X .60522 = $21,183. For Alberta, $35,000 X .65098 = $22,784.

4. The life estate interest for Austin is $21,183. The life estate interest for Alberta is $22,784. The total life estate value is $43,967, the sum of both life estate interests. Their son retains the remaining $26,033 of the profit from the sale. Austin and Alberta must reduce their excess assets to remain eligible for MA.

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Determining the Value of a Remainder Interest

Follow the steps below to determine the remainder interest when the client is a remainderman:

1. Complete the steps for determining the life estate interest.

2. Subtract the life estate interest from the property’s equity value.

Add the life estate interest of all owners together before subtracting the total life estate interest from the property’s equity value if there are two or more life estate owners.

3. The result is the remainder interest.

Divide the remainder interest by the number of remaindermen to determine each person’s portion if there is more than one remainderman.

Example:

Raymond and Margaret have named their son, Patrick, the remainderman of the life estate they created last month. The property has a market value of $70,000. Patrick is now applying for health care. He does not live on the property.

Action:

Determine the remainder interest. Treat the value of the remainder interest as non-homestead real property for Patrick:

1. Determine the life estate interest for all life estate owners (Raymond and Margaret). Raymond’s life estate interest = $21,183 and Margaret’s life estate interest = $22,784.

2. Subtract the life estate interest from the equity value of the property. First, add Margaret and Raymond’s life estate interests together. $21,183 + $22,784 = $43,967. Then, subtract from the equity value. $70,000 - $43,967 = $26,033.

3. The value of the remainder interest is $26,033.

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When the Remainder Interest Is Available to the Life Estate Owner

The full value of the property is available to the client when the client is the life estate owner and the remainder interest is available to him or her. As a result, the client owns both the life estate and remainder interests. The life estate and remainder interests merge into full ownership of the property. Evaluate the property as non-life estate real property.

Example:

Brenda transferred the remainder interest in her home into a revocable trust and retained a life estate interest in the home. The equity value of the property is $180,000. The remainder interest held in trust is available to Brenda because the trust is revocable. Brenda owns both the life estate and the remainder interest.

Action:

Evaluate the equity value of the property as a real property asset.

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Life Estate Transfers

There are several instances when a life estate transfer of assets must be considered. See Transfers for more information on transfer policy.

Note:  See Purchases as Transfers for more information when a person purchases a life estate interest in another person's home.

Evaluate a life estate for a possible transfer by the original owner of the property when:

l  The life estate is established. Evaluate the life estate as a transfer at the time of a request for MA payment of LTC services if the life estate is established prior to application and the life estate was created during the lookback period.

n  Creating the life estate and granting the remainder interest to someone other than the property owner is a transfer of real property.

n  The value of the transfer is the value of the remainder interest, less any compensation received. See Determining Life Estate Values.

Example:

Holly retained a life estate in her home two years ago and transferred the remainder interest in the property to her son, Nik, as the remainderman. She applies for health care today to help pay for her stay in the nursing home.

Action:

Following transfer policy, evaluate the life estate as a transfer of assets even though it was established before application because it took place within the lookback period.

Example:

Marty lives in his home and receives elderly waiver services. Last July he transferred his home to his son, reserving a life estate for himself. Marty continues to live in his home. Marty did not receive compensation for the remainder interest.

Action:

An asset transfer has occurred by creating the life estate. The value of the transferred remainder interest in the property on the date the remainder interest was transferred to Marty’s son is the value of the uncompensated transfer.

Marty's life estate is an excluded asset because Marty continues to live in the home.

l  The life estate is terminated prior to the death of the life estate owner, such as with a conditional limitation.

The value of this transfer is the value of the life estate interest on the date of the termination, less any compensation received. See Determining Life Estate Values.

Example:

Keesha retained a life estate interest in her home 20 years ago, and transferred the remainder interest in the property to her daughter. The life estate contract had a conditional limitation indicating that if Keesha was permanently placed in a residence outside of the home, the life estate would terminate and the property would be entirely transferred to Keesha’s daughter. Keesha was moved to an LTCF last week and it is a permanent placement. Keesha is now applying for health care.

Action:

There was a transfer of assets, the value of the remainder interest, when Keesha originally set up the life estate 20 years ago. However, it is now past the lookback period for transfers so do not evaluate this transfer.

Evaluate a transfer for the date that the life estate contract was terminated upon Keesha’s permanent LTC placement. Complete the calculation to determine what Keesha’s life estate interest was on the date of the termination. The amount of the life estate interest, less any compensation received for the value of the life estate interest from her daughter, is the amount of the transfer.

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