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Effective: December 1, 2006 |
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19.25.15.15ar1 - Life Estates (Archive) |
Archived: March 1, 2008 |
The owner of a property may convey, or transfer, ownership interest in property to one or more people via a life estate.
Determining Life Estate Interest.
Determining Remainder Interest.
A life estate is a legal means of limiting the ownership of the interest of real or personal property to a person’s lifetime. The life estate is established by conveying ownership of the property to one or more persons while still retaining the right to use the property during their lifetime.
The life estate is terminated by the death of the life estate owner unless otherwise specified in the life estate contract. This specified condition is known as a conditional limitation.
Example:
A life estate document may specify that the life estate will terminate at death or when a person leaves the home for six months or more, whichever occurs first.
Although the property owner can designate someone else as the ”r;life estate owner," the majority of property owners will retain a life estate interest for themselves and/or their spouse.
The owner of a life estate retains the right to live in the property until the life estate is terminated.
l The life estate owner is responsible for upkeep and repair of the property, including payment of the mortgage, taxes and insurance.
l The life estate owner may rent the property without consent of the remainderman, and is entitled to all income and profits from property rental.
l The life estate owner can sell the life estate interest without consent of the remainderman if they can find a buyer.
l The life estate interest is considered real property for the life estate owner.
Example:
Alice, age 75, lives in and owns her house. She establishes a life estate on the property naming her daughter, Carol, as the remainderman. The house needs new siding and Alice has decided on vinyl siding. Carol would prefer wood siding.
Action:
Because Alice is the life estate owner, she is responsible for maintenance. She must pay for the new siding and can choose the type of siding without Carol’s consent.
Example:
Shirley is a widow who owns a home. Shirley marries Jeff. The couple decides to sell Jeff's home and live in Shirley's home. Shirley wants to ensure that her children, not Jeff or Jeff's family, inherit her home. Shirley also wants to ensure that Jeff will have a place to live for the rest of his life if Shirley dies before him. Shirley transfers her home to her children reserving a life estate for herself and Jeff.
Action:
Shirley and Jeff each own a life estate interest on the home. They are both life estate owners of the home. Shirley's children own the remainder interest on the home and are the remaindermen.
The life estate contract transfers ownership of the property to a person or people called the remainderman.
The remainderman is the owner of the property but he or she does not have rights to possess the property until the life estate is terminated.
The remainder interest of the property is considered real property for the remainderman.
If the life estate owner lives on the property, exclude the life estate interest for the life estate owner as the person’s homestead.
If the remainderman is applying for health care, the remainderman’s interest in the life estate is counted as an asset because it is real property and not the homestead of the remainderman.
The life estate is unavailable if the life estate owner does not live on the property and one of the following is met:
l The remainderman refuses to sell the property and the life estate owner can’t find anyone willing to purchase the life estate interest only.
l The life estate owner and the remainderman are selling the entire property and are making a good faith, or reasonable, effort to sell it. See Non-Homestead Real Property for more information on reasonable effort to sell.
Example:
Sheldon lives in an LTCF. He owns a life estate valued at $10,000 and has named his daughter Terri the remainderman. Sheldon and Terri put the property up for sale and are making a reasonable effort to sell it.
Action:
Consider Sheldon’s life estate interest to be an unavailable asset until the property is sold.
Count the actual value of all non-excluded, available and saleable life estates.
l When a life estate property is sold, a determination of the life estate owner’s interest of the net proceeds from the sale must be calculated to determine the amount to count toward the life estate owner’s asset total.
n Multiply the net proceeds from the sale of the life estate by the figure on the Life Estate Mortality Table that corresponds to the life estate owner’s age at the time of the sale.
n The result is the amount to count toward the client’s asset total.
If the life estate owner does not live on the property, consider the value of a life estate to be not saleable if the owners of the remainder interest does not intend to purchase the life estate interest from the life estate owner or is not willing to sell the property.
Note: Life estates that are not saleable do not have a current market value. When determining eligibility or completing an asset assessment, use a $0 counted value for life estates determined not saleable.
Example:
Gladys lives in an LTCF. She owns a life estate valued at $12,000. Her son Jim owns the remainder interest. Jim does not wish to buy Gladys’ life estate interest and he does not want to sell the property.
Action:
Consider Gladys’ life estate interest to be not saleable and count $0 toward the asset total.
Determining Life Estate Interest
Follow the steps below to determine the value of the life estate interest:
1. Determine the property’s equity value by subtracting any encumbrances from the fair market value. The equity value used in the calculation is determined by the reason for the calculation of the life estate interest.
a. For current value, use the current equity value.
b. For the value of the life estate when it was created, use the equity value of the property on the creation date.
c. For 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.
If there are joint life estate owners:
l Divide the equity value by the number of owners to determine each owner’s share of the equity.
l If one owner of a life estate held in joint tenancy dies, re-determine the life estate interest for the surviving owner using the full equity value of the property.
2. Consult the Life Estate Mortality Table to find the mortality figure that corresponds to the life estate owner’s age. The age used in the calculation is determined by the reason for the calculation of the life estate interest.
a. For current value, use the current age of the life estate owner.
b. For the value of the life estate when it was created, use the age of the life estate owner on the creation date.
c. For the value of the life estate when it is terminated, use the age of the life estate owner on the termination date.
If there are joint life estate owners, identify the mortality figure that corresponds to each owner’s age.
3. Multiply the property’s equity value by the mortality figure found in Step 2.
If there are joint 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. The total value of the life estate is the sum of each person’s share of the life estate interest.
4. The result is the life estate owner’s life estate interest.
If there are joint 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 $8000 mortgage. Gregory created the life estate when he was 60 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 - $8000 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 60 at the time the life estate was created. The figure is .74491.
3. Multiply the equity value by the mortality figure. $44,000 equity value X .74491 = $32,776.04.
4. $32,776.04 is the value of Gregory’s life estate interest at the time the life estate was created. This is the value that will be used in the transfer calculations.
Example:
Austin (age 70) and Alberta (age 67) are a married couple who together created a life estate for their home 12 years ago. They named their son Axel as the remainderman. Austin and Alberta own the life estate, and their son owns the property as the remainderman. At the time they apply for health care, the home has a market value of $70,000. There are no encumbrances on the property.
Action:
To determine the current value life estate interest for Austin and Alberta:
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.
a. 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. $21,183 is the life estate interest for Austin. $22,784 is the life estate interest for Alberta. The total life estate value is $43,967, the sum of both life estate interests.
There is no need to determine the life estate interest at the time the life estate was created because it was done prior to the lookback period for transfers.
Determining Remainder Interest
Follow the steps below to determine the remainder interest:
1. Complete the steps for determining the life estate interest.
2. Subtract the life estate interest from the property’s equity value.
a. If the life estate is jointly owned, add the life estate interest of all owners together before subtracting the total life estate interest from the property’s equity value.
3. The result is the remainder interest.
a. If there is more than one remainderman, divide the remainder interest by the number of remaindermen to determine each person’s portion.
Note: This is only necessary when one or more remaindermen are applying for health care and the remainder interest must be counted as an asset for the applicant.
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. They are now applying for health care.
Action:
To determine the amount of the transfer that was made when the life estate was created, calculate the remainder interest. The value of the remainder interest is the value of the transferred asset:
1. Determine the life estate interest for all life estate owners. The worker has determined that 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 remainder interest that was transferred to Patrick at the time the life estate was created is $26,033.
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 life estate interest in another person's home.
Evaluating a life estate for a possible transfer by the original owner of the property must be completed when:
l The life estate is established. If the life estate is established prior to application, and the life estate was created during the lookback period, the life estate must be evaluated as a transfer at the time of application.
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 placed her home in life estate two years ago naming her son, Nik, as the remainderman. She applies for health care today.
Action:
Following transfer policy, the life estate must be evaluated as a transfer of assets even though it was established before application.
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:
By creating the life estate, an asset transfer has occurred. The value of the transfer is the value of the remainder interest owned by Marty's son.
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 placed her home in life estate 20 years ago, and named her daughter the remainderman. 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 this transfer will not be evaluated.
A transfer must be evaluated for the date that the life estate contract was terminated with Keesha’s permanent LTC placement. A calculation will need to be completed 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.