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Effective: March 1, 2008 |
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19.25.15.15ar2 - Life Estates (Archive) |
Archived: May 1, 2009 |
The owner of a property may convey, transfer, or retain an ownership interest in real property via a life estate. The life estate owner has certain rights to possess and use the property. The person to whom the property interest will revert upon the termination of a life estate is called the remainderman.
Definitions
The following definitions apply throughout this section.
A possessory estate 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 can, however, be held for the duration of another person’s life. A life estate is a form of legal ownership that is usually created through a deed, will, or by operation of law.
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 ”r;life tenant” or ”r;tenant for life.”
Life estate interest:
An interest in real property that is limited to the duration of the lifetime of a specified person or people.
Remainderman:
The person or people entitled to the remainder interest of an estate after the termination of a life estate.
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.
Land, all buildings, structures, improvements, or other fixtures on it belonging or pertaining to the land and all mines, minerals, fossils, and trees on or under it. Also included are life estates and mobile homes that are attached to a foundation on land owned by the client.
Determining Life Estate Interest.
Determining Remainder Interest.
A life estate is a legal means of conveying ownership of the interest in real property during a person’s lifetime while retaining certain rights to the property. The life estate is established when a person conveys ownership of the property to one or more people (remaindermen), retaining the right to use the property during the life estate owner’s lifetime.
Generally, the life estate is 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.
A life estate document will specify when the life estate terminates. This may be when the life estate owner or other specified person dies or another condition, such as when the life estate owner leaves the home for six months or more, whichever occurs first.
Example:
Shirley has a life estate interest that will terminate upon her death or six months after she no longer resides in the home, whichever occurs first. Shirley permanently moves into an assisted living facility in January.
Action:
Shirley’s life estate interest terminates six months from the date she moved into the assisted living facility as specified in the life estate document.
The life estate owner:
l Retains the right to live in the property until the life estate is terminated.
l Is responsible for upkeep and repair of the property, including payment of the mortgage, taxes and insurance.
l Is entitled to all income and profits from the property.
l Can sell the life estate interest without consent of the remainderman if they can find a buyer and the instrument establishing the life estate does not place restrictions on the right of the life estate owner to sell the property.
The life estate interest is considered real property for the life estate owner. If the life estate owner lives on the property, exclude the life estate interest for the life estate owner as the person’s homestead.
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 furnace in the house is not working and cannot be repaired.
Action:
Because Alice is the life estate owner, she is responsible for maintenance. She must pay for the new furnace and can choose the type of furnace without Carol’s consent.
Example:
James and Lilly own a home together and establish a life estate transferring ownership to their child.
Action:
James and Lilly each own a life estate interest. Their child holds the remainder interest in the home and is the remainderman.
Example:
Lupine owns a farm and established a life estate transferring ownership to his son. 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 any income from the 50 acres.
The remainderman has an ownership interest in the property but he or she does not have the right to use or possess the property without the permission of the life estate owner until the life estate is terminated. The remainderman can sell the property before the life estate is terminated, but the life estate owner would still retain rights to the use of the property.
The value of the remainder interest of the property is considered real property for the remainderman. If the remainderman is applying for health care, treat the remainderman’s interest as non-homestead real property unless the remainderman lives on the property.
Do not count the value of the life estate interest when the life estate is:
l The life estate owner’s homestead.
l Unavailable. A life estate is unavailable unless either of the following conditions exists:
n The remainderman purchases the life estate interest from the life estate owner.
n The life estate owner and the remainderman are selling the entire property. Do not count the value of the life estate interest until the proceeds from the sale of the property are actually received.
Do not require the remainderman to sign a statement or otherwise verify intent to purchase the life estate interest or sell the property.
Example:
Myrna lives in an LTCF and applies for MA. She established a life estate in her home 10 years ago with her son, Rufus, as the remainderman. Myrna states that neither she nor Rufus wants to sell the property, nor does Rufus wish to purchase the life estate interest.
Action:
Consider the life estate to be an unavailable asset for Myrna. Do not require either Myrna or Rufus to provide a written statement of their intentions.
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 but have not yet found a buyer.
Action:
Consider Sheldon’s life estate interest to be an unavailable asset until the property is sold.
Count the value of the life estate interest:
l As a countable asset in an asset assessment.
l When the property is sold.
l When the remainderman or someone else purchases the life estate interest.
When a life estate property is sold, determine the life estate owner’s share of the net proceeds using the steps below.
Determining Life Estate Interest
Follow the steps below to determine the value of the life estate interest:
1. Determine the property’s equity value for the applicable date below by subtracting any encumbrances from the fair market value as of the date for which the value is being computed.
a. For the value of the life estate when it was created, use the equity value of the property on the creation date. Use the value of the property on the date the warranty deed, quit claim deed or contract was signed.
b. 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.
c. For 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 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 the value of the life estate when it was created, use the age of the life estate owner on the creation date.
b. For the value of the life estate when it is terminated, use the age of the life estate owner on the termination date.
c. For the value of the life estate when the life estate interest or the property is sold, use the age of the owner on the date of sale.
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 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 - $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 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 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. 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.
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. 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.
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. Patrick is now applying for health care. He does not live on the property.
Action:
Determine the remainder interest. The value of the remainder interest is treated as non-homestead real property for Patrick:
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 value of the remainder interest 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 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:
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.