Planning for Life

How Does MassHealth Calculate Life Estates?

Posted by Harry S. Margolis on November 12, 2019

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By Harry S. Margolis

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Life estates have long been a prime long-term care planning device for protecting the home from MassHealth estate recovery because they're quite simple to create. MassHealth recently changed its rules in terms of how it measures life estates when they are created or when property held in a life estate is sold.

What is a Life Estate?

A life estate is a form of joint ownership of real estate where ownership interests are divided by time. The so-called "life tenant" has the right to occupy the property during his or her life and to collect any rental income earned from the property. The life tenant also has the obligation of maintaining the property.

The so-called "remaindermen" automatically take control of the property upon the death of the life tenant or the later to die of life tenants. Even though they have an ownership interest, remainderman have no right to enter the property, reside there or collect rents during the life of the life tenant.

Neither the life tenant nor the remaindermen can sell the property without the cooperation of the other, since both current and future interests must be combined for the sale.

Life estates may be created in a simple deed setting out the various interests of the different parties. Property in a life estate avoids probate and thus also avoids MassHealth estate recovery if the life tenant receives MassHealth benefits. At the same time, the life tenant retains the exclusive right to live in the property -- she cannot be evicted by the remaindermen. In addition, when the remaindermen receive the property the get it with a step-up in basis which usually puts them in a much better tax situation.

We have a more detailed explanations of the advantages and disadvantages of life estates here.

MassHealth Treatment of Creation or Sale of Life Estates

Two issues with respect to life estates are how they are valued when created or sold. When a life estate is created, the owner -- often a parent -- conveys an interest in the property to the remaindermen -- often one or more children. For purposes of MassHealth eligibility, the creation of a life estate is a transfer of property causing a penalty of a period of ineligibility for benefits. For practical purposes, this often means that the grantor is ineligible for nursing home coverage for the subsequent five years, but the period can be shorter based on the value of the remainder interest.

This valuation issue also comes up if the property is sold during the life tenant's life. The question is how much of the proceeds should go to the life tenant and how much to the remaindermen.

To determine these valuations, MassHealth uses tables that determine these interests. 
Those tables base the value of the life and remainder interests based on the age of the life tenant, the interest of the life tenant declining as she gets older. It recently switched from tables provided by the IRS that took into account interest rates to ones provided by the Social Security Administration which stay static no matter current interest rates. (You can read the MassHealth Operations Memo here.)

Under the new table if, for instance, a 70-year-old homeowner creates a life estate for herself and conveying a remainder interest in her home worth $500,000 to her children, she will be deemed to have given them a 39.5% interest, or property with a value of $197,500 while keeping an interest worth $302,500. If the property is sold 10 years later, when the mother is 80 years old, for $600,000, she will receive 44% of this amount, or $264,000 and her children the balance of $336,000.

MassHealth switched to these tables over the IRS ones because they give the life tenant a larger interest, meaning that if the mother in our example were in a nursing home, a larger amount of the proceeds would go to her and have to be spent down on her care, and a smaller amount would be protected for her children. The reason the different tables have this effect is that the IRS tables take into account interest rates. At higher rates, the life interest is more valuable. At current low interest rates, the life interest has less value. This corresponds with the returns one might get on any investment property -- more when interest rates are higher and less when they're lower.

What About Joint Owners?

One question these new policy leaves open is what happens with joint life tenants. When the value of the life estate is based on two life tenants, it should be higher since the life interest is likely to last longer. Since life expectancy tables are based on average lifespans, with some people living fewer and others living more years than the average, and life interests last as long as the longer lived of both life tenants, the odds are stronger that one of two life tenants will live longer than the average than would a single life tenants. While the IRS tables take this into account, the SSA table chosen by MassHealth does not.

Topics: MassHealth planning, MassHealth, life estate

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