Life Estates

3258. TRANSFERS OF ASSETS FOR LESS THAN FAIR MARKET VALUE 3258.9 Treatment of Certain Kinds of Transfers for Less Than Fair Market Value.--Certain financial transactions or purchases may constitute a transfer of assets for less than fair market value. Treat the following as described. A. Life Estates.--Under a life estate, an individual who owns property transfers ownership of that property to another individual while retaining, for the rest of his or her life (or the life of another person), certain rights to that property. Generally, a life estate entitles the owner of the life estate (the grantor) to possess, use, and obtain profits from the property as long as he or she lives. However, actual ownership of the property has passed to another individual. In a transaction involving a life estate, a transfer of assets is involved. This transfer is for less than fair market value whenever the value of the transferred asset is greater than the value of the rights conferred by the life estate. In determining whether a penalty is assessed because of a life estate and how long that penalty should be, compute the value of the asset transferred and the value of the life estate, and calculate the difference between the two. The value of the asset transferred is computed by using the regular Medicaid rules for determining the value of assets. To calculate the value of the life estate, use the life estate table below (from POMS SI 01140.120). Determine the value of the life estate by multiplying the current market value of the property by the life estate factor that corresponds to the grantor''s age. The value of the life estate is then subtracted from the value of the asset transferred to determine the portion of the asset that was transferred for less than fair market value. Or, if only the value of the transferred portion is needed, multiply the current market value of the asset by the remainder factor. EXAMPLE: Mrs. Able, age 65, owns a house with a small farm attached to it, worth $100,000 in total. She deeds the house and farm to her son but retains a life estate in the property. Under the terms of the life estate, Mrs. Able is entitled to live in the house for the rest of her life and to any produce, income, etc. generated by the farm. To determine the value of Mrs. Able''s life estate, the current market value of the property ($100,000) is multiplied by a life estate factor corresponding to Mrs. Able''s age in the table (.67970), resulting in a life estate worth $67,970. The penalty is assessed for the difference between the value of the asset transferred ($100,000) and the value of the life estate ($67,790), or a penalty based on $32,030 of assets transferred for less than fair market value. Some States allow life estates with powers, wherein the owner of the property creates a life estate for himself or herself, retaining the power to sell the property, with a remainder interest to someone else, e.g., a child. Since the life estate holder retains the power to sell the property, its value as a resource is its full equity value. In this situation, the individual has not transferred anything of value, because he or she can terminate the life estate at any time and restore full ownership to himself or herself. Instead, the full value of the asset in question is treated as a countable resource to the individual (assuming, of course, that it is not an otherwise excluded resource). LIFE ESTATE AND REMAINDER INTEREST TABLE