How A Boston Life Estate Works Together With Medicaid Plans
A life estate is a real estate form of ownership often used in connection with long-term care/Medicaid planning. A life estate is not a trust. A life estate is similar to a tenancy in common, in that two or more people have an ownership interest in the property, but the value of the ownership will depend upon the life tenant’s age rather than a fixed percentage of ownership. As the life tenant ages, that individual’s ownership percentage decreases.
Impacts On Property
The way a life estate interest is calculated for IRS and Medicaid purposes are based on the applicable 7520 rates in effect on the date of sale and also either Table S (when measuring a single individual life estate) or Table R (when measuring for a life estate of two people).
For example, an individual aged 80 having only a life estate interest in property which is being sold in January 2025 for a gross value of $500,000 needs to determine what their life estate interest in the property is.
The applicable 7520 rate in effect for January 2025 is 5.2%. When you go to Table S for interest at 5.2% it says that the life estate percentage for an individual aged 80 years old would be 34.378% of the sale proceeds. Therefore, the 80 year old life tenant would be entitled to $171,890 of the $500,000 sale proceeds, leaving the remaindermen with $328,110.
As it relates to the IRS, the $171,890 would be the amount listed on the 1099 for the sale of the house to be reported on your income tax return. For Medicaid, the $171,890 would be the amount the state would value the life estate and if the life tenant did not actually receive these funds and instead allowed the remaindermen to receive all $500,000 of the sale proceeds, the state would deem the $171,890 to be a disqualifying transfer, provided that the sale took place within the five year lookback period of the date of the Medicaid application.
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