How Does MassHealth Treat a Sale of a Life Estate in 2014?

by: Brian E. Barreira, Esq.

When a person who has a life estate wants to sell the real estate, the life tenant is legally entitled to a share of the proceeds.The amount of the proceeds that the life tenant is supposed to receive is based on his/her life expectancy and interest rates at the time of sale.

To calculate the value of the life estate, you must first determine what the applicable interest rate is.The interest rate in the month of the sale can be found at http://www.tigertables.com/7520.htm.Once you have this figure, you then go to IRS Book Aleph at http://www.unclefed.com/IRS-Forms/2001/p1457.pdf and look in Table S for the page displaying tables with that interest rate.Looking up the life tenant’s age on that page will get you the breakdown between the life tenant’s percentage interest in the proceeds and the other parties, who on that page are referred to as the “Remainder.”For further explanation, including an example, see MassHealth Eligibility Operations Memo 07-18.

Fortunately, interest rates have increased in the past year, so the process of calculating a life estate value is easier than it has been in the past couple of years.  If the interest rates required to be used are below 2.2, different IRS tables need to be looked at, so in that situation go to http://www.irs.gov/irb/2011-38_IRB/ar06.html.

The life tenant’s share of the proceeds can be eligible for the $250,000 capital gains exclusion under Internal Revenue Code Section 121, but often the persons receiving the remainder do not live there and their proceeds are subject to capital gains taxation without the ability to use that capital gains exclusion.Thus, it can often be advisable to wait until the life tenant’s death before selling real estate, so that the real estate will receive a step-up in basis under Internal Revenue Code Section 2036.

Note that the failure of the life tenant to receive the life tenant’s full share of the sale proceeds is considered a disqualifying transfer of assets under federal Medicaid law and MassHealth regulations, and is subject to the 5-year lookback period.