Opinion: MassHealth Change Negatively Impacts “Life Estate” Deeds

A letter to the editor from Patrick Curley:

The Commonwealth’s Medicaid agency, known as MassHealth, recently issued an “Eligibility Operations Memo” that dramatically and negatively impacts seniors who may own real estate through life estate deeds.

For many decades, signing a life estate deed has been a common practice for seniors. There are three general benefits to life estates.

First, the life tenant (usually the parent) may live in their home for the rest of their life. The remaindermen (usually the children) named on the deed have no rights to occupy the home until the life tenant dies.

Second, after the five-year MassHealth “look back” period has passed, the value of the property may be shielded in the event that the parent applies for MassHealth benefits. During the five-year “look back” period, however, MassHealth will treat a life estate deed as a disqualifying transfer.

Third, upon a life tenant’s death, the home passes outside probate to the remaindermen
named on the deed.

It is not uncommon for the life tenant and remaindermen to sell the home before the life tenant dies for any number of personal reasons. In that event, previously MassHealth relied upon carefully considered IRS tables to value the respective shares of the life tenant and remaindermen, which reviewed life expectancies and valuations based on interest rates.

By way of example, for a sale in August 2019, a 79-year-old male life tenant would have been entitled to roughly 17% of the net sale proceeds from his home owned through a life estate deed, with the remaining 83% of the sale proceeds belonging to the remaindermen.

The new Eligibility Operations Memo, however, rejects the IRS tables and values life estates based upon entirely different tables. Those tables, in some cases, nearly triple the ownership interest attributed to a life tenant. That same 79-year-old male noted above would now be entitled to roughly 46% of the net sale proceeds. That dramatically reduces the asset protection value of the life estate deed in the event of a sale.

MassHealth’s new rules add enormous uncertainty to life tenants selling real estate. The rules fail to outline how to value joint life estates as are often held by married couples. In addition, because capital gains taxes are almost always owed upon the sale of real estate and the IRS will continue to use its tables to calculate how that tax is owed, they could cause remainder holders to be forced to pay taxes on a greater share than they actually received. Worse still, there is a risk that MassHealth conceivably may treat the payment of some capital gains taxes as a disqualifying transfer penalty should the life tenant later apply for MassHealth. Additionally, if a remainder owner has a taxable estate, they may face gift tax consequences from the IRS if they follow the MassHealth formula and give the life tenant “too much” from the sale proceeds.

Suffice it to say that the Operations Memo was not well thought out and causes great confusion by deviating from the clear-cut tables that have been used by the IRS. It comes as no surprise that MassHealth issued it in the dead of August when it would receive the least amount of notice and attention.

Because so few attorneys are dedicated to Elder Law, it is likely that seniors and their families will not learn of this important change until they sell their house or quite possibly not until they apply for MassHealth. If, for example, they follow a real estate or tax attorney’s advice and apply IRS regulations, they could find that they have made a gift for MassHealth purposes. If they follow MassHealth regulations, they could find that they, or their children, have underpaid or misfiled their taxes.

Readers who have owned their homes through life estate deeds for many years may think that the government would offer them some kind of “grandfather” protection. Sadly, the Operations Memo applies to all life estate deeds, new and old.

I believe that MassHealth’s Operations Memo does not comply with state and federal law. Thus, there is hope that with legal advocacy – and perhaps Court action – MassHealth may retract its Memo and return to the clarity that the IRS life estate tables provided for so many years.

In the meantime, those with existing life estate deeds, or those thinking about creating one in the future, would be well served discussing these important issues with a qualified elder law attorney who focuses their practice on this complex area of law.

Patrick G. Curley, Esq., Certified Elder Law Attorney