A life estate grants someone (the life tenant) the right to use a property for life, with a remainderman inheriting it automatically at death. Life estate deeds are commonly used in the US for probate avoidance and, in some states, Medicaid planning, because the remainder passes outside probate.
How does the IRS value a life estate?
The IRS uses actuarial factors from Table S based on the life tenant's age and the Section 7520 interest rate (published monthly, equal to 120% of the federal mid-term rate). Multiplying the property value by these factors splits it between the life estate and the remainder for gift, estate and income tax purposes.
Why does a life estate matter for Medicaid?
Transferring a remainder interest while keeping a life estate can be part of Medicaid planning, though it is subject to the five-year look-back period. The retained life estate also generally preserves a stepped-up basis for the remainderman, unlike an outright gift of the property.
What is a remainder interest worth?
The remainder interest is the present value of receiving the property after the life estate ends. It equals the property value discounted over the life tenant's expected remaining life at the Section 7520 rate — a younger life tenant means a longer wait and a smaller remainder value today.