Anglo-American common law has long recognized the concept of a life estate. The "life tenant" is permitted to use the property (usually, but not always, real estate) for his or her life, but on the death of the life tenant the property immediately and automatically vests in the "remainder" beneficiary. A grandmother, say, might leave the family home to her son for life, but have it pass to a granddaughter on the son’s death. The life tenant (the son) has the right to use the property—even to rent it out—but has an obligation to pay the taxes and upkeep for his life.

The owner of a piece of property, similarly, might sell or give the property to another person but retain a life estate for himself or herself. That means that at the instant of death the life tenant’s interest ceases, and there is nothing to transfer through the probate process or subject to the claims of the original owner’s creditors. There are problems with life estates (notably, the original owner no longer has the power to decide who will ultimately receive the property), but they remain a popular choice for estate planning—particularly for relatively modest estates.

The deed with a retained life estate has become a popular choice for Medicaid planning. If the owner of a property sells the remainder interest to his or her children and continues to live in the home, Medicaid eligibility can be obtained as soon as the proceeds from the sale (together with any other assets) are spent down. If the owner gives the property away there may be a waiting period (under new rules, probably five years), but eligibility may be immediate after that, and the home can stay in the family.

Not so in Iowa and Oregon. The state legislatures in those two states (and a handful of others) have passed laws permitting the state Medicaid agency to pursue the value of the life estate held by a Medicaid beneficiary after death. Although real estate and elder law attorneys have long been skeptical about the state’s ability to make such a change in property law, two recent cases make clear that the change is permissible. In Estate of Serovy (Iowa Supreme Court, March 24, 2006) and State of Oregon v. Willingham (Oregon Court of Appeals, May 31, 2006), two different state courts have come to the same conclusion: the state can, with appropriate statutes, force a calculation of the value of the life estate in the moment before the owner’s death and demand payment from the remainder interest holder—or sell the property to recover its claim.

Neither case makes clear how to value the interest subject to the state’s Medicaid reimbursement claim. Presumably, the state can look to actuarial tables setting the life expectancy for people at different ages and calculate the percentage of the property subject to its claim.

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