Nov 17, 2014
The new law now provides that transfers of property into and out of a trust, and via an estate, to these family members, are exempt, in addition to direct transfers.
Beginning December 31, there is yet another beneficial new exception to “uncapping” of transfers of residential real property between certain family members.
In the early 1990’s the Michigan Legislature passed legislation that “capped” the ability of local taxing bodies to increase the “taxable value” of real property to a the lesser of (currently 1.05%) and the rate of inflation for the year. The statute attempted to define “transfer,” and also set out a series of exceptions to “transfers.” Over the ensuing years, other exceptions (notably the Agriculture Exception) were added. But also during this period, some disagreements arose over the meaning and intent of this legislation. The was a particularly important issue for family cottages and recreational properties that were passed down from generation to generation.
In 2011, the Michigan Supreme Court interpreted one of these disagreements, in Klooster v. City of Charlevoix, holding among other things, that if at the time all owners at one generation died, but there was also a surviving joint tenant in the next generation (most commonly one or more children), that the survivorship conveyance of title by operation of law was not a “transfer” as the Legislature intended that term. While I have never been persuaded by the Klooster analysis, who am I to rock the boat – particularly when the decision is basically favorable to the taxpayer? See my blog, “Michigan Supreme Court Buys Us Another Generation on Real Property Taxes,” from March, 2011. The Klooster case gave us some new, limited planning opportunities to preserve the “cap” on family transfer of property. But it wasn’t enough.
It wasn’t enough
In December of 2012, Governor Snyder signed new Legislation aimed at this problem. See, New Michigan Law Avoids “Uncapping” in Family Transfers.” But as we will see, the aim was not as accurate as it might have been. The new legislation (effective December 31, 2013, and on), provided that a direct transfer or conveyance of residential real property to a person related to the transferor “by blood or affinity to the first degree,” where the residential use continued, was not deemed a transfer for “uncapping” purposes. This rather archaic definition seemed reasonably clear to those of us who took the basic Wills and Estates course in law school, but it left way to much uncertainty on the table.
It remained unclear whether these transfers among family members only applied to direct transfers (which would exclude transfers using Trusts, Wills, Estates and Limited Liability Companies). If they did, it was – though a welcome forward step – still not enough.
It was still not enough
My own view was that given the history of interpretation of similar issues by local governments and by the Michigan Department of Treasury, combined with the near-bankrupt condition of our state government, they were going to take a very literal interpretation of the statutory language. In Michigan State Tax Commission Bulletin number 23 dated December 16, 2013, my supposition was confirmed. They would view this as only applying to direct transfers: “Due to the blood relationship clause, the Commission has defined the transferee and transferor as a ‘person.’ Therefore, this exception to uncapping does not apply to a trust, a limited liability company, or a distribution from probate.” Transfers to and from estate planning devices like trusts would not come within the exception. Nor would transfers from an estate, whether by Will or intestate succession. Again, while there were some additional planning opportunities (the “Ladybird” Deed, for example would work), they were still too limited. One of the benefits of estate planning – and particularly the trust as a planning tool – is the ability to maintain some management and control where the beneficiaries are either not sufficiently mature to manage, or where there are multiple beneficiaries. The trust allows ownership and management of assets for the benefit of children, including family legacy real estate (like the family cottage).
Now there is good news
The title of the blog promised good news. And there is. On October 10, the Legislature passed still more legislation, clarifying the “uncapping” rules. Effective December 31, the law now defines those family members within the no uncapping exception more specifically as transfers to “a mother, father, brother, sister, child, adopted child, or grandchild. And even better, the new law now provides that transfers of property into and out of a trust, and via an estate, to these family members, are exempt, in addition to direct transfers.
We now can breathe easier as estate planners and clients, knowing that we can continue to plan for estates using tried and true techniques. Like any new law, there will be a period study and analysis and inevitably, questions about clarity of certain provisions and interpretation.
All in all: I think this is a great development.
Thanks to my Law Partner and fellow Estate Planner, Elian Fichtner for her research and help on this article and topic. See more about both of us on our website link at the top of the Blog