New Michigan Law Avoids “Uncapping” in Family Transfers

Two years ago in March, I reported here on the Klooster v City of Charlevoix case, which addressed the issue of "uncapping" in a real estate transaction between family members. 1994 amendments to the Michigan Real Property Tax, placed a "cap" on the amount a taxing authority could increase the value of real property under consistent ownership. Under the 1994 rules, a taxing authority may raise the taxable value of real property no more than the lesser of 5% and a CPI calculation.

The principal change is new sub-paragraph (s) which provides a new exception for residential real property transferred to a relative who is related by blood or affinity to the first degree (i.e., children)

However, when there is a "transfer" of ownership in real property, the taxing authority may "uncap" the valuation for the "tax day" immediately following the transfer, raising the taxable value as high as the state determined State Equalized Value (SEV) of the property. This can be a considerable increase in taxes for the new owner.

The Klooster Court interpreted the transfer provisions of the statute, holding that where a father added his son as a "Joint Tenant with rights of Survivorship" while the father was alive and while the father remained a joint owner, there was no transfer. That seems to track with the plain language of the exceptions to "transfer" in the statute. In what was a surprise to many of us (most certainly to the City of Charlevoix and municipal entities around the state), the further held the death of the original joint owner (the father) was not a transfer. This lead to a new (for some of us at least) avenue of planning and caused us to re-think our planning strategies see, Some Family Cottage Strategies in Light of the Klooster Case; my follow up to the Klooster article.

Perhaps in response to Klooster and the uncertainty that surrounded its reasoning, and certainly to protect family interests in family-owned residential real estate, the Michigan Legislature passed, and Governor Snyder signed into law in December of 2012, a newer, clearer exception to the "transfer" for family-owned real property. House Enrolled Bill No. 4753, signed into law on December 27, 2012, amends Section 27a(7) of the Michigan General Property Tax Act (MCL 211.27a) to provide several new exceptions. Most are clarifications of existing exceptions.

The principal change is new sub-paragraph (s) which provides a new exception for residential real property transferred to a relative who is related by blood or affinity to the first degree (i.e., children). Notably, the exception does not limit itself to "cottage" or "vacation" property. Nor are the number of instances or parcels limited. Indeed, the Senate Fiscal Agency's "Bill Analysis" acknowledges that the exception is not limited to "homesteads," nor is there any limit to the number of times a single parcel could be transferred to first-degree relatives.

Caution!

It is important to note that this new transfer exception does not become effective until December 31, 2013! Thus, for owners dying before December 31, it may still be wise to consider the strategies discussed at the link above, at least temporarily. Still, this is a welcome change for owners of family real property, particularly in those instances of homesteads and family cottages that may have remained in the family for multiple generations. Like all legal changes, this development will require planners to consider whether old strategies remain viable and what, if any, new strategies may come into play.

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Congress Finally Gives us Answers on Estate and Gift Tax

To quote former President Gerald Ford, with respect to the Federal Estate and Gift Tax: "our long, national nightmare is over." Late on January 1, Congress enacted "The American Taxpayer Relief Act of 2012." I won't go into great detail about the act (there is a lot about it we still don't actually know and will have to wait for the analysis of people more capable than I am), but will point out the highlights of the Estate and Gift Tax provisions which are of considerable importance to Estate Planning.

The Act preserves the $5 million per person ($10 million per married couple) "unified" estate and gift tax exemption and indexes it for inflation.

The Act preserves the 2012 levels of a $5 million per person exemption, maintains the "unified"estate and gift structure (meaning the $5 million threshold applied to total transfers, whether by gift during lifetime or inheritance on death), and indexes them for inflation. The Act also makes the concept of "portability," which was added in the 2010 extension for the first time, a permanent part of the tax structure. What "portability" means is that for married couples, the $5 million credit can be allocated or "shared" between them at any time, including after death. This effectively eliminates–in most cases–the need for those "clunky," inconvenient, "AB Trusts" ("his and hers"), and all the allocations and adjustments we were constantly making in those plans. This should have the effect of greatly simplifying the planning process in all but a few instances. The only real, substantive change in the law is a (modest?) increase in the rate (which will only apply after the $5/10 million credit has been used up).

What does "permanent" mean?

Most importantly, the Act makes the current Estate and Gift tax laws permanent. One of my colleagues asked me, what does "permanent" mean? I think that is a fair question. In 2000, the so-called "Bush Tax Cuts" were implemented and because of internal machinations in Congress, were built around a 10-year "sunset." This meant that unless Congress acted during the 10-year period, the laws would automatically expire on December 31, 2010. In a demonstration of the "brinksmanship" for which our modern Congress has become so famous for, in late December of 2010, they "extended" the law for 2 more years.

For the first time in the past 12 years, planners will be able to tell clients what to expect in this area. As we move forward in 2013, I expect that many of our clients will be looking at much simpler estate planning devices.  I think that is a plus

But when they extended the general tax laws, they made unanticipated major changes to the Federal Estate and Gift tax. This was in every way a good change. But it was "temporary," because it was part of an extension, again due to expire recently on December 31, 2012. The new law does not have a "sunset" provision. This means that until Congress acts by legislation to change it, it is permanent. That is as "permanent" as any law gets these days.

My personal view, and what I have been able to glean from reading other sources, suggests that Congress has no appetite to make future major changes to this area, for a number of reasons. So, what we now have is some consistency and something on which we should be able to rely for the foreseeable future.

For the first time in the past 12 years, planners will be able to tell clients what to expect in this area. As we move forward in 2013, I expect that many of our clients will be looking at much simpler estate planning devices. I think that is a plus.

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