Avoiding Uncapping of Property Taxes on Family Transfers

On December 31, 2012, Governor Snyder signed into law Public Act 497 of 2012 which provides that beginning December 31, 2013, a transfer of residential real property is exempt from uncapping property taxes if the transfer is to family members of “the first degree of kinship” and the use of the residential real property does not change following the transfer. This means that you can transfer your cottage or other residential real estate to your parents, siblings, or children without having to worry about the property taxes being reassessed at fair market value.

This is a huge break for families who have owned cottages and other residential real estate for a long time. Before this legislation, a transfer to family members would uncap the property taxes and the increase in the property taxes often made continued ownership by the family impractical. In recent years, Michigan court cases have held that under certain circumstances, joint ownership between parents and children avoided uncapping. However, owning property jointly with one or more children also has its disadvantages (liability exposure and loss of control, etc.).

The new legislation would allow you to transfer property to children at death without having the property taxes uncap. The legislation does not specify how the property must be transferred. For example, it is not clear that a conveyance of the property to a trust for the benefit of one’s children will avoid uncapping. It may be better to consider a “ladybird” deed that would allow you to keep control of the property during your lifetime and then allow the property to pass to your children if you still own the property at death. This would allow you to keep control of the property because your children would not have a vested interest until your death, and the property would pass free of probate proceedings. The State Tax Commission may provide more guidance on its interpretation of the legislation in the future.