Property Tax Relief for Transfers of Family Residences
In December 2012, Governor Snyder signed into law Public Act 497 of 2012 creating an exemption from uncapping property taxes for transfers of residential real estate after December 31, 2013, if the transfer of residential property is to one or more family members related to the transferor by blood or affinity to the first degree and the residential use of the property continues following the transfer.
This legislation provides a significant tax break for families who have owned cottages and other residential real estate for a long time. The assessor is allowed to increase a property tax assessment at the annual inflation rate or 5%, whichever is less. If the property value appreciates at a much higher level than the inflation rate, the assessment may be relatively low when compared to the property value. Before this legislation, a transfer to children, for example, would cause the property taxes to be “uncapped” and reassessed at the property’s then fair market value and could cause a big increase in property taxes. Often, this increase in the property taxes makes retaining the residence impossible for family members.
After the legislation was adopted, there were questions about how the property must be transferred in order to qualify for the exemption. Certainly, a direct deed during the transferor’s lifetime to those qualifying family members would qualify for the exemption. However, there was concern that a transfer into a Trust for the benefit of those same family members might not qualify. On December 16, 2013, the State Tax Commission issued Bulletin 23 of 2013 to provide guidance regarding the new law. The Bulletin clarified the family members who would qualify as related to the transferor by blood or affinity to the first degree. Those relatives include the transferor’s spouse, father or mother, father or mother of the spouse of the transferor, son or daughter, adopted son or daughter, son or daughter of the transferor’s spouse, and siblings.
The Bulletin also clarified the Tax Commission’s interpretation that both the transferee and transferor must be “persons.” The Tax Commission concludes that the exemption from uncapping does not apply to a Trust, a limited liability company, or even to a distribution from a probate estate.
It is possible that the legislature may revise the statute to make it clear that a distribution from the transferor’s own probate estate directly to qualifying relatives or from the transferor’s Trust to those same relatives qualifies for the exemption. Until the legislature takes that action, however, it seems the prudent approach is to do a direct deed to a qualifying relative. This interpretation by the State Tax Commission is unfortunate because many parents, for example, would prefer to leave property in a Trust to be managed for the benefit of their children. However, under this interpretation, if they do so, the property taxes will uncap.
So, what do you do to assure that your property passes to close family members and qualifies for the exemption? One approach is to deed the property to qualifying relatives now. This would involve gift tax issues and some loss of control over the property. If you deed property to yourself and your children as joint owners, your children have a current vested interest in the property. As a result, if you want to sell the property, you would need your children to sign the deed and agree to the transaction. Also, to the extent there is an accident or other liability event with respect to the property, both you and your children are potentially liable as owners.
An attractive alternative is to sign a deed that is commonly referred to as a “ladybird” deed. This deed essentially allows you to keep ownership and control during your lifetime, but then provides that if you still own the property at your death, the property passes directly to the transferees (children, for example) without probate. In other words, the transfer to your children would not be effective until the time of your death and then only if you still own the property. This gives you complete control over the property during your lifetime, it avoids probate on the transfer to your children, and should qualify as a transfer exempt from uncapping property taxes.
This approach works very well if your children or other transferees get along well and will cooperate with each other following your death, since they will own the property together. If there is friction among them or other complications, the ladybird deed may not be a good solution.
Remember, you do not need to worry about this uncapping issue unless: (1) you are leaving residential property to qualifying relatives; (2) those relatives will want to continue owning the property following your death or lifetime transfer; and (3) if there is a big difference between the value at which your property is assessed and the value at which it would be assessed if the property taxes were uncapped. You can determine this difference by looking at your tax bill and comparing the taxable value with the state equalized value. The state equalized value is what the assessor believes is one-half of the true cash value (fair market value) of the property at that time. The taxable value is equal to one-half of the value at which the property is capped. If you purchased your property recently, it is possible that there is little or no difference between the two figures. However, if you purchased the property 30 years ago at a very low value and the property has appreciated substantially over those 30 years, there could be a big difference between the two figures.
If you would like our assistance in reviewing your particular situation with residential real estate and your desires regarding transferring property to family members, please contact us.
