PUBLIC ACT 497 NOW EFFECTIVE!

Public Act (PA) 497 was passed and signed by Governor Snyder in December, 2012, and created an exemption from “uncapping” of property values for property tax purposes on transfers of ownership of residential property (including vacation property) if the transferee (person receiving ownership) is related to the transferor (person transferring ownership) by blood or affinity to the first degree, and the use of the property does not change.  The law applies to transfers after December 31, 2013.

 This law was designed to help family vacation property owners who have a large differential between their property’s “taxable value” and the property’s “State Equalized Value.”  Both of these values can be found on your property tax bill and annual property assessment.  Without PA 497, when property is transferred to another owner, the taxable value on the property “uncaps” and the current State Equalized Value becomes the new taxable value. The intended result of PA 497 was to assist families in keeping property in the family by avoiding the large increase in property taxes that would otherwise result when ownership is passed on to the next generation of family members.   To determine your uncapped property taxes go to the Property Tax Estimator on our website.  You will need the two values listed on your tax bill or assessment.

 Ever since the law was signed in December, 2012, there has been much discussion and speculation about how this briefly worded law will be interpreted.  On December 16, 2013, the Michigan State Tax Commission issued Bulletin 23 showing its intent to interpret the law very narrowly.  According to the Tax Commission, this means that PA 497 will apply only where the transferor and the transferee are persons, not entities.  They conclude that the exemption for uncapping does not apply (emphasis in original) to transfers by a trust, to distributions from probate (i.e., an inheritance under a last will and testament), or to transfers of ownership in limited liability companies, partnerships or corporations.

 The Tax Commission stated that in order to take full advantage of the new law, the transfer of ownership must occur while the owner is alive, and must be made to a person related to the first degree by blood or affinity – a spouse, father or mother, father or mother of the spouse, son or daughter, adopted son or daughter, son or daughter of the spouse, or siblings.  This means that if the property is transferred to more than one person, the new owners will be “tenants in common” with no protection from partition, and will have no structure, direction or guidance in managing the property.  My book “Saving the Family Cottage, A Guide to Succession Planning” (Nolo Press, 4th ed., 2013) describes the common problems that arise when property is owned as tenants in common.

 Please understand that the Tax Commission does not have the final say in the legal interpretation of the property tax laws in Michigan.  The Tax Commission was set up to give direction and guidance to municipal tax assessors in their application of the property tax laws.  Thus, while the opinion of the Tax Commission is important, the final say on how to interpret tax statutes lies in our court system.  Procedurally, if a property owner feels that the property tax laws have been applied incorrectly, the remedy is to appeal to the local Board of Review, then the Michigan Tax Tribunal (an administrative agency within the Michigan Department of Treasury) and then to the Court of Appeals in the area where the property is located.  It may be several years before we have any further interpretation of these laws.

 Property taxes are only one consideration in passing on family vacation property to the next generation.  If there is no planning done on how the property will be handled when mom and dad are gone, there is a high risk for dispute and damaged family relationships.  It is important that the tax “tail” not wag the “dog” in these matters.  Letting property tax matters take control over all other considerations can result in even more serious conflicts than not considering it at all.

 So what is a family to do?  Given the Tax Commission’s literal interpretation of the law and the opposition that has always existed to an exemption as created by PA 497, for some families where property taxes will determine whether a next generation can afford to keep a family vacation property, now is the time to act.  However, I strongly urge those families to transfer the property along with a structured succession plan.  Property can be transferred to children, while also putting in place a plan that will provide structure, direction and guidance in managing the property.

 If your family vacation property is currently titled in the name of an estate planning trust, steps can be taken to remove the property from the trust and retitle it in individual names before taking the next step of transferring the property to children.  If the family vacation property is currently titled in the name of a limited liability company, PA 497 does not apply to you.  Also, there is no guarantee that property can be transferred out of a limited liability company without uncapping the property for property tax purposes.  While it would seem that the same rationale used in transferring the property into an LLC without uncapping (by keeping ownership of the LLC identical to the previous ownership) could be used in transferring property out of an LLC, it is likely that will not be the case.  There is case law where property transferred multiple times in and out of an LLC for refinancing purposes resulted in uncapping.  For owners where uncapping is a primary concern and the property is already owned by an LLC, I would not recommend doing anything further with your property ownership.  Rest assured that the planning you put into place with your current LLC will continue to work as originally planned.

 I am currently working with the State Bar of Michigan, which is supporting a proposed amendment to PA 497 to more clearly define the transfers covered by PA 497, including transfers of ownership in LLCs.  A proposal has been sent to the State Representative who drafted PA 497.  However, initial reaction to a proposed amendment to PA 497 has been met with resistance from various political groups.  This same resistance is likely to seek a repeal of PA 497.

 If property taxes are the primary concern in being able to keep your family vacation property in the family, now is the time to take advantage of PA 497.  Again, I would urge you to do this with careful planning for the next generation.  I would be delighted to discuss your individual situation and planning options available to you.  Please contact our office.  There is no better time than now to put a cottage succession plan in place for your family vacation property.

Comments

  1. Outstanding commentary on the current issues related to the Family Cottage and trying to pass the property to the Children and avoid Uncapping, while maintaining some liability protection if the cottage is to be used as a vacation rental. I just wanted to note that I believe your comments are ‘right on’ and very helpful.

  2. Ed Fulton says:

    This transfer of ownership topic is raising another tax question to my mind: Capital Gains Tax. My father owns a 50% interest in a lake front property in Lake County, Michigan. His five cousins own the remaining 50% interest. They are dividing the property into two parcels so that my father will own one of these parcels and his cousins will own the other. Could there be any capital gains liability from such a land division?

    After this land division, my father intends to give me his parcel. Could there be any capital gains liability for my father as a result of this gift?

    • There may be a capital gain on the exchange of parcels between your father and his cousins. Capital gains are measured by the difference between the value of the property interest your father is trading, and his “basis” in the property. The determination of “basis” may be a little complicated, and I strongly recommend that your father consult with an income tax professional before he completes the swap in order to determine his tax liability if he completes the swap.

      There are no capital gain taxes on gifts. However, there may be gift taxes on the gift to you if the value of the interest you receive is more than $14,000 (which may be doubled to $28,000 if your father is married at the time of the gift). The gift tax is assessed on the donor, so your father would be responsible for payment of the gift tax. In addition to the annual gift tax exclusion amount, your father also has a lifetime $5 million exclusion from gift taxes which is combined with his estate tax exemption amount. Again, I recommend that your father consult with a tax professional before making the gift to get specific information on any tax liability created by these transfers of property.

  3. Robert Stoeckley says:

    I greatly appreciate your efforts on this. Please keep us informed as to any progress toward restoring what was probably the original intent of the legislation. My wife inherited property from her late father’s trust, and we will not be able to afford the uncapped taxes, so we are holding off on transferring the property from the trust (she and her sister are co-successor trustees) in hopes of a reversal of Bulletin 23. Is there a limit as to how long they can continue the trust? Perhaps they can just leave the property in the trust until some distant time.

    • Your question raises an issue that frequently arises when property is owned by a trust. Setting aside Bulletin 23 for a moment, the current uncapping law states that property value uncaps whenever there is a “transfer of ownership”. Many people believe that when title to property is held by a trust, there is no uncapping until the property is transferred out of the trust. Unfortunately, that is not the case. The law provides that when property is owned by a trust, the property value uncaps whenever there is a change in beneficiaries of the trust. For most families, Mom and Dad are the initial beneficiaries of their trust while either one is alive. When the second parent dies, the children are typically named the successor beneficiaries. Thus, the property value uncaps on the death of the second parent to die, even though title to and ownership of the property remains in the parent’s trust.

      I haven’t seen your parent’s trust and don’t know anything more about your specific situation, but you should know that the property value uncaps whenever there is a change in the beneficiaries of the trust.

      Turning now to Bulletin 23 and how long property may be held in a trust, there is an ancient rule of law that says that property may be held in a trust for a limited amount of time. The limit is measured by the lives of those people that are alive at the time the trust is created, but for most people, the limit is generally said to be about 90 years. At the end of that time, the trust must terminate, so the property would have to be distributed out of the trust by that time.

      In terms of changes to Bulletin 23, there is some reason to be optimistic that changes will be forthcoming in teh near future, perhaps as soon as this calendar year. I will continue to post updates on the website whenever a change is made.

  4. Tim Randall says:

    Thanks for all the great insight!
    If a property was put into a LLC, some years ago, to delay uncapping, can the LLC be dissolved back to the original owners and then passed down without uncapping?

    • What a great question. There currently is no law to answer it, and in asking various township tax assessors, I’m getting some “yes” and some “no” answers. Under Michigan’s current property tax system, each Township is left to determine the answer to this since there is no law written anywhere to deal with this question. If you want to deal with this issue now, the best approach is to talk with the tax assessor for the township in which your property is located and ask him/her.

      There is a proposal in the Michigan legislature that would allow LLC owners to pass their ownership to their children without uncapping, so removing the property from the LLC would not be necessary. I am working with the sponsor of the original legislation that created the exemption from uncappging when real estate is passed from parent to child to get an amendment to the law that would allow ownership in LLC’s, partnerships and corporations to be passed from parent to child without uncapping. It is difficult to know when or even if such additional legislation will be passed.

  5. Tim Randall says:

    Thank you very much for you prompt reply. Do you see any issues in keeping the property in the LLC until this law becomes more settled? What would happen should one of the owners of the LLC should die, but still more than 50% are alive?

    • I really don’t see any downside to keeping property in the LLC entity until more clarity on uncapping is forthcoming. In fact, some assessors are taking the position that removing the property from the LLC is an uncapping transfer in itself. Work is underway to change this result, but in the meantime, I would recommend leaving the property in the LLC.

      The current uncapping rules for LLC property is that there is no uncapping of the property value until MORE THAN 50% of the ownership of the LLC is transferred, at which point the entire cap is removed. Thus, if one owner dies while owning 50% or less of the LLC, there is no uncapping. However, as soon as any ownership is transferred that puts to the total transferred ownership over 50% on a cumulative basis since the last uncapping event (or since Januaary 1, 1995 whichever is more recent), the cap comes off and the property taxes will go up in the following calendar year.

  6. Scott Purtill says:

    Is there any issue doing simultaneous closings to have uncle sell property to father and the daughter buy from father?

    • I”m not sure that I have all the facts here, but if your concern is how to get title to property from uncle to daughter without uncapping the value and increasing the property taxes, it is possible to accomplish this. The current uncapping laws on Michigan property allow siblings to transfer property without uncapping, and also allow parents to transfer property to their children without uncapping. So, assuming uncle is father’s brother, and assuming that father is daughter’s parent, the sequence would be for uncle to transfer the property to father, and separately, for father to transfer it to daughter. Simulataneous closings on these transfers are okay, so long as the deeds are recorded in the proper sequence–uncle to father first, and then father to daughter. I typically recommend that the closings be held at least one day apart and that the deeds be recorded separately and in sequence in order to eliminate any question about the which transfer occurred first. However, these transfers may be closed simultaneously so long as the deeds are recorded in the correct order.

  7. Peter Wendling says:

    What about ladybird deeds? The tax commission first said they are fine and no uncapping in the December guidelines, then in April the example goes away.

    • Peter,
      Good question. I have asked the State Tax Commission staff about this, and they will not give a reason why the example was deleted from the April Guidelines. One could assume that the Commission, or at least the staff of the Commission, believes Lady Bird deeds WILL uncap at the death of the grantor, but they clearly have not stated that in the Guidelines. There is pending legislation before the Senate Finance Committee which, if approved and signed into law, will permit parents to leave real property to their children in trusts or wills, or by intestate succession. I would hope that such legislation will eliminate any question about uncapping in a Lady Bird deed, and that no uncapping would result. But the Commission works in mysterious ways, and if they can find a way to avoid exemptions from uncapping, they appear to be doing so.

      Every local tax assessor with whom I have spoken is relying on the December Guidelines and advising that Lady Bird deeds will not uncap on either event—execution of the deed or death of grantor. Take that for what it’s worth.

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