PUBLIC ACT 310 NOW EFFECTIVE!

PUBLIC ACT 310 NOW EFFECTIVE!

Public Act 310 of 2014 (HB 5552) was passed and signed by Governor Snyder in October, 2014. This new law created another exemption from the “uncapping” of property values for property tax purposes on transfers of ownership of residential property, including vacation property. PA 497 of 2012 created an exemption from uncapping if the transfer was made to eligible relatives during the lifetime of the property owner. PA 310 of 2014 extends this exemption and allows property owners to leave residential property to eligible relatives in a trust or will which effectively transfers ownership on the death of the current owner without uncapping the property taxes.

Just as PA 497 of 2012 defined eligible relatives of the property owner who could receive property without “uncapping” the value for property tax purposes, PA 310 of 2014 also restricts the exemption to transfers to certain relatives of the owner. Under the new law, there will be no uncapping of property value if the property is left to the owner’s spouse, or the owner or spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson or granddaughter and the property is not used for any commercial purpose following the transfer.

PA 310 of 2014 also exempts from uncapping a change of beneficiaries of a trust which owns Michigan property, so long as the new beneficiaries are in the same group of relatives listed above, and the property is not used for any commercial purpose after the change of beneficiaries. However, in this part of the new law, upon request by either the Department of Treasury or the local tax assessor, the new beneficiaries must provide proof that they meet these requirements.

By its own terms, PA 310 of 2014 applies ONLY to transfers that take place on or after December 31, 2014. This means that the transfer must be dated on or after that date. It is not clear whether the event triggering the transfer must occur on or after that date. For example, when a property owner dies and leaves property in his/her Last Will and Testament, actual title to the property is transferred as part of the process in Probate Court when the Personal Representative for the Estate deeds the property to the designated beneficiary, not when the decedent died. The unanswered question is whether the date of death of the decedent or the date of the transfer of title by deed must occur on or after December 31, 2014.

There will be more questions that arise to which there are no clear answers, but for now, if a property owner wants to leave residential property to his/her children or grandchildren after the owner dies, it will be possible to do so without uncapping the property value for property tax purposes.

We will continue to monitor this closely and as additional information becomes available, it will be posted on this website. In the meantime, please contact our office if you would like to discuss your individual situation.

Comments

  1. Thank you so much for posting this — and in such clear simple English too.

  2. How does this impact cottages that are held in LLCs? The law seems to talk only about individuals and trusts. If there is a majority LLC member (shareholder) who passes on, will the exemption from “uncapping” of property taxes still hold?
    Thanks.

    • I should have been more clear: the minority members of the LLC are all sons and daughters; the majority member who dies is a parent.

      • As the law reads in December, 2014, the law on uncapping property value when the property is owned by an LLC is different from property owned directly. In the situation where the LLC owns the property, the property value uncaps (and in most cases, the taxes go up) when MORE THAN 50% of the ownership of the LLC is transferred. This is measured on a cumulative basis from the time the LLC acquires ownership of the property. Thus, when a majority owner of an LLC dies and leaves ownership to his/her heirs, the property value will uncap and the taxes will be adjusted in the calendar year following the transfer of ownership. It is the obligation of the LLC to notify the tax assessor in the municipality where the property is located that more than 50% of the ownership of the LLC has been transferred. It does not matter who inherits the ownership of LLC, since the recent amendments allowing parents to transfer property to their children without uncapping do NOT apply to transfers of LLC ownership. The Michigan State Bar is working with the Michigan legislature to try to correct this situation, but any changes in the law allowing LLC interests to pass to children without uncapping will apply only prospectively.

  3. Dear Mr. Frye

    How does the new law affect residential property that is being rented.

    Sincerely,

    Charles P. Reisman

    • By its own terms, PA 310 provides an exemption from uncapping on property ownership transfers among qualified individuals “so long as there is no commercial use of the property”. I know of no statutory definition of “commercial use” in this context, but common sense suggests that if the property is rented out to non-family members on a routine basis, the use is more commercial than residential. However, the line gets very difficult to draw when the renting is for one or two weeks of the entire year, or the renters are family members who are paying an amount to offset the costs of operating the property during their stay.

      The best suggestion I can give you is to contact your local tax assessor, describe what use you want to make of the property and then simply ask whether the assessor believes your proposed activity constitutes “commercial use” that would void the exemption in PA 310.

      I would be very interested in replies that anyone gets to this question.

  4. Robert & Sharon Mueller says:

    As husband and wife, we own vacation hunting cabin on 20 acres in Iosco County with an SEV of only $30,100. We have a will that states our 3 married children are heirs and power of attorney in event of our death. Is it also wise that we have our Attorney add our 3 married children to the actual deed of cabin as co-owners now to assure they are already transferred in per the Public Act 310. Our remaining home, investments, insurance, cash would be disbursed evenly in the will. The intent is that the Iosco cabin and acreage remain in the family, as was wished by my wife’s parents when they added our name to the deed.

    • With the passage of PA 310, there is no reason to add your children to the title to the property, if your goal is to pass it on without increasing property taxes on the death of both spouses. PA 310 provides that a parent may leave the property to his/her children in a will or trust and the value will not “uncap” on the death of either or both spouses. Adding more names to the title has a number of disadvantages to your family, including the fact that as each of your children die, ownership of the property automatically becomes more concentrated in the remaining joint owners, and the heirs of the deceased owner are cut out of any interest in the property. When the last surviving joint owner becomes the sole owner, he/she may do whatever he/she wishes with the property, including selling it and keeping the proceeds, all to the exclusion of the heirs of the deceased joint owners. There are a number of ways to keep the property in the family without using joint ownership, including using a trust or LLC to own it.

  5. Matt Walli says:

    Dear Mr. Frye,

    Thank you for this very useful information. Could you please clarify how PA 310 of 2014 will affect revocable trusts established prior to December 31, 2014? You state that “PA 310 of 2014 applies ONLY to transfers that take place on or after December 31, 2014”. In the case of a revokable trust (with trust creator (settlor) as sole beneficiary during their lifetime and distribution of property to settlor’s children upon their death) would the establishment of the trust itself have to have been prior to Dec 31, 2014? My assumption is that this is not the case, and that for an existing trust, established prior to 2014, where the trust creator was still living as of Dec 31, 2014, that this date requirement would be satisfied. Could you clarify this? Thank you.

    • For purposes of application of PA 310, the date the trust was established is irrelevant, as is the date the property was transferred into the trust. The crucial date for avoiding uncapping is the date there is a change of beneficiaries of the trust. For example, let’s assume Dad set up the trust in 1990, and transferred the property into it in the same year. The trust provides that Dad is the current beneficiary of the trust during his lifetime, and on his death, Dad’s 3 children become the new present beneficiaries of the trust. So long as Dad dies after December 31, 2014, the transfer of the property out of the trust to the three children will be exempt from uncapping.

  6. Roger Lourde says:

    My parents “technically” sold their lake house to me 20 years ago, with a “life-tenant arrangement” for them to spend their summers there. The title is in my name. Mom is still alive. This was done with intent of avoiding uncapped property taxes, probate, and estate taxes when they pass. Does PA310 put the “uncapped” issue to bed? or do we have another problem because this action took place before 12/31/2014?

    • The critical dates of uncapping are the dates of transfer of ownership of the property. Without seeing the actual documents, I really cannot answer your question. I don’t know what it means to “technically” sell property 20 years ago. If you mean that they signed a deed to transfer title to the property to you, but reserved a life estate for themselves, then the most current reading of the uncapping laws from Michigan State Tax Commission indicates that the property value will uncap on the death of the second of your parents to die. I strongly suggest that you take the deeds and other relevant documents to an experienced real estate attorney who can review them and give you more specific advice on your particular situation.

  7. James Dugle says:

    Dear Mr. Frye
    I understand that under PA 310 our cottage can now pass to our son through our revocable trust and still remain capped for property tax purposes. Since the cottage will pass by inheritance does the cost basis of cottage still increase to what cottage is worth at the time of our death? Thank you for your help.
    James and Joanne Dugle

    • The “basis” of the property in the hands of your son is completely unrelated to the uncapping (or not) of the property value for property tax purposes. Under current federal estate tax laws, your son will receive a “stepped up” basis in the property (typically, the fair market value at your date of death) if he inherits it at your death. If he were to receive it as a lifetime gift from you, he would receive a “carry over” basis, which means he would have the same basis that you had in the property at the time you gifted it to him. So, as long as he receives title to the property as a result of your death, he should get a stepped up basis. Please check with your income tax professional who will want to review your documents in order to confirm how title will pass to your son.

    • In most cases, the answer is yes. Please see my answer to the question immediately below. Again, I strongly recommend that you review your question with your income tax professional who should examine your documents before giving you an answer to your specific situation.

  8. In 2013, my wife’s parents filed a quit claim deed putting my wife and I on the deed to a Michigan vacation property as JOWROS in order to avoid uncapping of the property taxes. We have a concern should they have some catastrophic health issue that wipes out their retirement savings that liens could be placed against the property. Could a new transfer take place that would not uncap the property taxes given the new law and help us avoid such liens?

    • You have a right to be concerned, since the scenario you describe is certainly possible. Other than buying adequate health insurance for them, the only way to be absolutely sure that no liens are placed on the property is for them to deed it over to you completely by removing their names from the joint ownership. There are pros and cons to this, for example, in a lifetime “gift” of property, you would receive their “basis” in it for income tax purposes, so if you ever sold it, you would pay much more in capital gains taxes than you would if you acquired title to the property at their death.

  9. Thanks. Would the taxes upcap in such a situation?

    • Beginning after December 31, 2014, transfers of property are exempt from uncapping if the transferee (new owner after the transfer) or the transferee’s spouse is related to the transferor (current owner before the transfer) or the transferor’s spouse in any of the following ways:
      Mother, father, sister, brother, daughter, son, whether adopted or natural, grandchild, or grandparent
      In the situation you describe, I would suggest that all of the joint owners convey title back to the parents alone, and then the parents convey title to the daughter and son-in-law in a second transfer.

      As in all cases involving a transfer which you believe to be exempt from uncapping, I strongly recommend that you communicate with the Township tax assessor and describe what you are trying to accomplish BEFORE any actual transfers are made. You want the assessor to agree with your belief that the transfers in questions will be exempt. The uncapping laws are complex, difficult for the assessors to apply, and carry devastating consequences if not done properly. Hence, it is well worth your time and effort to communicate with the assessor before any transfers are made.

  10. Kathleen D says:

    Where does this those of us who inherited family vacation property before December 31, 2014? Our taxes uncapped creating severe hardships for middle class people hoping to hold on to a family cottage. Did not the legislature give any thought to making any of these provisions retroactive?

    • I can find no indication that the Legislature gave any thought to making the amendments retroactive. Thus, for those families whose vacation property was uncapped because of a transfer of ownership before the amendments became effective, I know of no remedy or relief that is available or likely to become available in the foreseeable future.

  11. Sandra P says:

    My parents transferred ownership of their lakefront home to their Revocable Trust in 1993, and named we three children as beneficiaries. Mom died in July 2012. I am a daughter, and have resided at this home since Spring 2014, taking care of my Dad until his death Oct. 2014. I am Trustee.

    Melrose Township Assessor uncapped the Property Taxes for 2015. I filed PRE Form 2368, and supplied proof of residency. The Assessor just denied my Request, stating “The uncapping of Taxable Value happened because the owner of the Trust passed away in 2014. If you can prove you were an owner, not just a beneficiary, then it could be recapped at a later date. A conveyance from a parent must have taken place during the parents’ lifetime.”

    As I read it, the State of Michigan Transfer of Ownership Guidelines clearly states on page 9 under #3 and #8 that my PRE exemption should be eligible. What Statutes can I cite to convince this Assessor he is wrong, assuming I am correct, short of going through the paperwork hassle to formally Appeal? Or was he technically correct because Dad died two months before the December 30, 2014 effective date of the new law?

    The property will be sold, but for now, because it’s prime lakefront, the Trust will be hit with an egregious increase, more than doubling the Property Tax. I am aware there is a Conditional Recission option, but on principle, I feel he is wrong to deny my PRE.

    • There are two distinct property tax concepts in your question, and I believe they are getting confused. The Principal Residence Exemption (“PRE”), formerly called the Homestead Exemption, is an 18 mill reduction in your property taxes if the property for which you are claiming the Exemption is your principal residence. This reduction in taxes is not related to taxable value, dates of death or the Transfer of Ownership guidelines published by the State Tax Commission. The person claiming the PRE must live on the property on a full time basis, and must be an owner (or the current beneficiary of a trust that is the owner) of the property in question.

      Uncapping taxable value, on the other hand, refers to the change in the value of the property for property tax purposes that occurs when there is a “change of ownership” of the property. Here, dates of death are critical, because prior to December 31, 2014, a “transfer of ownership” for property tax purposes occurred when there was a change of beneficiaries of a trust that owned the property. This has no connection with who resides on the property, and even applies to vacant land where there is no resident whatsoever. The definition of “change of ownership” has become incredibly complicated and often does result in an increase in property taxes of two, three or even four or more times the amount of taxes paid by the previous owner.

      When vacation property is used as the full time residence for parents who own the property, it is not unusual for the children to receive a “double whammy” when the parents die, because the PRE is lost if none of the children assumes full time residency, and the taxable value is uncapped at the same time due to a transfer of ownership. The overall result can be devastating for the next generation of family members. This was partially addressed by recent changes in the uncapping laws which now allow parents to transfer ownership of property to their children in some ways without uncapping, but those changes had no impact on the eligibility for claiming Principal Residence Exemption.

      With respect to your specific question, the Assessor is correct that at the date of your father’s death in October, 2014, the uncapping law provided that you had to be an owner when your father died in order to avoid uncapping at his death. At that time, the law stated that an uncapping “transfer of ownership” occurred when there is a change of beneficiaries of a trust that owns the property. I am assuming that your parents’ trust provided for your mother and father to be the beneficiaries of the trust so long as either one of them was alive, and that you and your siblings became the beneficiaries of the trust when the second parent died. While it was possible to avoid uncapping on your father’s death if he had transferred ownership to you before he died, the unfortunate aspect of the uncapping laws in effect at his death meant that the property value uncapped when he died.

      If you reside on the property on a full time basis and are now an owner of the property, you should be eligible for the PRE even though the property value uncapped as a result of your father’s passing. You must file the PRE Affidavit (Form 2368) with the Township before June 1 in order to receive the PRE on the summer taxes that come out on July 1.

      I hope this helps clarify the application of these two property tax exemptions.

  12. Kathleen D says:

    With regard to Sandra P’s question, wouldn’t the transfer occur on the date the property was deeded out of the trust to the children? If that happened after Dec 31 2014 they should be exempt from uncapping, see quote from Tax Commission’s 2015 guidelines below:
    “Q. Is a conveyance of property which constitutes a distribution from a trust a transfer of
    ownership?
    Yes. However, there are two exceptions when a distribution from a trust is not a transfer of
    ownership. A conveyance of property which is a distribution from a trust is not a transfer of
    ownership if the distributee is also the sole present beneficiary of the trust or the spouse of the
    sole present beneficiary or both. See MCL 211.27a(6)(d)(i).
    Beginning December 31, 2014, a distribution of residential real property to a distributee who is
    the trust’s settlor or the settlor’s spouse’s mother, father, brother, sister, son, daughter, adopted
    son, adopted daughter, grandson, or granddaughter and the residential real property is not used
    for any commercial purpose following the conveyance is not a transfer of ownership. See MCL
    211.27a(6)(d)(ii).”

    As long as the property remains in the trust there should not be any uncapping. They remain contingent beneficiaries until the trust is distributed. The assessor is of course trying to make the parent’s death date the operative date, but that argument is clearly not supported under any version of MCL 27a (with regard to trusts, not lifetime transfers), unless he can successfully assert that that an undue length of time elapsed before the trust was distributed. (And it is not atypical for this to take years.) In any case, if the trust distributes after Dec 31 2014 then under the new law the conveyance did not happen until after the effective date and the property should be exempt from uncapping.

    • The position of the Michigan State Tax Commission will be that the law you quoted was not in effect on the date of Dad’s death in October, 2014. At that time, the law in effect (and is still in effect as we speak today) is that there is a “transfer of ownership” of property owned by a trust (for uncapping purposes) on the date there is a change in the present beneficiaries of the trust–not, as you suggest, on the date the property is deeded out of the trust. I am assuming that Dad’s trust specified that he and Mother were the present beneficiaries so long as they are alive, and when both are deceased, the children become the beneficiaries of the trust. Thus, Sandra became a present beneficiary of the trust on Dad’s death, which occurred before the new law went into effect. While I would prefer your interpretation of the law, the reality is that the State Tax Commission will not agree with it.

  13. Mom died in April 2015. Her MI cottage was in her revocable trust. Trust gives 1/3 interest in her estate to each of her three children. Property will be sold. One child might want to buy it. Trustee wants to sell it in an arm’s length transaction with the potential buyer. Would child buying the cottage in an arm’s length transaction from the trust for full MV uncap the property value?

    • The best approach would be for the trustee to distribute the property to the 3 children as specified in the trust, and have the one who wants to buy it simply buy it from the other 2. Distributions from a trust to children of the Settlor are exempt from uncapping, and transfers from one sibling to another are also exempt. This would eliminate any concern by the trustee about arm’s length or the price at which the property is purchased.

  14. In your initial post you wrote:

    “By its own terms, PA 310 of 2014 applies ONLY to transfers that take place on or after December 31, 2014. This means that the transfer must be dated on or after that date. It is not clear whether the event triggering the transfer must occur on or after that date. For example, when a property owner dies and leaves property in his/her Last Will and Testament, actual title to the property is transferred as part of the process in Probate Court when the Personal Representative for the Estate deeds the property to the designated beneficiary, not when the decedent died. The unanswered question is whether the date of death of the decedent or the date of the transfer of title by deed must occur on or after December 31, 2014.”

    Is this still an unanswered question? Are you aware of any cases in which new property owner (child) successfully argued that the latter was the date of transfer?

    • I am not aware of any court cases or any further guidance from the Michigan State Tax Commission addressing this issue. It appears that the answer is still up to the local tax assessor in the municipality where the property is located.

  15. My 5 brothers and sisters and I own a cottage together. We plan to form an LLC to protect the cottage now that nieces and nephews are beginning to use the cottage and for insurance/liability purposes. Will the taxable value be uncapped if we form an LLC? Is there a better way to obtain the protection were are looking for?

    • As the uncapping laws read today, you may transfer the property to an LLC without uncapping provided the owners of the LLC are identical to the owners of the real estate prior to the transfer both in name and in percentage owned. A recent guideline issued by the Michigan State Tax Commission suggests that it is also necessary to have a “business purpose” for forming the LLC, but there is no guidance as to what constitutes the necessary “business purpose”. I suggest that you confirm with the township or city tax assessor where the property is located to see if the “business purpose” requirement has been defined and what is required to satisfy it.

  16. Don Eugene says:

    My in-laws sold the family cottage to my wife in 1992 with a “life estate”. Our understanding is that we file a “quit claim deed” when the 2nd parent passes. Will PA 310 protect us from uncapping of property taxes?

    • If the property was actually “sold”, then your wife should have already received a deed to the property. The sellers may have reserved a life estate, but the deed should have been recorded when the property was sold. You would then record the death certificates of the sellers when they die, and no further action should be necessary. Technically, as the law reads today, the property value will uncap and the property taxes most likely will increase when the sellers’ life estate ends.

      If no deed was delivered to your wife when she “bought” the property, then she hasn’t received title to the property and ownership remains with the “sellers”. In this case, if you receive a deed from someone when the life tenants pass away, then there will be no uncapping if the “sellers” were your wife’s parents, siblings, children, grandchildren or the spouses of those individuals.

      There is not enough information in your email to give you a specific answer. I suggest that you contact a local attorney who is experienced in real estate matters and consult with him or her.

  17. My parents each inherited a family cottage and bought out their siblings. My parents set those 2 properties in one LLC for my 2 sisters and I. My parents each kept 1% ownership. So each of the sisters owns 32.666 and each parent owns 1% which gets us to %100. The LLC transfer started years ago and is complete. Here’s the tricky part, one property is in an association and the land is in a 99 year lease. We are stockholders in that Assoc. The other property owns the land out right.

    So if we decide amongst the three of us that we are not interested in sharing the properties and one or two siblings want out and their portion of of the worth what happens with the taxes uncapping? With the law change last year, it appears we would have been better off to never have put these in an LLC. What can we do now?

    • The most recent “Transfer of Ownership” Guidelines issued by the Michigan State Tax Commission specifically allow removal of property from an LLC without uncapping the property taxes so long as the property is transferred from the LLC back to the same person or persons who originally transferred it into the LLC. Thus, your LLC could transfer the property back to the former owners, presumably your parents, without uncapping, and they can then transfer it to you and your siblings in any amount or ratio you all desire, all without uncapping, according to the State Tax Commission.

      Before you transfer anything, I strongly suggest that you contact the local tax assessor and describe what you are proposing to do and obtain the concurrence of the assessor that the transfers will not uncap the property taxes.

  18. My Grandfather passed away in spring of 2013. He had a trust in his will that the cottage he owned be placed in my name when he passed. The property taxes were uncapped and now I pay double what they were when he was alive and before the property was transferred to my name. Then in 2014 the Governor passed the bill that any property left in a trust would not be uncapped for property tax. My question is: has anyone been through the same situation and have they went to a tribunal and got it reversed so that the property tax was the same before 2013?

    • Public Act 310 (2014) is the new law that exempts from uncapping Michigan property left in a trust to a child or grandchild (among others) of the Settlor of the trust–that is, the person who set up the trust. The new law applies to property that is transferred after December 31, 2014. In this case, Grandfather created a trust in his will that left Michigan property to his grandchild. However, Grandfather died in 2013 before the change in the law became effective. At the time of Grandfather’s death, the law stated that property left in a trust would “uncap” in value (thus, raising the property taxes) when the Settlor died and the property was transferred to the new owner, regardless of the relationship between the Settlor and the new owner. The new law is not retroactive, and there are no plans of which I am aware to make it retroactive. I know of no case where a new property owner was successful in appealing the uncapping. If anyone else knows of such a case, please post a response to this comment.

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