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Nov 2019
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November 25, 2019

Uncapping Your Property Taxes Can Be a Costly Estate Planning Mistake

Michigan’s “capping” of property taxes has made it more affordable for some families to keep waterfront cottages, and other properties which may have greatly appreciated in value over the years, in the family for generations.
 
Property tax “uncapping”

In Michigan, annual increases to the taxable value of a property (the dollar value that you pay taxes on) are “capped” at the lesser of the rate of inflation or 5%.
 
However, when a transfer of property ownership occurs, such as a sale, the cap on the taxable value of the property is removed, and the state equalized value (SEV) of the property becomes the new taxable value. If you double the SEV, the result is the local assessor’s view of the current fair market value of the property.
 
If a property’s taxes have been capped for a generation or more, the disparity between the taxable value and the SEV could be quite large, and the property tax bills after “uncapping” would be significantly higher moving forward.
 
Estate planning for property

Accidently triggering a property’s “uncapping” by failing to understand Michigan’s property tax rules could be a costly planning mistake for families with high-value properties. As you give thought to how your properties fit into your estate planning, keep the following in mind:
 
Some transactions do not uncap property taxes

Michigan law generally allows exceptions to the uncapping rules for residential property. These exceptions allow property owners to make certain property transfers without uncapping the property taxes, including transactions:
 
  • Among commonly controlled entities, or an affiliated group (LLCs, corporations, etc.)
  • To create joint tenancies, where at least one person is an original owner of the property (or spouse of an original owner)
  • By court order unless monetary consideration is ordered
  • Of qualified agricultural property and qualified forest property
  • To certain immediate family members:
    • the owner’s spouse
    • the owner’s or owner’s spouse’s 
    • mother
    • father
    • sibling
    • child or adopted child
    • grandchild
  • To trusts where the sole present beneficiaries are the owner or one or more immediate family members
  • From trusts to one or more immediate family members
  • By life estate deed or a “Lady Bird Deed” to immediate family members (this allows you to retain control over the property during your life and automatically transfer it at your death without probate.)
 
NOTE: An important part of the family members’ exception to uncapping is that a residential property cannot be used for any commercial purpose following the conveyance. If you decide to turn the vacation cottage that Mom and Dad left you into a rental for more than 15 days a year, you will risk uncapping the taxes.
 
Transactions that uncap property taxes  
 
All other transfers not mentioned above will result in uncapping the property taxes, including a transfer of more than 50% of the ownership interest in a LLC or corporation.  The use of corporations or LLCs to hold residential property should be carefully evaluated. You may uncap the property taxes by transferring the property to the entity or upon transferring more than 50% of the ownership of the entity, even if the resulting owners are immediate family members to whom you could have transferred the property directly without uncapping the property taxes. 
 
Plan appropriately for your property
 
An important part of your estate plan is determining which strategies to use to title your properties and eventually transfer them in a tax-efficient manner. If you have property outside of Michigan or the U.S., remember that other states and countries have different laws governing property transfers and taxes. Warner has attorneys licensed in other states to help you plan for these properties as well.
 
If your family members have indicated that they would like to keep your home or vacation property in the family, discuss with your Warner attorney or Jennifer Remondino (616.396.3243) the best way to title the property and transfer it affordably to the next generation.

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