For many Michiganders, the family cottage is a treasured place filled with lasting memories. What families may not spend much time considering, however, is planning for the future of the property so it can be enjoyed by generations to come.
In 1994, Michigan voters approved what is colloquially known as “Proposal A,” which, among other things, capped the annual increase in a property’s taxable value to the lesser of 5% or the rate of inflation. This cap is removed, however, when the property is transferred. Upon a transfer, as defined by the statute, the property’s taxable value is reset to the state equalized value of the property for the calendar year following the transfer. Family members may hold certain property for years or even decades. Failing to plan for the eventual transfer of the property, even among family members, could result in significant property tax consequences for the future owners.
Intrafamilial Transfer Considerations
Fortunately, Michigan law also provides several exclusions from the definition of property transfer that are relevant to intrafamilial cottages. For example, residential property transferred to the current owner’s or the current owner’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson or granddaughter will not be considered a transfer of property for the purposes of the taxable value uncapping statute, as long as the property is not used for any commercial purpose following the transfer.
Transferring residential property to a trust whose sole present beneficiary or beneficiaries are the settlor’s or the settlor’s spouse’s specific relatives as noted above is also exempt from the definition of a transfer of property, if the property is not used for any commercial purpose following the conveyance. Additionally, the change of the present beneficiaries of a trust will be considered a transfer of the property owned by that trust, unless the change adds or substitutes the settlor’s or the settlor’s spouse’s relatives listed above and the property is not used for any commercial purpose following the change in ownership.
No Commercial Purpose Requirement
It’s important to understand that these intrafamilial transfer exemptions are — as noted above — conditioned on the property being used only for residential purposes following the transfer. The law defines this as limiting any rentals to less than 15 days per calendar year. Your family should be prepared to discuss this and ensure that family members who are interested in owning and maintaining the family cottage understand that if they intend to claim one of these taxable value uncapping exemptions, they will be unable to use the property to generate significant rental income.
Other Considerations
Intrafamilial transfers may still be subject to state or local transfer taxes, and there are other estate-related issues, such as shared-use agreements, to take into consideration in the process of planning for the succession of ownership of a family cottage. Warner’s team of real estate and estate planning attorneys can help draft shared-use agreements, plan for the future of your cottage and analyze all facets of a potential transfer. Contact your Warner attorney to get started.