2014 PA 310, signed late last year, provides a number of new exemptions from the “uncapping” of a property’s taxable value upon transfer of ownership of residential real property to certain relatives, and even includes certain transfers from trusts and estates.
In general, under MCL 211.27a whenever a transfer of ownership of real property occurs, the taxable value of the property uncaps in the following year and is re-set at fifty percent of the property’s true cash value (i.e. the state equalized value). There are, however, a number of exemptions to the definition of a “transfer of ownership.”These exemptions allow for certain transfers to occur without uncapping the taxable value of the property, which can be of great significance to those who hold highly appreciated real property. Previously, there has been an exemption for conveyances from a settlor or settlor’s spouse, or both, to a trust where the sole present beneficiary(ies) of the trust are the settlor or the settlor’s spouse, or both, and for conveyances by distribution from a trust where the distributee is the sole present beneficiary or the spouse of the sole present beneficiary, or both. 2014 PA 310 has expanded the list of exemptions available and will certainly benefit many, including those receiving residential real property as part of an inheritance.
Beginning December 31, 2014, certain transfers of residential real property to one’s mother, father, brother, sister, son (by blood or adoption), daughter (by blood or adoption), grandson, or granddaughter or to one’s spouse’s mother, father, brother, sister, son (by blood or adoption), daughter (by blood or adoption), grandson, or granddaughter (hereafter collectively referred to as “Immediate Relative” for purposes of this article) will not result in uncapping the taxable value of the property. In addition to outright transfers, the expanded list of exemptions include:
- Conveyances to a trust if the property is conveyed by the settlor or the settlor’s spouse, or both, and the sole present beneficiary(ies) of the trust are the settlor’s or settlor’s spouse’s Immediate Relative(s), as defined above.
- Conveyances by distribution from a trust if the distributee is the settlor’s or settlor’s spouse’s Immediate Relative, as defined above.
- Conveyances by distribution under a will or by intestate succession if the distributee is the decedent’s or the decedent’s spouse’s Immediate Relative, as defined above.
- A change that adds or substitutes the settlor’s or settlor’s spouse’s Immediate Relative(s), as defined above, as sole present beneficiary(ies) of a trust holding residential real property.
The only drawback of 2014 PA 310 is that in order to meet the requirements of the new exemptions, the residential real property may not be used for any commercial purpose following the conveyance. Therefore, transferees who receive residential real property such as apartments and rental properties, including vacation rental properties, will not benefit from the new exemptions available because the taxable values of these types of properties will still uncap upon transfer of ownership. Note that planning opportunities may also exist for avoiding uncapping with respect to nonresidential real property and commercial property, or for the transfer of property to persons who are not Immediate Relative(s). See for example, Klooster v. City of Charlevoix, 488 Mich 289, 795 NW2d 678 (2011).
The Michigan State Tax Commission (STC) has issued updated “Transfer of Ownership Guidelines” to provide guidance on the application of the new exemptions available under 2014 PA 310. See also STC Bulletin 15 of 2014.
Take note that the updated Transfer of Ownership Guidelines raise an issue for individuals who have previously executed “Lady Bird” deeds as part of their estate plans. The conveyance used in a Lady Bird deed is described more fully in Land Title Standard 9.3, but essentially it creates a life estate coupled with a power of appointment retained by the grantor and names a default beneficiary to take the property in the event the power of appointment is not exercised. The updated Transfer of Ownership Guidelines appear to indicate that the STC intends to uncap a property’s taxable value when the life estate ends, even when the remainder interest passes to an Immediate Relative, as defined above. While many attorneys may disagree with the STC’s Guidelines, proceed with caution. Until the question is resolved as to whether Lady Bird deeds fit within an exemption to the definition of a transfer of ownership, there is risk involved with this type of planning if one’s goal is to avoid uncapping of property taxes at the death of the holder of the life estate.
If you have any questions or would like to discuss whether a certain transfer of ownership of residential real property will result in uncapping the taxable value of the property, please contact attorney Melisa M.W. Mysliwiec at email@example.com or 616.301.0800. Melisa works out of Fraser Trebilcock’s Grand Rapids and Lansing offices, focusing her work in the areas of Elder Law and Medicaid planning, estate planning, and trust and estate administration. She was named a “Rising Star” in Michigan by Super Lawyers in 2013, and is an Accredited Attorney by the Department of Veterans Affairs.