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The Joint Tenancy Uncapping Exception Explained
Klooster v City of Charlevoix: The Joint Tenancy Uncapping Exception Explained
By Loukas P. Kalliantasis
On March 10, 2011, the Michigan Supreme Court issued a unanimous decision in Klooster v City of Charlevoix. The Court clarified the requirements of the joint tenancy exception to property tax uncapping. If carefully prepared in accordance with Klooster, a property transaction creating or terminating a joint tenancy will avoid property tax uncapping and, therefore, lock-in low property tax values and result in property tax savings. This is especially important for highly appreciated properties.
In 1994, Proposal A amended the Michigan Constitution and, through related legislation, caps increases to property tax assessments to the lesser of five percent or the rate of inflation so long as there is not a transfer of ownership. At times when property values are increasing, this generally keeps increases in property taxes lower than corresponding increases in property values. The Proposal A legislation broadly defines a transfer of ownership, which results in property being uncapped and reassessed at its true cash value. It also defines instances that are not transfers of ownership and, therefore, increases to property taxable values are capped to the lesser of five percent or the rate of inflation.
The Klooster decision dealt with one such instance that is not a transfer of ownership, specifically, the joint tenancy exception. In 1959, the taxpayer's parents purchased the subject property. In 2004, the taxpayer's mother transferred her interest in the property to the taxpayer's father. The father then transferred the property to himself and the taxpayer as joint tenants with rights of survivorship. In early 2005, the taxpayer's father passed away. The taxpayer then became the sole owner of the property. Later that year, the taxpayer transferred the property to himself and his brother as joint tenants with rights of survivorship. The events in 2005 led the city assessor to uncap the property's true cash value in 2006. The issue presented was whether the property's true cash value uncapped in 2006 as a result of the 2005 transfers.
The Michigan Supreme Court explained that there are two requirements to the joint tenancy exception. The first requirement is original-ownership. That is, at least one person creating or terminating a joint tenancy must be an original owner of the property going back to the last uncapping event. The second requirement is continuous-tenancy. This requirement only applies when the property is held as a joint tenancy at the time of the transfer. If applicable, it requires at least one person to be a joint tenant since the joint tenancy was initially created. Applying these requirements to the facts before it, the Court found that the property transfer resulting from the death of the taxpayer's father met the requirements of the joint tenancy exception and, therefore, an uncapping did not result. However, the Court found that the property's taxable value did uncap when the taxpayer later transferred the property to himself and his brother as joint tenants with rights of survivorship.
The complexity of the joint tenancy exception can be demonstrated by the Klooster decision's history. The Michigan Tax Tribunal found that the property's true cash value uncapped in 2006. In its decision, however, the tribunal only considered the first 2005 transfer resulting from the death of the taxpayer's father. It did not reach the second 2005 transfer from the taxpayer to himself and his brother. The Michigan Supreme Court found that the tax tribunal reached the right result but for the wrong reason. Applying the requirements of the joint tenancy exception, it was the second 2005 transfer that ultimately uncapped the property, not the first. As for the Michigan Court of Appeals, it reached the wrong result. It reversed the tribunal and held that the property's true cash value did not uncap in 2006. It also held that for purposes of the second requirement, a "conveyance" requires a transfer of title in writing.
The Michigan Supreme Court found error in the Michigan Court of Appeals' result and held that a "conveyance" did not require a written instrument. The Michigan SupremeCourt in Klooster answered many (but not all) questions which had caused confusion among legal practitioners and the courts alike. Taxpayers should seek property tax advice from legal counsel knowledgeable with the Klooster decision before executing a deed creating or terminating a joint tenancy. Careful attention should also be paid to the Michigan Legislature to see if it overturns the Klooster decision by legislation.
Loukas P. Kalliantasis is an associate attorney with Fraser Trebilcock in Lansing. He may be reached at 517.377.0893 or by e-mail at lkall@fraserlawfirm.com.