August, 2020 | Fraser Blog

The Ins and Outs of Cottage Succession Planning in Michigan (Part One)

This is part one of a two-part blog post series on cottage succession planning in Michigan. You can view part two here.

The family cottage is a place for fun and relaxation in Michigan. It’s where different generations gather and form lifelong memories. When purchasing a cottage, it’s often the intent of the owner to pass the cottage on to future generations to enjoy. Unfortunately, that vision may not become a reality due to challenges such as high property taxes, differing objectives among heirs and resulting family disputes that result in the cottage being sold upon the owner’s death. Common issues that prevent the passing of a cottage to future generations in Michigan can be addressed through careful cottage succession planning.

Michigan is a Market for Second Homes

When the COVID-19 crisis hit, many predicted calamitous economic consequences. With record-high unemployment and a plunge in gross domestic product, there has been a severe plunge in economic activity across the United States. However, few anticipated that a mere four months after the pandemic took hold in Michigan and across the country, we would see record home sales driven by low mortgage rates and flight from dense urban areas.

In 2020, the Wall Street Journal reported that in New York City the luxury real-estate market has been delivered a “stunning gut-punch” due to the COVID-19 crisis. Meanwhile, the Detroit Free Press reported that Michigan’s “Up North” cottage market has “become a red-hot market this summer, and not just despite COVID-19, but perhaps because of it,” with sale prices up as much as 10% from a year ago in some areas.

With plentiful access to fresh water and beautiful natural landscapes, Michigan has always been a desirable place to own a cottage. In fact, the National Association of Home Builders estimates that 50 percent of second homes in the United States are located in eight states, with Michigan being one of them.

With so many second homes in Michigan, it’s natural that there is a great deal of interest among homeowners in succession planning issues that allow second-home cottages to remain within their families for generations to come. The goal of cottage succession planning is to set up legal ground rules that provide the best chance to keep a cottage in the family and prevent intra-family squabbles that may arise in the absence of a plan.

Reasons to Develop a Cottage Succession Plan

There are a number of reasons why a cottage owner may want to develop a cottage plan, which usually addresses concerns about successorship through the creative use of a limited liability company (LLC) or a trust (typically used for more favorable treatment associated with the uncapping of taxable value), tailored specifically for ownership of the cottage property. Here are ten common reasons why a cottage plan may be advisable.

1. 1. Prevent a joint owner from forcing the sale of the cottage through an action for partition
  2. An alternative to allowing common law rules to dictate how the cottage operates
  3. Prevent transfer of an interest in the cottage outside the family
  4. Protect owners from creditor claims
  5. Establish a framework for making decisions affecting the cottage
  6. Provide sanctions for nonpayment of cottage expenses
  7. A vehicle for an “endowment” (money set aside to fund cottage expenses)
  8. To require mediation or arbitration of family disputes
  9. Allocate control of the cottage between or among generations of owners
  10. May help delay (or avoid) the uncapping of Michigan property taxes

Michigan Real Estate Taxes

Cottage succession planning in Michigan has unique aspects due to its complicated real estate tax framework. Pursuant to Proposal A, a 1994 amendment to the Michigan Constitution, a property’s annual assessment increase is “capped” and cannot exceed the lesser of five percent or the rate of inflation during the preceding year. However, when ownership of property is “transferred” to a new owner, the property value is “uncapped” for purposes of calculating property taxes, and the value is adjusted to the current fair market value.

Prior to Proposal A, it was common for cottage planning to involve the use of a limited liability company (“LLC”) to enable successive generations to use and manage a family cottage. But the Michigan legislature, in revising real property tax laws to address Proposal A, did not include LLCs as a means of “transfer” that would prevent the uncapping of property taxes.

Pursuant to Michigan Compiled Laws, Section 211.27(a), transfers of ownership do not include (and therefore do not give rise to uncapping) the following:

- - Transfers to a spouse or jointly with a spouse
  - Transfers to a “qualified family member”
  - Transfers subject to a life lease retained by grantor.
  - Transfers to a trust if the settlor, settlor’s spouse or a “qualified family member” is the present beneficiary of the trust
  - Transfers from a trust, including a beneficial interest in a trust, to a “qualified family member”
  - Transfers from an estate to a “qualified family member”

A “qualified family member” includes:

- - Transferor
  - Spouse of the transferor
  - Transferor’s or transferor’s spouse’s:
  - Mother or father
  - Brother or sister
  - Son or daughter, including adopted children
  - Grandson or granddaughter

The Trust Approach to Cottage Succession Planning

Although the manager and member structure and the limited liability protection afforded LLCs make them the ideal entity to be used for cottage succession planning, in Michigan, the favorable treatment associated with trusts as a means to prevent the uncapping of real estate taxes upon transfer of a cottage to the next generation, have resulted in trusts being the entity of choice in Michigan. Part two of this series will discuss in further detail the aspects of using a trust in cottage succession planning in Michigan allowing the cottage to be used and enjoyed by future generations in an organized way that helps reduce the risk of family disputes and accordingly increases the likelihood that the cottage will be part of the family for generations to come.

If you have any questions about planning issues for your cottage in Michigan, please contact Fraser Trebilcock shareholder Mark Kellogg.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Fraser Trebilcock attorney Mark E. Kellogg is a certified public accountant, and has devoted over 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, commercial lending, and estate planning. You can reach him at 517.377.0890 or mkellogg@fraserlawfirm.com.

New Guidance for Employers on W-2 Reporting for Sick and Family Leave Wages Paid Pursuant to the Families First Coronavirus Response Act

On July 8, 2020, the Internal Revenue Service (“IRS”) and the U.S. Department of Treasury (“Treasury”) released guidance to employers regarding the requirement to report the amount of qualified sick leave wages and qualified family leave wages paid to employees under the Families First Coronavirus Response Act (“FFCRA”). The guidance was provided in Notice 2020-54 (the “Guidance”).

Background

The FFCRA, which was enacted on March 18, 2020, requires employers with fewer than 500 employees to provide paid leave due to certain circumstances related to COVID-19 through two separate provisions: the Emergency Paid Sick Leave Act (“EPSLA”) and the Emergency Family and Medical Leave Expansion Act (“EFMLA”).

The EPSLA applies to virtually all private employers with fewer than 500 employees and to virtually all public agencies employing one or more employees. Under section 5102(a) of the EPSLA, employers shall provide employees with paid sick time if they are unable to work (or telework) due to a need for leave because:

The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
The employee has been advised by a health care provider to self-quarantine due to concerns relating to COVID-19;
The employee has COVID-19 symptoms and is seeking a medical diagnosis;
The employee is caring for an individual subject to quarantine or isolation or advised to self-quarantine as described in paragraphs (1) or (2) above;
The employee is caring for his/her child if the school or place of care has been closed or the child care provider is unavailable due to COVID-19 precautions; and
The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.

An employee who is unable to work or telework for reasons related to COVID-19 described in (1), (2), or (3) above is entitled to paid sick leave at the employee’s regular rate of pay or, if higher, the federal minimum wage or any applicable state or local minimum wage, up to $511 per day and $5,110 in the aggregate. An employee who is unable to work or telework for reasons related to COVID-19 described in (4), (5), or (6) above is entitled to paid sick leave at two-thirds the employee’s regular rate of pay or, if higher, the federal minimum wage or any applicable state or local minimum wage, up to $200 per day and $2,000 in the aggregate.

Pursuant to the EFMLA, expanded FMLA leave applies to employees who have been employed at least 30 days by employers who employ fewer than 500 employees (and public agencies) if those employees are unable to work (or telework) because they need to care for their children due to the closure of schools or unavailability of day care due to a government declared COVID-19 public health emergency. The first 10 days of the 12-week job-protected leave is unpaid. However, subsequent days must be paid leave in an amount of not less than two-thirds of regular pay, capped at $200 per day with a maximum cap of $10,000 per employee.

Form W-2 Reporting

Pursuant to the Guidance, employers must separately state the total amount of qualified sick leave wages paid pursuant to paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA, qualified sick leave wages paid pursuant to paragraphs (4), (5), and (6) of section 5102(a) of the EPSLA, and qualified family leave wages paid pursuant to the EFMLEA.

With respect to paid sick leave under the EPSLA, in addition including qualified sick leave wages in the amount of wages paid to the employee reported in Boxes 1, 3 , and 5 of Form W-2, such amounts must be separately reported either in Box 14 of Form W-2 or on a separate statement. In labeling wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA, employers must use the following (or similar) language: “sick leave wages subject to the $511 per day limit.” For wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of the EPSLA, employers must use the following (or similar) language: “sick leave wages subject to the $200 per day limit.”

When reporting family leave wages under the EFMLEA, in addition to including such wages in the amount of wages paid to the employee reported in Boxes 1, 3, and 5 of Form W-2, employers must separately report to the employee the total amount of qualified family leave wages paid in either Box 14 of Form W-2 or on a separate statement. In doing so, employers must use the following (or similar) language: “emergency family leave wages.”

According to the Guidance, if a separate statement regarding sick leave wages and/or family leave wages is provided to the employee and the employee receives a paper Form W-2, then the statement must be included with the Form W-2 provided to the employee. If the employee receives an electronic Form W-2, then the statement shall be provided in the same manner and at the same time as the Form W-2.

Model Language for Instructions

The Guidance provides model language that employers may include for instruction to employees related to wages reported in Box 14 of Form W-2 or in a separate statement:

“Included in Box 14, if applicable, are amounts paid to you as qualified sick leave wages or qualified family leave wages under the Families First Coronavirus Response Act. Specifically, up to three types of paid qualified sick leave wages or qualified family leave wages are reported in Box 14:

Sick leave wages subject to the $511 per day limit because of care you required;
Sick leave wages subject to the $200 per day limit because of care you provided to another; and
Emergency family leave wages.

If you have self-employment income in addition to wages paid by your employer, and you intend to claim any qualified sick leave or qualified family leave equivalent credits, you must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with your income tax return and reduce (but not below zero) any qualified sick leave or qualified family leave equivalent credits by the amount of these qualified leave wages. If you have self-employment income, you should refer to the instructions for your individual income tax return for more information.”

Conclusion

The law and guidance regarding employer requirements related to wages for sick leave and family leave are rapidly evolving. We will continue to keep you informed of new developments. Please contact your Fraser Trebilcock attorney with any questions you may have about your obligations.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Worker Payroll Tax Payment’s Delayed By Executive Order

On Saturday, the President issued an executive order to defer the withholding, deposit, and payment of certain payroll taxes paid from September 1st through December 31, 2020, although the President indicated that it could end up being applied retroactive to August 1st.

The deferral applies to any employee whose pretax wages or compensation during any bi-weekly pay period is less than $4,000. The tax payments are deferred without any penalties, interest, additional amount, or addition to the tax.

The deferral applies to the employee’s portion of Social Security and Medicare taxes (a combined rate of 7.65%). (The deferral also applies to Railroad Retirement Act Tier 1 tax).

The IRS has the authority under the Internal Revenue Code to delay tax payments for up to a year during a presidentially declared disaster. The president declared the coronavirus pandemic a national emergency on March 13th.

Guidance on implementing the order and to ultimately eliminate the obligation to pay the deferred taxes is expected in the near future. That said, while the president has authority to delay the collection of taxes, only an act of Congress can eliminate them altogether.

While the deferral on collecting these taxes should result in bigger paychecks, if and when employees see a boost in their take home pay remains to be seen. First, because the relief is only a temporary deferral, employees, or their employers as their withholding agent, will have repay the deferred taxes next year. Second, many payroll companies will find it challenging to make programing changes to their payroll systems by September 1st. Finally, because the taxes are not forgiven, employers and payroll companies need guidance and further assurances from the IRS, that they will not have to foot the bill for their employees deferred taxes. As a result, it is possible that some employers will continue to withhold payroll taxes from there employee paychecks to minimize the risk both to themselves and their workers.

All of this means that over next few weeks, employers will need to explain to their employees why their take-home pay is or is not going up, and how that could be possibly reversed next year.

Stay tuned for further updates as new information emerges.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.