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Michigan Supreme Court finds Statutory Basis of Executive Orders Unconstitutional: Next Steps Uncertain

UPDATE (10/13): On Monday, October 12, 2020, the Michigan Supreme Court issued an Order in Michigan House of Representative and Senate v Governor, reversing the lower Court of Appeal decision in that case which upheld the Governor’s source of emergency authority. The Supreme Court took this action on Monday in light of. and consistent with, its recent decision on the same questions on October 2nd involving certified questions for the US District Court. The Supreme Court’s October 12 Order has been given immediate effect, putting to rest any question regarding the timing of its ruling and or binding effect. You can read that Order here.

Late on Friday, October 2, 2020, the Michigan Supreme Court ruled that the Governor’s use of the Emergency Powers of the Governor Act and the Emergency Management Act as two sources of authority to issue a host of executive orders regulating capacity limits in public-facing businesses, public mask use, school re-openings, the size of public and private gatherings, among others was unconstitutional. In the wake of the Court’s ruling, uncertainty abounds regarding the legal effect and enforceability of the Governor’s numerous executive orders issued to date. Although the Attorney General announced Sunday that she will not enforce the Governor’s COVID-19 executive orders, this does not mean all COVID-19 related rules and regulations are invalid or not without practical merit. Further, both state and local health agencies have quickly moved to fill the regulatory void left as a result of the Court’s ruling.

This controversy started towards the end of April, when the state legislature moved forward with a bill aimed at preventing the Governor from renewing her original state of emergency declaration. The Governor, relying on the 1945 emergency powers law, issued an executive order to keep a stay-at-home order in place through June 1 without consent of the Legislature. This law has been the legal basis for continued rolling orders that have kept some public-facing businesses such as bowling alleys and movie theaters shuttered until Oct. 9. There have been a number of lower state court cases challenging the Governor’s action, all of which have sided in her favor.

One particular lawsuit was brought in federal district court by three medical groups in West Michigan. The three medical groups sued the Governor, challenging her spring executive order that prohibited doctors and medical facilities from performing “elective” procedures in an effort to preserve personal protection equipment when it was in short supply during the early days of the pandemic.

The Michigan Supreme Court is the ultimate authority on interpreting state law, and the federal district court judge noted that state law questions regarding the limit of the Governor’s authority were crucial to the case before it. The law permits federal courts to ask for guidance – called a certified question — on state law questions from a state’s highest court. State supreme courts are not required to accept certified questions from a federal court but they usually do.

Here the Federal court certified two questions to the Michigan Supreme Court:

Whether, under the Emergency Powers of the Governor Act, MCL § 10.31, et seq. [(the “1945 law”)], or the Emergency Management Act, MCL § 30.401, et seq. [(the “1976 law”)], [the] Governor has the authority after April 30, 2020 to issue or renew any executive orders related to the COVID-19 pandemic; and
Whether the [1945 law] and/or the [1976 law] violates the Separation of Powers and/or the Non-Delegation Clauses of the Michigan Constitution.

In answering these questions, the Michigan Supreme Court stated:

“[w]e conclude that the Governor lacked the authority to declare a ‘state of emergency’ or a ‘state of disaster’ under the EMA after April 30, 2020, on the basis of the COVID-19 pandemic. Furthermore, we conclude that the EPGA is in violation of the Constitution of our state because it purports to delegate to the executive branch the legislative powers of state government— including its plenary police powers— and to allow the exercise of such powers indefinitely.”

Friday’s ruling throws into doubt the Governor’s many executive orders addressing a variety of issues in response to the COVID-19 pandemic in Michigan. For example, orders that expand unemployment eligibility during a pandemic, that allow local governments to hold their meetings virtually to avoid in-person meetings that could allow the virus to spread, that place moratoriums on foreclosures and evictions, and those that permit remote witnessing and notarization of legal documents, are all somewhat in question.

Additional uncertainly surrounds the effective date of the Court’s order and if it is even entitled to binding effect, as it was issued in response to a certified question from the Federal District Court and therefore merely “advisory” in nature. For the most part, these questions have answered (1) the order was effective on October 2^nd, and (2) there is a clear likelihood that the Court’s decision will be followed in any subsequent state or federal court decisions.

State regulators are nevertheless holding fast. The Michigan Occupational Safety and Health Administration (MIOSHA) has issued thousands of dollars in citations to Michigan businesses for failing to implement COVID-19 precautions under the agency’s “general duty clause,” which requires employers to provide workspaces free of hazards causing death or “serious harm.” Since the Supreme Court decision Friday, many have questioned the validity of the citations, arguing that violations of the general duty clause were based on non-compliance with the Governor’s executive orders on mask usage, social distancing, or employee training. State regulators have said that they will not rescind any fines and penalties for workplace COVID-19 non-compliance, even in light of a Michigan Supreme Court decision upending the Governor’s executive orders back to April 30.

Further, the Director of the Michigan Department of Health and Human Services, citing authority under the Michigan Public Health Code, quickly issued an emergency order reinstating requirements that masks should be worn at most indoor and outdoor gatherings and events, limiting attendance at indoor and outdoor gatherings, limiting organized sports and other limitations on certain food service establishments, including bars. The order specifies that violations are a misdemeanor punishable by imprisonment for not more than 6 months, or a fine of not more than $200, or both.

Local health departments are issuing similar orders. The Oakland County Health Department on Saturday ordered residents of Michigan’s second-most populous county to wear masks or facial coverings when leaving their homes. More orders will follow to outline capacity limits for bars and restaurants and instill public health screenings, the department said. Ingham County followed suit Sunday by issuing emergency orders similar to Oakland’s, with rules requiring face masks, limiting restaurant capacity to 50%, mandating employee health screenings and putting restrictions on indoor and outdoor gatherings. Other local action is anticipated in Kent, Ottawa, St. Clair, and Wayne.

It will take a while for the Legislature and Governor to sort out these issues legislatively as there are only 3 session days left before the November 3 election and only 14 session days after the election. In the meantime, the Administration will pursue reissuing some of these orders through administrative rules and regulatory action.

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.

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.

IRS Announces 2021 Increases for HSAs

The IRS has released its 2021 annual inflation adjustments for Health Savings Accounts (HSAs) as determined under Section 223 of the Internal Revenue Code. Specifically, IRS Revenue Procedure 2020-32 provides the adjusted limits for contributions to a Health Savings Account (“HSA”), as well as the high deductible health plan (“HDHP”) minimums and maximums for calendar year 2021.

The 2021 limits are as follows:

Annual Contribution Limit
- Single Coverage: $3,600
- Family Coverage: $7,200
HDHP-Minimum Deductible
- Single Coverage: $1,400
- Family Coverage: $2,800
HDHP-Maximum Annual Out-of-Pocket Expenses (including deductibles, co-payments and other amounts, but not including premiums)
- Single Coverage: $7,000
- Family Coverage: $14,000
The catch-up contribution for eligible individuals age 55 or older by year end remains at $1,000.

Plans and related documentation, including employee communications, should be updated to reflect these new limits for 2021.

As always, please keep in mind that participation in a health FSA (or any other non-HDHP) will result in HSA ineligibility, unless the health FSA is limited to: (1) limited-scope dental or vision excepted benefits; and/or (2) post-deductible expenses.

This alert serves as a general summary of lengthy and comprehensive new provisions of the Internal Revenue Code. It does not constitute legal guidance. Please contact us with any specific questions.

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.

Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

Client Alert: Delay of Deadline to Furnish Forms 1095-B and 1095-C to Individuals & Related Relief

Statements to Individuals

The Internal Revenue Service (“IRS”) has extended the deadline for 2020 Information Reporting by employers (and other entities) to individuals under Internal Revenue Code sections 6055 and 6056 by just over a month. However, the deadline for these entities to file with the Internal Revenue Service (IRS) remains the same.

IRS Notice 2020-76 extends the due dates for the following 2020 information reporting Forms from January 31, 2021 to March 2, 2021:

2020 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage
2020 Form 1095-B, Health Coverage

Please note that no further extension beyond the March 2, 2020 deadline is allowed. Therefore, this deadline for furnishing the Forms to individuals must be met.

Reporting to IRS

However, the due dates for filing these Forms and their Transmittals with the IRS remains unchanged. Specifically, the due date for filing the following documents with the IRS is February 28 for paper filings; however, if filing electronically, the due date is March 31 (employers who are required to file 250 or more Forms must file electronically):

2020 Form 1094-B, Transmittal of Health Coverage Information Returns, and the 2020 Form 1095-B, Health Coverage
2020 Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and the
2020 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage

Additional extensions may still be available for filing these Forms with the IRS.

Penalty Relief for Form 1095-B Statement to Responsible Individuals

The Notice addresses that as the individual shared responsibility payment was reduced to zero for months beginning after December 31, 2018, and because an individual will not need the information on Form 1095-B to compute his or her federal tax liability or to file an income tax return with the IRS, the Treasury Department and the IRS have determined that relief from penalties associated with furnishing a statement under section 6055 is appropriate. Therefore, the IRS will not assess a penalty under section 6722 against reporting entities who fail to furnish a Form 1095-B to responsible individuals if two conditions are met:

First, the reporting entity posts a notice prominently on its website stating that responsible individuals may receive a copy of their 2020 Form 1095-B upon request, accompanied by an email address and a physical address to which a request may be sent, as well as a telephone number that responsible individuals can use to contact the reporting entity with any questions.
Second, the reporting entity furnishes a 2020 Form 1095-B to any responsible individual upon request within 30 days of the date the request is received.

This relief does not extend to the requirement that applicable large employers (ALEs) must furnish Forms 1095-C to full-time employees. Those statements must continue to be provided. However, the penalty relief will apply to employees enrolled in an ALE’s self-insured health plan who are not full-time employees for any month of 2020.

Last Year for Good-Faith Transition Relief

IRS Notice 2020-76 also extends the good-faith transition relief from Code section 6721 and 6722, which are the Code sections imposing penalties for filing incorrect or incomplete information on the return or statement. Specifically, entities showing that they have made good faith efforts to comply may avoid penalties for incorrect or incomplete information reporting. However, relief is not available to entities who fail to file returns or furnish the statements, miss a deadline, or otherwise had not made good faith efforts to comply. The Notice states that in determining good faith, the IRS “will take into account whether an employer or other coverage provider made reasonable efforts to prepare for reporting the required information to the Service and furnishing it to employees and covered individuals, such as gathering and transmitting the necessary data to an agent to prepare the data for submission to the IRS or testing its ability to transmit information to the IRS.” However, this is the last year the IRS and Treasury Department intend on providing this transition relief.

Indications this may be the Last Year for Statement Relief

Last, the IRS indicates that unless it receives comments explaining why the relief afforded in this notice continues to be necessary, no relief relating to the furnishing requirements under sections 6055 and 6056 will be granted in future years.

Taxpayers and reporting entities are strongly encouraged to submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov (type “IRS- 2020-0037” in the search field on the regulations.gov homepage to find this notice and submit comments).
Alternatively, taxpayers and reporting entities may mail comments to: Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2020-76) Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044
Comments must be submitted by February 1, 2021.

You can find the full Notice here: https://www.irs.gov/pub/irs-drop/n-20-76.pdf.

If you should have questions regarding employer reporting requirements or other ACA mandates, the Employee Benefits Department at Fraser Trebilcock can assist.

The Importance of Up-to-Date Estate Planning During COVID-19

The recent surge in the coronavirus pandemic across the country has reminded all of us that a return to “normal” is far from imminent. The public health and economic crises caused by the pandemic have had many secondary effects, one of which is that we have all been reminded of our own mortality. For many people, this has sparked a renewed and urgent interest in estate planning, including creating, updating and/or finalizing estate planning documents.

For those who have been holding off on estate planning, the uncertainty of the current moment should serve as motivation to act. Without an estate plan in place, an incapacitated individual will be faced with the unpleasant prospect of having state law and probate courts determine who will be responsible for their financial affairs and healthcare decisions. A thoughtful, up-to-date estate plan, on the other hand, provides peace of mind for you and your loved ones and allows you to control where your assets go at your death.

At any time, but especially during times like these, there are several key estate planning issues that you should review with an estate planning attorney.

Is Your Will or Living Trust Up to Date?

The first step in estate planning is making sure that you have at minimum the following documents: a will, durable power of attorney, and patient advocate designation. For many, a living trust (revocable grantor trust) will be the centerpiece of their estate plan, allowing for an orderly management of assets during times of incapacity, the avoidance of probate, and the orderly distribution of assets at death. Even after these documents are in place, they should be reviewed and updated, as appropriate, every few years. Periodic review with an estate planning attorney allows you to ensure that choices you previously made, such as the beneficiaries of assets upon your death and the appointment of financial and healthcare representatives during your life, are consistent with your current preferences, and appropriate based on current law. Over time, as assets grow and additional assets are added to your portfolio, trust funding and estate planning goals need to be revisited.

Is Your Trust Funded?

A revocable grantor trust (commonly called a “living trust”) protects spouses, children and those with special needs; a properly drafted and funded trust can also help reduce or eliminate federal estate taxes. The terms of a trust may include who will control your assets upon your disability or death and may provide for gifts to charity, family, and friends. One of the most important benefits of a trust is that it allows an estate to be administered outside of probate court. However, for a trust to serve this purpose, it must be fully funded.

Funding a trust involves retitling assets, such as a home and financial assets, into the name of the trust, and designating the trust as the beneficiary of certain assets, such as life insurance and retirement accounts. Failure to fund assets into a trust means that such assets may not go to intended beneficiaries. In my experience, many clients fail to follow through with funding after establishing a trust. Every time a trust is reviewed and updated is a good time to review funding issues.

Given the recent passage into law of the SECURE Act and the CARES Act, special care must be given to how beneficiaries are designated for qualified retirement accounts such as IRAs and 401(k)s. Based on your circumstances and estate planning goals, these accounts are sometimes designated for specific beneficiaries and other times the trust is more appropriately designated as the beneficiary.

Are Any Changes Required to Your Durable Powers of Attorney and Patient Advocate Designations?

A durable power of attorney is a legal document that empowers a representative of your choosing, called an agent, to have authority to manage your financial affairs. A patient advocate designation is a legal document that names another individual as a patient advocate to make medical decisions on your behalf, in accordance with your wishes, once two doctors certify that you are unable to communicate decisions regarding your medical or mental health treatment. Having a durable power of attorney and a patient advocate designation in place is critically important, particularly in a time of a global pandemic.

At the time of your inability to act, if you have not designated an agent and a patient advocate, no one will be legally authorized to act on your behalf. Family members will be forced to go to probate court, expending time and incurring expenses, to request appointment of a conservator and a guardian to handle these responsibilities.

Are There Tax Planning Strategies You Should be Considering?

Federal estate, gift and generation skipping transfer tax exemptions are generous under federal tax law but may not always be. Currently, the federal estate tax exemption is $11.58 million per person, reduced by lifetime taxable gifts. For deaths after December 31, 2025, the exemption is set to drop to a $5 million base instead of the current $10 million base, as adjusted by a cost of living allowance. However, it is possible, depending on the outcome of the upcoming 2020 election that the unusually high exemption amounts may be reduced even sooner than the end of 2025. Many high net worth individuals are making large gifts of their remaining federal estate tax exemptions in order to fully use them. The saying, “if you don’t use it, you’ll lose it,” applies fully to the federal estate tax exemption.

Given the current low interest rate environment, and the massive national debt (nearly $27 trillion as of the time of this writing), it’s unlikely that we will see more favorable exemptions in the years to come. Now is a good time to consider which estate tax planning strategies would be beneficial for you and your family. Options include gifts of assets outright or in trust, making intrafamily loans, creating spousal lifetime access trusts, creating grantor retained annuity trusts, and making non-taxable gifts directly to educational institutions to fund education for grandchildren, and other charitable donations.

While the Department of Treasury has made clear that if you fully utilize your current federal estate tax exemption now, but at death the applicable exclusion amount is lower, there will be no claw-back of assets into your estate of amounts over the then-applicable exclusion amount. However, if you fail to use your full federal estate tax exemption before it is reduced, you will forever lose the option to do so.

For example, under current law, if you currently have $11.58 million, you cannot give away assets now of $5.58 million and expect that in 2026 you will still have $5 million in assets to give tax free at death. Instead, if you give $5.58 million away now and die in 2026, the full $5 million remaining at your death will be subject to federal estate tax. Conversely, if you give away $11.58 million now and die in 2026 with no other assets, you will not have a taxable estate at death and no federal estate tax will be due.

Do You—and Do Your Designated Fiduciaries—Know Where Your Estate Planning Documents Are?

One important goal of estate planning is to create peace of mind for yourself and your loved ones. For all of us, getting our affairs in order is the responsible thing to do so that when we die or become incapacitated, our loved ones aren’t left to clean up a mess.

The simple act of making sure that you and your designated fiduciaries know where your estate planning documents are located is often overlooked but can prevent unnecessary confusion and frustration. I advise my clients to store their documents in a safe and secure location, and to inform fiduciaries of how to access them. In most instances, it’s advisable to inform designated fiduciaries where to find your important estate planning documents, and in some instances, to provide fiduciaries with a copy. It is helpful to also inform your fiduciaries of the name and contact information of the estate planning attorney who created the documents.

Now is the Time to Act

The COVID-19 pandemic has laid bare the importance of having an up-to-date estate plan. Despite the need for social distancing, we can help our clients create, update, and execute their important documents, such as wills, trusts, powers of attorney, and patient advocate designations, either in person or through remote audio/video technology. To move forward with your estate planning priorities, please contact Marlaine C. Teahan at mteahan@fraserlawfirm.com or 517.377.0869.

Chair of Fraser Trebilcock’s Trusts and Estates Department and serving as Secretary/Treasurer of the firm, attorney Marlaine C. Teahan is a Fellow of the American College of Trust and Estate Counsel, and is the past Chair of the Probate and Estate Planning Section of the State Bar of Michigan. For help with your estate planning needs, contact Marlaine at 517-377-0869 or mteahan@fraserlawfirm.com.

Filing a Proof of Claim in Bankruptcy: What You Need to Know

When a company files for bankruptcy and it owes you money, it means you have a “claim” in the debtor’s bankruptcy proceedings. A claim, in short, is a right to payment. A creditor with a claim must often take affirmative action by filing a “proof of claim” form in order to preserve and protect its rights to payment.

Filing a proof of claim can be a relatively simple process involving the submission of a short form. But it’s often not that easy, and the negative consequences of doing it wrong can be severe.

Experienced legal counsel can help you to avoid the common pitfalls inherent in filing a claim. While the information below provides a general overview of many of the most salient issues, there are many nuances and considerations that should be taken into account with all of these issues, and an attorney can help you to identify and weigh them.

Do You Have to File a Claim?

If you’re owed money by a bankrupt debtor, you likely have to file a claim. The technical definition of a “claim” under Section 101(5) of the Bankruptcy Code is: “(A) a right to payment, whether or not reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or (B) a right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.”

The only instance when you would not have to file a claim for money you are owed is if your claim is accurately reflected on the debtor’s schedules (which must be filed shortly after a case is filed) and is not listed as disputed, contingent or unliquidated. A creditor must take care to ensure that the claim amount listed on the debtor’s schedules is accurate and the claim is scheduled against the right debtor (in cases involving more than one debtor entity). Even when a claim is scheduled, and assuming there are no reasons not to (see below), a creditor may choose to file a claim to guard against a debtor modifying or removing its scheduled claim.

By When Must You File a Claim?

The bankruptcy court will establish a deadline, or “bar date,” by which claims must be filed. That said, a claim can be filed well in advance of the bar date. Often, it’s best to strike the right balance when it comes to timing—not so early that all information related to your claim isn’t captured, but not so late that you’re bumping up against the deadline. It’s important to follow all procedures set forth in the Federal Rules of Bankruptcy Procedure, local rules, and orders issued in the case when it comes to the timing of the submission of your claim form. Don’t put yourself in a position of having to petition the court to late-file a claim due to an avoidable mistake or misunderstanding regarding the applicable rules.

What Supporting Documentation is Required to Assert a Claim?

Federal Rule of Bankruptcy Procedure 3001 provides that proofs of claim must conform to the applicable proof of claim form. Rule 3001 states that when a claim is based on a writing, “a copy of the writing shall be filed with the proof of claim.” In the event the writing has been lost or destroyed, “a statement of the circumstances of the loss or destruction shall be filed with the claim.”

In practical terms, this means that a proof of claim form should include supporting documentation such as relevant contracts, invoices, and correspondence sufficient to support the claim. While the supporting documentation need not be exhaustive, it should be inclusive of all pertinent information necessary to demonstrate the basis of the claim.

In some cases, a creditor will need to file a “contingent” or “unliquidated” claim—meaning a claim is open-ended or the claim amount has yet to be determined—and explain the basis for doing so. The filing of contingent and unliquidated claims is permitted, but it’s a good idea to discuss the risks (and potential benefits) with legal counsel before doing so.

What Happens if the Debtor Objects to My Claim?

The debtor has the opportunity to object to claims filed in the case. The bases for claim objections vary, from disputes as to the amount asserted to arguments that the claim was filed against the wrong entity. A creditor must be served with an objection and has an opportunity to respond.

Often, claim objections are resolved without the parties having to resort to extensive litigation in the bankruptcy court. The lawyers for a creditor and the debtor will typically attempt to reach a resolution of the objection through negotiation and additional information sharing.

Depending on the dollar amount at stake, and the differing viewpoints of the parties as to the merits, some claim objections will not be capable of resolving and it will be necessary to litigate to a resolution. In such instances, additional discovery and a trial before the bankruptcy court may be necessary.

Are There Risks to Filing a Claim?

One of the primary risks that must be considered before filing a claim is that the act of filing a claim constitutes a creditor’s consent to the jurisdiction of the bankruptcy court. The consent is not only to jurisdiction to adjudicate the claim, but also extends to related matters including claims that the debtor may have against the creditor. Accordingly, before filing a claim, a creditor should consult with legal counsel to determine whether there is any risk that, by filing a claim, the creditor will put itself at risk of being sued in the bankruptcy court.

Protect and Preserve Your Rights With a Proof of Claim

Increasing numbers of businesses being affected by the economic fallout from COVID-19 are filing for bankruptcy protection, which means that an increasing number of businesses will be forced to pursue claims for prepetition debts through bankruptcy court. The consequences of not properly preparing and filing a proof of claim can be severe, so it’s important to consult with legal counsel to ensure that your rights are protected. For questions or assistance, please contact Fraser Trebilcock attorney Jonathan T. Walton, Jr.

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

Jonathan T. Walton, Jr.’s legal practice focuses on cases arising from commercial transactions, the Uniform Commercial Code, the federal and state securities laws, banking laws and bankruptcy litigation. In the areas of banking, commercial, construction and real estate litigation, he represents lenders, contractors and owners on construction-related claims, and lenders and borrowers in commercial and residential foreclosure matters, large loan defaults and collections, lien priority disputes, and title insurance company liability. He can be reached at (313) 965-9038 or jwalton@fraserlawfirm.com.

[Client Reminder] October 14 Deadline: Medicare Part D Notice of Creditable (or Non-Creditable) Coverage

Medicare Part D notices (of either creditable or non-creditable coverage) are due for distribution prior to October 15th.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 requires entities who offer prescription drug coverage to notify Medicare Part D eligible individuals whether their prescription coverage is creditable coverage. With respect to group health plans including prescription coverage offered by an employer to any Medicare Part D eligible employees (whether or not retired) or to Medicare Part D Medicare-eligible spouses or dependents, the employer must provide those individuals with a Notice of Creditable or Non-Creditable Coverage to advise them whether the drug plan’s total gross value is at least as valuable as the standard Part D coverage (i.e., creditable). Medicare Part D notices must be provided to Medicare-eligible individuals prior to October 15th of each year (i.e., by October 14th).

The initial notices were due by November 15, 2005 and have been modified numerous times. The newest model notices and guidance were issued for use after April 1, 2011. Therefore, any notices you send from this point forward must conform to the new guidelines. Use of the former model notices will not suffice.

Downloads to the updated guidance and various notices can be found on the CMS website HERE and HERE.

As a reminder, there are five instances in which such notice must be provided:

Prior to an individual’s initial enrollment period for Part D;
Prior to the effective date of enrollment in your company’s prescription drug coverage;
Upon any change in your plan’s creditable status;
Prior to the annual election period for Part D (which begins each October 15); and
Upon the individual’s request.

Providing the notice above is important as a late enrollment penalty will be assessed to those persons who go 63 days or longer without creditable coverage (for example, if they enroll in an employer’s prescription plan which is not as valuable as the Part D coverage instead of enrolling directly in the Medicare Part D coverage).

If your plan does not offer creditable prescription drug coverage and if the Part D eligible person enrolls in your plan instead of the Part D plan for at least 63 days, a permanent late enrollment penalty of 1% of the premium is added to the Medicare premium for each month the person does not enroll in Part D.

Please contact us if you need assistance with your Notice of Creditable (or Non-Creditable) Coverage.

Reminder: Submit Medicare Part D Notice to CMS

As discussed above, employers offering group health plans with prescription drug coverage are required to disclose to all Part D-eligible individuals who are enrolled in or were seeking to enroll in the group health plan coverage whether such coverage was “actuarially equivalent,” i.e., creditable. (Coverage is creditable if its actuarial value equals or exceeds the actuarial value of standard prescription drug coverage under Part D.) This notice is required to be provided to all Part D eligible persons, including active employees over age 65.

The regulations also require group health plan sponsors with Part D eligible individuals to submit a similar notice to the Centers for Medicare and Medicaid Services (“CMS”). Specifically, employers must electronically file these notices each year through the form supplied on the CMS website.

The filing deadline is 60 days following the first day of the plan year.

At a minimum, the Disclosure to CMS Form must be provided to CMS annually and upon the occurrence of certain other events including:

Within 60 days after the beginning date of the plan year for which disclosure is provided;
Within 30 days after termination of the prescription drug plan; and
Within 30 days after any change in creditable status of the prescription drug plan.

The Disclosure to CMS Form must be completed online at the CMS Creditable Coverage Disclosure to CMS Form web page HERE.

The online process is composed of the following three step process:

Enter the Disclosure Information;
Verify and Submit Disclosure Information; and
Receive Submission Confirmation.

The Disclosure to CMS Form requires employers to provide detailed information to CMS including but not limited to, the name of the entity offering coverage, whether the entity has any subsidiaries, the number of benefit options offered, the creditable coverage status of the options offered, the period covered by the Disclosure to CMS Form, the number of Part D eligible individuals, the date of the notice of creditable coverage, and any change in creditable coverage status.

For more information about this disclosure requirement (instructions for submitting the notice), please see the CMS website for updated guidance HERE.

As with the Part D Notices to Part D Medicare-eligible individuals, while nothing in the regulations prevents a third-party from submitting the notices (such as a TPA or insurer), the ultimate responsibility falls on the plan sponsor.

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

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

This is part two of a two-part blog post series on cottage succession planning in Michigan.

As summer winds down, the second-home market continues to heat up in Michigan. One of the issues many second-home owners face is determining the best way to keep a family cottage in the family for generations to come. In this series on cottage planning in Michigan, we are addressing that very issue.

In part one, we discussed the reasons why a cottage owner may want to develop a cottage plan (including Michigan’s complicated real estate tax framework). This article deals with the mechanics of cottage succession planning in Michigan—specifically, utilizing a limited liability company or trust structure to allow a cottage to be used and enjoyed by future generations in an organized way that helps reduce the risk of family disputes, thereby increasing the likelihood that the cottage will be part of the family for years to come.

What is a Cottage Plan?

A cottage plan is an agreement that describes how a cottage will be shared, managed and passed on to future generations of family members. Cottage plans typically cover a range of issues that can impede the succession of a cottage if left unaddressed, including:

Who should own the cottage?
Who should manage it?
Who should pay for it?
What if an owner wants/needs out?
Who gets to use it?
How should use be scheduled?

By working through these issues in a cottage plan, an owner (or “founder” in cottage-planning lingo) can achieve various goals that are commonly shared by those who desire to keep the cottage in the family. Those goals include:

Keeping the cottage in the family for future generations so that it can continue to serve as a gathering place for extended family
Giving children equal shares of the cottage (while avoiding “trapping” an inheritance in the cottage)
Keeping interests in the cottage out of hands of in-laws and creditors
Reinforcing family interests versus any one individual’s interests

An effective cottage plan can and should also address the objectives of the family members (or “heirs”) who will enjoy the cottage beyond the owner’s lifetime. Such objectives include:

Protecting the cottage from a divorce
Developing decision-making structures and control mechanisms
Developing consequences for failure to abide by rules—financial and behavioral
Developing a fair, flexible scheduling system
Provide an exit strategy where desired or necessary by providing the ability to sell interests back to family

Cottage Planning Solutions

Most husbands and wives who own a cottage hold title as joint tenants with rights of survivorship, which means that title to the property automatically passes to the survivor on the death of the first co-owner regardless of any provision in a will or trust. Upon the death of the survivor, and in the absence of a cottage plan, the cottage will pass to heirs as tenants in common.

A tenancy in common can be problematic for a number of reasons, including:

Each tenant in common (“TIC”) has a right to partition
Each TIC may use the cottage at any time
A TIC may transfer his interest to any person at any time – including his/her spouse.
A TIC does not owe rent to the other owners for using the cottage.

A better approach, which helps avoid the issues that often arise when heirs are tenants in common, is to have title to the cottage held either by a limited liability company (“LLC”) or a trust. Under an LLC structure, a management committee, which serves a function similar to a board of directors, is formed to manage the cottage’s affairs. With a trust, co-trustees are appointed to make decisions. In either case, if the family and entity is structured by branches, it is advisable to have one representative from each branch of the family involved in decision making.

Through the cottage planning process, the founders decide who may be a “member” (under an LLC) or beneficiary (under a trust). Virtually all cottage plans restrict participation to lineal descendants of founders, which ensures the cottage remains in the family—in other words, preventing in-laws from becoming members or beneficiaries.

One of the primary advantages of having a cottage plan utilizing an LLC or trust structure is that it provides a mechanism for transferring membership or beneficial ownership interests. Plans typically include a “put option” which requires the LLC or trust to purchase the interests of members or beneficiaries who want to sell their stake, and a “call option” that allows for the forced buy-out of difficult members or beneficiaries. Valuation and payment term guidelines for purchases are defined in the plan. This provides a predetermined exist strategy for those who do not wish to participate in the cottage or those who do not or are unable to contribute their fair share to cottage costs and expenses. The predetermined terms established for the buy-out provisions offer the opportunity for a graceful exit.

Plans also address issues related to expenses, such as taxes and maintenance, for the cottage. Expenses are typically allocated according to a predetermined sharing ratio among the members and beneficiaries. Often, an annual budget is prepared and an annual assessment is determined at the beginning of each year or season. Failure to pay expenses can be dealt with through an escalating series of sanctions, from the imposition of late fees and interest all the way to the forced buy-out of the delinquent member or beneficiary.

In many instances, founders choose to offset the ongoing expenses of a cottage by establishing an endowment, which is a dedicated sum of money for a specific use. For example, a $500,000 endowment invested at a five percent rate of return will create a pre-tax return of $25,000 per year, which is a sum sufficient to operate many cottages. The endowment may be held and managed by a bank trustee or by the LLC. If a cottage is sold, the endowment distributes to the founder’s descendants. One way to fund the endowment is to purchase a “second-to-die” life insurance policy.

Finally, a cottage plan typically addresses issues related to the use of the cottage—that is, who can use the cottage at any given time. Two common approaches include a “rooming house” structure in which any member or beneficiary can use it any time, and a “time share” structure in which members and beneficiaries are allocated specific time slots for use.

Take Action to Create a Cottage Plan

There are significant advantages to having a cottage plan that utilizes an LLC or trust structure. There is no single option that is best for all families, so it’s important to consult with an experienced cottage law attorney to determine what option is right for you. With a bit of planning, you can help ensure that your cottage will be a source of enjoyment for your 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.

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.

The DHS / CDC “September Surprise” – The Order to Temporarily Halt Residential Evictions

Introduction:

Effective upon publication in the Federal Register on Friday, September 4, 2020, the Acting Chief of Staff of the Centers for Disease Control and Prevention, a division of the U.S. Department of Health and Human Services (HHS), announced an Order that purports to temporarily halt all residential evictions in the United States and US Territories. The Order includes tribal lands but excludes American Samoa. The stated purpose is to prevent the further spread of COVID-19.

The Gist:

Under this Order a residential landlord or other entity with a legal right to evict is prevented from evicting “any covered person from any residential property in any jurisdiction to which this Order applies.” The duration of the Order is through the end of 2020. This Order does not apply in any State, local, territorial, or tribal area with a moratorium on residential evictions that provides the same or greater level of public health protection than are provided in this Order.

Because Michigan’s eviction moratorium has expired as of July 15, 2020 (even though some district courts enforced it through August 15, 2020), this Order applies in Michigan. Some media outlets were reporting that some Michigan district courts are halting eviction procedures until the legality and enforceability of the Order is worked out.

This Order is intended to be temporary and it does not “relieve any individual of any obligation to pay rent, make a housing payment, or comply with any other obligation that the individual may have under a tenancy.” Landlords can still charge and collect of fees, penalties, and interest as a result of the failure to pay rent, assuming they are allowed for under the lease. Landlords can still evict for reasons other than non-payment caused by Covid-19, such as where a tenant is:

“engaging in criminal activity”;
“threatening the health or safety of other residents”;
“damaging or posing an immediate and significant risk” to property;
“violating any applicable building code, health ordinance, or similar regulation relating to health and safety”; or
“violating any other contractual obligation” other than payment of rent or associated fees.

The Tenant Declaration:

The Order attaches a sample declaration that a Tenant must sign, under penalty of perjury, in order to qualify for protection under the Order. “Each adult listed on the lease. . . should. . . provide a declaration.” The Declaration must state that the tenant:

Has used best efforts to obtain all available government assistance for rent or housing;
Earns less than $99,000 annually ($198,000 if filing a joint tax return), or was not required to report any income in 2019 to the IRS, or received an Economic Impact Payment (stimulus check) pursuant to Section 2201 of the CARES Act;
Is unable to pay the full rent due to substantial loss of household income;
Is using best efforts to make timely partial payments that are as close to the full payment as the individual’s circumstances may permit; and that
Eviction would likely render the individual homeless or force them into a new congregate or shared living setting.

Under the terms of the Order, if a tenant cannot so attest, the protections are not available to the tenant.

The Stick:

The Order comes with stiff criminal penalties and fines for violators. A person violating this Order may be subject to a fine up to $100,000 if the violation does not result in a death, one year in jail, or both. If the violation results in death the fine can rise to $250,000 plus one year in jail. Institutional violators may be subject to a fine of no more than $200,000 per event if the violation does not result in a death or $500,000 per event if the violation results in a death. The U.S. Department of Justice is the only department or person that can initiate court proceedings seeking to impose these criminal penalties.

Federal Authority and What this Likely Means:

The authority for this Order is Section 361 of the Public Health Service Act, codified at 42 U.S.C. §264, along with a related regulation, being 42 CFR §70.2. This Order represents, at a minimum, creative use of the enabling authority. Others (including judges and attorneys for landlords)would argue that the statute and regulation cited as authority for this Order do not, on their face, grant the authority for its issuance. Until a federal court strikes the Order, however, landlords would be advised to heed it – particularly due to the severe penalties associated with a violation.

The underlying statute, 42 U.S.C. § 264, authorizes the Surgeon General, with approval of the DHHS Secretary, “to make and enforce such regulations as in his judgment are necessary to prevent the introduction, transmission, or spread of communicable diseases from . . . one State or possession into any other.” For that purpose the Surgeon General “may provide for. . . inspection, fumigation, disinfection, sanitation, pest extermination, destruction of animals or articles found to be so infected or contaminated as to be sources of dangerous infection to human beings, and other measures, as in his judgment may be necessary.” Id. (emphasis added). Editorially, this Order appears to rely completely on (or arguably stretch) the “other measures” language.

From there the statute authorizes actions such as apprehending and forcibly detaining infected people, foreign nationals and others entering the country, and conduct of that sort. Nothing remotely appears to provide authority to the CDC or jurisdiction to the CDC over people that are well and otherwise unaffected by the disease in question.

Similarly, “Nothing in this section or. . . the regulations promulgated under such sections, may be construed as superseding any provision under State law (including regulations and including provisions established by political subdivisions of States), except to the extent that such a provision conflicts with an exercise of Federal authority under this section.” 42 U.S.C. § 264(e). On the face of it, local ordinances can take precedence over this federal statute if they are not in conflict with what appear to be the enforcement powers under this statute. A court could find that the general common law of contracts and court eviction-governing statutes could be the exact laws that shall not be preempted by the federal scheme.

The Order also relies on 42 CFR § 70.2 for its authority. Under this regulation, which by title addresses “measures in the event of inadequate local control,” the CDC Director must determine that measures taken by state or local health authorities “are insufficient to prevent the spread of any of the communicable diseases from such State. . . to any other State.” Once local or state inadequacy is determined, the CDC Director “may take such measures to prevent such spread of the diseases as he/she deems reasonably necessary, including inspection, fumigation, disinfection, sanitation, pest extermination, and destruction of animals or articles believed to be sources of infection.” Under the regulation, there is no “other measures” language as appears in the statute. However, the powers “include” an express list of items and may well contain related implied powers. That said, an eviction moratorium seems to be quite a departure from fumigating and exterminating pests as listed in the express powers.

Because the Order arguably exceeds the authority of the CDC in this instance, there are reasons to believe that this Order, though enforceable on its face and applicable in Michigan under its terms, may not survive a rigorous judicial examination. That is not a reason to disregard it, however, unless and until a court of competent jurisdiction strikes it or enjoins the enforcement of it.

Ambiguity – Are Land Contracts and Possessory Writs Covered?

Under the definition of “evict” in the Order, the eviction prohibition “does not include foreclosure on a home mortgage.” Thus, unless there is a foreclosure moratorium in place covering the mortgagor-homeowner, it appears that this Order, at a minimum, does not halt the foreclosure process. To wit:

“Evict” and “Eviction” means any action by a landlord, owner of a residential property, or other person with a legal right to pursue eviction or a possessory action, to remove or cause the removal of a covered person from a residential property. This does not include foreclosure on a home mortgage.

This “other person with a legal right to pursue . . . a possessory action” language might, on its face, include a land contract vendor-seller or even a mortgagee-lender and prevent them from obtaining the final eviction order or “Writ of Restitution” which completes the foreclosure or land contract forfeiture process where the purchaser remains in possession of the property. Certainly the language excluding foreclosure from the Order would support a position that a foreclosing mortgagee-lender can obtain that final possessory writ (which is basically finalizing an eviction). But, land contract vendor-sellers are not expressly excluded. The answer for land contract vendor-sellers may lie in the definition of the “residential property” to which the eviction moratorium is intended to apply. That states that:

“Residential property” means any property leased for residential purposes, including any house, building, mobile home or land in a mobile home park, or similar dwelling leased for residential purposes, but shall not include any hotel, motel, or other guest house rented to a temporary guest or seasonal tenant as defined under the laws of the State, territorial, tribal, or local jurisdiction.

This “leased for residential purposes” language would appear on its face to exclude land contract sales. While mortgagor-borrowers and land contract vendee-purchasers might have arguments against eviction based on the “right to pursue possessory action” language, it appears that the bulk of the Order supports the argument that the Order does not impact the right to recapture possession after a failed sale, either land contract or mortgage. As of the time of writing, however, there does not appear to be any scholarship or judicial opinions on the matter.

If you have any questions, please contact your Fraser Trebilcock attorney.

Jared Roberts is a shareholder at Fraser Trebilcock who works in real estate litigation and transactions, among other areas of the law. Jared also “walks the walk” as a landlord and owner of residential rental properties and apartments in Downtown Lansing. He may be reached at jroberts@fraserlawfirm.com and (517) 482-0887.

New York Federal Court Strikes Down Key Provisions of FFRCA Final Rule

In response to a lawsuit by the State of New York, a New York federal district court judge struck down aspects of a U.S. Department of Labor (“DOL”) final rule (the “Rule”) providing guidance on interpretations of the Families First Coronavirus Response Act (FFCRA). The court’s ruling, which was made on August 3, 2020, strikes down the Rule’s “work availability” requirement, the “health care provider” definition, portions of the employer consent requirement for intermittent leave, and the advance documentation requirements for taking FFCRA leave.

It is unclear whether this decision applies only to New York or on a nationwide basis. An appeal of the decision to the U.S. Court of Appeals for the Second Circuit is expected.

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.

Pursuant to the EFMLEA, which is a temporary amendment to the Family and Medical Leave Act (FMLA), eligible employees (those employed for 30 calendar days or longer) receive up to 12 workweeks of leave to care for their child whose school or place of care has been closed, or whose childcare provider is unavailable, due to COVID-19 precautions.

On April 1, 2020, the DOL issued the Rule implementing and interpreting the FFCRA. On April 14, New York filed a complaint for declaratory and injunctive relief against the DOL and the Secretary of Labor in the U.S. District Court for the Southern District of New York, and moved for summary judgment.

Work Availability Requirement Under the FFCRA

The Rule clarified that employees are not entitled to paid leave under the FFCRA if their employers “do not have work” for them to do. This “work availability” requirement was significant because, as the district court explained, COVID-19 has caused the temporary shutdown or slowdown of many businesses nationwide, resulting in a decrease in work available to employees.

In its complaint, New York asserted that “[t]he Final Rule imposes a new ‘work availability’ requirement that permits employers to deny their workers emergency family leave or paid sick leave, with no statutory basis.” The DOL argued that the Rule is consistent with the statute because employees are not “unable to work (or telework)” (due to one of six reasons listed above) if their employer has no work available for them to perform.

The Court disagreed, concluding that the work availability requirement exceeded the DOL’s authority because it applied only to three of six qualifying reasons for EPSLA leave, which the court found inconsistent with the language of the FFCRA. The court also found the DOL’s “barebones explanation” for the work availability requirement to be “patently deficient,” particularly in light of its “enormously consequential” impact of narrowing the scope of the FFCRA.

Definition of “Health Care Provider”

The FFCRA permits employers to exclude a “health care provider or emergency responder” from paid leave benefits. New York argued that the Rule’s definition of a “health care provider” exceeds the DOL’s authority under the FFCRA. The DOL defined “health care providers” as employees of a broad group of employers, including, in part, anyone employed at “any doctor’s office, hospital, health care center, clinic, post-secondary educational institution offering health care instruction, medical school, local health department or agency, nursing facility, retirement facility, nursing home, home health care provider, any facility that performs laboratory or medical testing, pharmacy, or any similar institutions, Employer, or entity.”

The court determined that the FFCRA “unambiguously forecloses” the DOL’s definition. The court found the definition to be “vastly overbroad” because it included individuals whose roles bore “no nexus whatsoever” to the provision of healthcare services and “who were not even arguably necessary or relevant to the healthcare system’s vitality.”

Intermittent Leave Provisions

The Rule permits employees to take leave intermittently (i) upon agreement between the employer and employee and (ii) only for a subset of qualifying conditions. New York took issue with both aspects of the Rule. The court upheld the DOL’s limitation of leave to qualifying reasons that are not logically correlated with a higher risk of viral infection. However, the court determined that the DOL “utterly fails to explain why employer consent is required for the remaining qualifying conditions.” Therefore, the district court vacated the requirement for employer consent.

Documentation Requirements

New York also challenged the Rule’s requirement that employees submit to their employer, prior to taking FFCRA leave, documentation explaining their reason for leave, the duration of leave, and, to the extent relevant, the authority for the isolation or quarantine order qualifying them for leave.

The district court noted that the FFCRA contains notice requirements but no documentation requirement for taking leave. It concluded that the requirement that employees furnish documentation in advance of leave imposed different and more onerous standards inconsistent with the FFCRA’s unambiguous notice provisions. The district court stated: “The documentation requirements, to the extent they are a precondition to leave, cannot stand.”

Conclusion

As noted above, it is unclear whether this decision applies only to New York or has nationwide impact. We will continue to monitor and keep you informed as to further developments, which could include an appeal of the decision or new guidance being issued by DOL. If you have any questions about this case, or FFCRA issues more broadly, please contact your Fraser Trebilcock attorney.

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 tailored specifically for ownership of the cottage property. Here are ten common reasons why a cottage plan may be advisable.

Prevent a joint owner from forcing the sale of the cottage through an action for partition
An alternative to allowing common law rules to dictate how the cottage operates
Prevent transfer of an interest in the cottage outside the family
Protect owners from creditor claims
Establish a framework for making decisions affecting the cottage
Provide sanctions for nonpayment of cottage expenses
A vehicle for an “endowment” (money set aside to fund cottage expenses)
To require mediation or arbitration of family disputes
Allocate control of the cottage between or among generations of owners
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.

Stay tuned for part two in this series in cottage succession planning. In the interim, if you have any questions about planning issues for your cottage in Michigan, please contact Fraser Trebilcock shareholder Mark Kellogg.