Plan To Be 100

As of January 1, 2014, a new exception exists in Michigan’s property tax uncapping rules.  Generally, property taxes are uncapped (that is, the property taxes are based on the “state equalized value” as opposed to the often artificially lower “taxable value”) when real estate is conveyed to a new owner.  However, there are exceptions.  The latest is that uncapping will not occur when the residential property is conveyed from an owner to a person related to them “by blood or affinity to the first degree.” MCL 211.27a(7)(s).

The new law came as a surprise to attorneys in both the real estate and estate planning world, and to this day it remains unclear where the idea came from or what it was intended to fix or improve.  That said, and at the risk of looking a gift horse in the mouth, the new rule complicates planning by further inserting the issue of avoiding an uncapping into traditional strategies for planning to pass real estate (in this case appreciated residential real estate), into the variables considered when planning.  For residential property that has been “capped” for a lengthy period, and which has increased in value during that period, the attraction of this planning tool may be significant.

Initially there were questions about exactly what the law meant.  Much of that has been clarified by subsequent policy statements from the Michigan Department of Treasury.  Specifically, the treasury department has instructed local taxing authorities to only apply the exception to lifetime transfers (thereby excluding what might be the most potentially beneficial aspects of the law, including passing assets by will, trust or other conveyance at death).  The Department of Treasury has also issued it’s interpretation of what is mean by the phrase: “by blood or affinity to the first degree.”  They say it means: children, parents, spouses, siblings, parents of spouses, and children of spouses.

This change in uncapping rules comes only two years after the Michigan Supreme Court issued its own surprise ruling in the case of Klooster v City of Charlevoix, in which we learned that uncapping can be avoided as to any type of real estate through the creation of joint tenancies.  The result of the case provides that by taking the proper steps, real estate passing from one or more persons to another through joint ownerships does not result in uncapping either at the time the joint tenancy is created of upon the death of a joint tenant (causing the property to vest in the surviving joint owner).

What these two changes to the law (one by statute and one by case law) add up to is both: (1) more options to avoid uncapping real estate in suitable situations, and (2) making the issue of planning to pass property with potential uncapping costs a more important consideration in the planning process.

Finally, Michigan’s property tax laws were also amended to exempt the homestead of a “disabled” veteran from any property taxes.  To qualify the veteran must be have a service-related disability causing them to be 100% disabled.  MCL 211.7b(1).