New Michigan Law Expands Exemptions from Uncapping Property Tax Values for Transfers Between Parents and Children

The Michigan legislature recently added an exemption to the definition of "Transfer of Ownership" under the uncapping provisions of the General Property Tax Act. The new law provides that beginning December 31, 2013, transfers of residential real property from a transferor to a transferee who is related by blood or affinity to the first degree are not "transfers of ownership" and do not "uncap" the taxable value of the property provided that the use of the property does not change following the transfer. (MCL 211.77(a)(7)(s))

It is important to note that any previous transfers already completed from parents to children or from parents and/or children to trusts or limited liability companies prior to December 31, 2013, do not qualify for this new exemption. For example, any deed transferring property recorded prior to December 31, 2013, will not be subject to the new law.

What's Clear and Not Clear About the New Law
What is clear is that for those transfers of real estate that occur after December 31, 2013, between a parent and a child, that transfer will not uncap the taxable value of the property allowing a taxing authority to increase the value upon which taxes are assessed. The new law specifically references only transfers between a transferor and transferee where the parties are related "by blood or affinity to the first degree." The only certainty in the new law is that transfers from a parent/transferor to a child/transferee during the parents' lifetime will qualify as an exempt transfer.

However, the new law is not clear about transfers from a parents' revocable trust or deceased parents' estate after the parents' death. Neither a trust nor an estate would be related to a child "by blood or affinity…" and thus the new provisions of this law would not apply as the law currently is drafted.  

Where Are We Now
The only thing we know for sure is that under the new law, lifetime transfers from a parent to a child are "exempt transfers." If the rationale underlying the new provision is sound in the context of the transfer by a person, the same rationale should apply in the case of transferors from a parents' trust or estate to their children. Efforts are underway to request the legislature consider further amendments to the new law to include those transfers. Further regulations that will be issued by the Michigan Department of Treasury may also be helpful in clarifying the new law's effect.

The legislature's motivation in creating the new law and exemption was to allow families to maintain ownership of residential properties, especially family cottages and secondary homes, without facing significantly higher property taxes after the death of the parents and transfer of the property to the next generation. Although the new law and the exception will be useful as an estate-planning tool, it only solves one potential problem in the cottage law and succession planning process. The new law does not address issues concerning the future management, use and enjoyment of the cottage by the next-generation children as common owners. Those issues are still a separate concern for the future common ownership of the family cottage. 

Next week's blog - The distinction the new tax law exemption to the transfer of ownership rules and the joint ownership with rights of survivorship exception to avoid the uncapping of a property's value for property tax purposes.