The Joint Ownership Exception to the Transfer of Ownership Under Michigan Property Tax Law

The Joint Ownership Exception to the Transfer of Ownership Under Michigan Property Tax Law

A common concern among parents wishing to transfer ownership of cottages and other legacy-type residences to their children is the "uncapping" of real estate taxes that occurs upon transfer of ownership. The general rule is that as long as someone owns real estate, the "taxable value" of the real estate remains "capped" and increases only incrementally against a statutory capped amount on an annual basis. However, when there is a transfer of ownership of the property to another party, that transfer typically results in an uncapping of the property's value to a much higher fair market value for assessment of property taxes. A transfer of property from parents to their children upon the parents' death is an uncapping event. Oftentimes, the transfer and resulting uncapping event results in a dramatic rise in the property taxes to the point that the children oftentimes cannot afford the property. 

A relatively recent court case in Michigan, Klooster v. City of Charlevoix, decided by the Michigan Supreme Court, confirmed that adding a new owner as a "joint tenant with rights of survivorship" to a deed will prevent property taxes from "uncapping" upon the original owners' death. The joint tenancy exemption has two requirements: 

First, at least one of the joint tenants must have been the original owner - i.e., one of the joint tenants must have owned the property before the joint tenancy was created and at the time the property was last uncapped, or before the current tax law went into effect in 1994.

Second, at least one person involved in the transfer must have been a joint tenant the entire time that the joint tenancy was in existence.

Simply put, that means that if Mom and Dad own a house and add their children onto the deed, the property taxes will remain "capped" at the parents' level after both parents have died.  This is especially significant for families that have highly appreciated land that they have owned for decades.

It should be noted that the joint tenancy exception to uncapping is different from the new exception adopted by the Michigan Legislature wherein transfers of ownership from parents to children are exempt transfer from property tax uncapping. That newly created exception was the topic of my discussion in my blog last week entitled, "The Cottage Tax on Uncapped Property Values and the Parent-Child Transfer."

The effect of the Klooster case whereby the Court concluded that "original owners" of property may use certain joint tenancies as a means of transferring without uncapping property taxes may be an important planning tool for families attempting to keep their family cottages or other legacy assets within the family. However, joint tenancy alone only addresses one aspect of cottage law and succession planning with respect to avoiding higher property taxes after the parents' death. The tax law does nothing to address the other issues of the next generation's/children's ownership of the property, such as management, payment of operating expenses, use of the cottage and future transfers of ownership by the children. In many cases, those issues with respect to the future use and enjoyment of the cottage outweigh any tax concerns.

A couple other considerations must be kept in mind with respect to this type of planning:

  • With "joint tenants with rights of survivorship," everyone on the deed has to agree to sell. One person can refuse to sell and then the property cannot be sold (although a court can force the sale if circumstances warrant it). 
  • Additionally, it can open up the property to children's creditors during the parents' lifetimes (if a child is sued or has other financial liability, because the children have an interest in the property). 

As a result, while the Klooster case provides an interesting planning tool, other options should be considered when planning for the future of the family cottage. Next week's blog - The Transfer of Ownership Rules Under Michigan Property Tax Law and Cottage Law-Succession Planning.

 

Next week's blog - The Transfer of Ownership Rules Under Michigan Property Tax Law and Cottage Law-Succession Planning.