The Transfer of Ownership Rules Under Michigan Property Tax Law and Cottage Law-Succession Planning

The Transfer of Ownership Rules Under Michigan Property Tax Law and Cottage Law-Succession Planning

Transfers of Ownership and Property Tax Uncapping
As a general rule, when there is a transfer of title of property in Michigan, the value of the property is "uncapped" and increased for the assessment of property tax. This results in a significant increase of property taxes, oftentimes to the point that the next generation of new owners in a family cannot afford to keep the family cottage.

In the past two weeks, I’ve discussed in my weekly blogs two "exceptions" from the transfer of ownership rules.[1] These exceptions provide the opportunity for parents to transfer ownership of property to their children in order to avoid the "uncapping" of the property for tax purposes.

In summary, one exception provides that parents can transfer ownership to children during their lifetimes and avoid the uncapping of the property's value. The other exception involves parents transferring ownership from themselves to their children as joint tenants with rights of survivorship. Upon the death of joint owners, the resulting transfer of ownership interest to the survivor is not an uncapping event.

What Issues the Tax Strategies Do Not Solve
While these strategies are useful and effective in limiting the increase of property taxes upon the transfer of property from parents to children, these rules fall short of facilitating any meaningful planning for the future common ownership of the property among children and future generations of owners. The tax rules result in children being able to save money on taxes, but they fail to address the issues of how the routine expenses of the family cottage will be paid: How will the family cottage be managed and decisions be made? How will the cottage be used, by whom and when? If a common owner wants to sell his or her interest, how will that work?  How much is his/her interest worth? Will the remaining owners be able to pay the exiting owner over time or will they be put in a financial crisis to have to pay immediately? These are all practical and common issues that owners of a family cottage encounter. While the transfer of ownership may have saved taxes, this may be of little consequence if the children cannot agree on how the aforementioned issues will be governed between them.

What's the Choice?
Unfortunately, there is a disconnect between the tax strategies and rules that avoid uncapping of the cottage's value for tax purposes and families being able to construct a binding plan, structure and agreements to address the non-tax issues.

The most typical way to address the non-tax issues referenced above is through cottage trusts, or cottage LLCs. Unfortunately, current or future transfers of ownership to these entities may result in an "uncapping" event at some point when the process of transferring the ownership is completed between parents and children.

At The Penning Group, we collaborate with affiliated professionals and work on the next level of planning opportunities to bring the tax planning and common ownership management together to benefit families that are trying to keep the “family” in the family cottage. We will continue to update you on our progress in the coming weeks and months ahead.

[1] See blogs entitled, "The Cottage Tax on Uncapped Property Values and the Parent-Child Transfer" and "The Joint Ownership Exception to the Transfer of Ownership Rules Under Michigan Property Tax Law."