Michigan Property Tax Uncapping Update

Michigan Property Tax Uncapping Update

Owners of real property in Michigan have “enjoyed” having a cap imposed on the amount their property taxes can increase in any given year since 1995. A reasonable taxpayer might expect that, by the twentieth anniversary, the guidelines for when property taxes uncap would be well-established and consistently applied. However, the uncapping laws continue to evolve, with a series of significant changes have taken place over the past five or so years.

As frustrating as a constantly changing tax landscape can be for Michigan property owners, the changes have, by and large, been on the side of increasing flexibility and planning opportunities. The uncapping statute defines what constitutes a “transfer of ownership” resulting in an uncapping of the taxes, and what does not. For purposes of planning – and by planning here, we generally mean seeking to preserve the property tax cap as long as possible, or to reduce uncapping incidence within a family – we are primarily concerned with the exceptions to the uncapping rules. Or, more clearly, what sorts of transfers will NOT serve to uncap the taxes?
As a brief review of the uncapping rules, a transfer of ownership, as defined by statute, effectively resets the property tax cap, setting the new owner’s taxable value to equal the current state equalized value (SEV, Michigan’s term for the current assessed value, purported to represent one-half of the market value, in the assessor’s opinion). The property taxes are then capped for the new owner until another transfer of ownership occurs.

Any Michigan property owner will have noticed the Taxable Value and SEV on their semiannual tax bills or their annual notice of assessment from their township treasurer, and how those numbers are rarely the same. The greater the disparity between those two values for your parcel(s), the more seriously you will want to evaluate this issue, especially if you intend the property in question to stay within the family after you are gone (such as farmland, lake cottage, hunting ground).

In spring of 2011, the Supreme Court of Michigan clarified one key exception to the transfer of ownership uncapping rules – namely, joint tenancy with rights of survivorship. This opened the door to planning to preserve a property tax cap across a generation (or two), but as much of a boon to Michigan families as it seemed, it came with a number of significant drawbacks. I explored this exception, and its pitfalls, in an article in the September 2012 edition of this publication, an archived copy of which is available on our firm’s website, www.thklaw.com.

Due to the issues inherent to the joint ownership exception, it was appropriate to employ in only a very limited set of circumstances. As the only viable tool in our toolbox for a couple of years there, we had a number of clients interested in it, and it was disappointing to be able to recommend it to so few. The Michigan legislature, thankfully, surprised many by passing a law at the end of 2012, effective January 1, 2014, which created a new exception.

The new exception looked promising at first – it allowed for transfers to family members related “by blood or affinity of the first degree.” Through the entirety of 2013, we were having conversations with folks about the new options on the horizon, with the caveat that we did not know exactly what would and would not be considered by the taxing authorities as included in the new exception. The statute was not as clear as it could be, and sadly, just days before the new law took effect, the Michigan Department of Treasury issued guidance that seriously dampened the excitement. The new exception would, they said, somewhat counterintuitive to the apparent purpose of the new law, not apply to transfers in inheritance, that is to say, those from trusts and estates after the prior owner had passed away. This exception, once promising, now only applied to transfers made during lifetime. With few families selling property to their children or grandchildren, such transfers would often take the form of a gift, which has its own serious drawbacks, particularly in the form of losing a step up in basis for capital gains purposes (especially relevant for highly appreciated, non-principal residence property).

Our hopes for actual viable planning avenues temporarily crushed by another narrowly-applicable exception, we were excited to see the legislature take the issue up again in 2014. They tried again, presumably with the same goal, but with new, and unambiguous, language. The new law, effective January 1, 2015, allows for preservation of the property tax cap for transfers of residential real estate to the transferor’s or the transferor’s spouse’s “mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter,” provided the use of that residential property remains the same. Perhaps most importantly, this applies to transfers in the trust and estate context – if the estate or trust beneficiary qualifies as one of the relations above, the distribution to that beneficiary will not uncap the property taxes.

Finally, we have some real planning opportunities for Michigan residential real property, on the property tax front, that does not involve the drawbacks of joint ownership or inter vivos gifting. Property owners can now pass their Michigan real estate to members of their nuclear family, as defined above and in the statute, during life, or at death through their trust or estate, without causing an uncapping of the property taxes. However, all of that said, if any lesson can be gleaned by the past few years’ history of legislative changes, it is that we should expect additional changes in the future to the property tax cap rules.

To further prove the point, the legislature made an additional change at the end of 2014, effective April 1, 2015, which modified the rules for the uncapping exception for property subject to a conservation easement. Prior to this change, the conservation easement needed to be in place prior to the owner’s death to preserve the property tax cap. The drawback there was that placing the easement would depress the cash or resale value of the property, and therefore reduce the available assets for the owner’s support later in life; a very real tradeoff. The new rule requires the conservation easement be in place prior to conveyance to qualify for the uncapping exception, allowing additional planning flexibility for families, and for trustees and personal representatives in an administrative context.

The takeaway from these recent developments is twofold: (1) all Michigan property owners should evaluate their intentions with respect to their real property and the property tax cap implications on future use; and, (2) all Michigan property owners should expect, and stay mindful of, future changes to the property tax legal landscape. Minimizing carrying costs is a major contributor to a family successfully carrying real property across generations, and is worthy of your attention and consideration in your own planning.

Every property owner’s situation is unique to them, and for this reason, we recommend that you contact an attorney if you have questions about how Michigan’s Property Tax Uncapping law could impact your estate planning.

Adam S. Russell, Estate Planning & Administration Attorney, Tuesley Hall Konopa, LLP

Author: Adam S. Russell is an estate planning attorney at Tuesley Hall Konopa, LLP. Practice areas include trust and estate planning, estate administration, tax planning, charitable planning, and charitable trusts, trust funding, special needs trusts and supplemental needs trusts, prenuptial agreements, and probate. Additionally, Adam is licensed to practice in both Indiana and Michigan and regularly meets with clients in our South Bend, Elkhart and Cassopolis offices.

You can contact Adam by calling 574.232.3538 or by email arussell@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.

Digital Asset Planning Gets National Attention

Digital Asset Planning Gets National Attention

You may have seen the front-page article in the South Bend Tribune this past Thursday on planning for your digital assets should you pass away. Planning for digital assets is something the attorneys at Tuesley Hall Konopa have been addressing with our clients for some time now.

This element of planning is, as indicated by the AP article and the ULC endorsement it details, increasingly receiving national attention, a trend which will only continue as the gaps between state laws on the subject and individual tech companies’ respective policies come into greater contrast.

The AP article mentions several examples where courts have become involved in this new area of intersection between our personal and our digital lives. Several states, including Indiana, have responded in recent years with state laws seeking to provide a method for estates to effectively deal with digital assets. Please see my prior entry on Indiana’s law for digital assets in estates. Similar statutes have been proposed in Michigan in recent years, but have not yet become law.

However, these court cases highlight just how the patchwork system of state laws falls short of providing tech companies with a reliable framework on which to base their privacy policies. The Uniform Law Commission’s endorsement of the Uniform Fiduciary Access to Digital Assets Act is a great step towards closing that gap.

Companies will vary in their response to this approach, and there will assuredly be more court cases in the future, but families can, and should, give important consideration to their own digital asset planning. The more comprehensively you cover these topics in your estate plan, the better equipped your loved ones will be in the event of your passing. These are conversations we are having with our clients now, and we include language in estate planning the documents we prepare to cover these situations.

If you need to plan for your digital assets, the attorneys at Tuesley Hall Konopa have the knowledge and experience to help. Call 574.232.3538 for an appointment.

Adam S. Russell, Estate Planning & Administration Attorney, Tuesley Hall Konopa, LLP

Author: Adam S. Russell is an estate planning attorney at Tuesley Hall Konopa, LLP. Practice areas include trust and estate planning, estate administration, tax planning, charitable planning, and charitable trusts, trust funding, special needs trusts and supplemental needs trusts, prenuptial agreements, and probate. Additionally, Adam is licensed to practice in both Indiana and Michigan and regularly meets with clients in our South Bend, Elkhart and Cassopolis offices.

You can contact Adam by calling 574.232.3538 or by email arussell@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.

Digital Asset Planning Gets National Attention

Estate Planning: Have you considered your digital assets?

As more and more facets of our lives, professional and personal, involve some sort of digital component, it is becoming increasingly important for individuals to incorporate and account for their digital assets in their overall estate plans. Digital assets could include PayPal or other online-only financial accounts, blogs, digital photo collections, email and social media accounts, digital media, domain names, and so on.

Indiana is ahead of the curve with what can be considered the most robust statutory framework to provide for the administration of digital assets in an estate context (IC 29-1-13-1.1). This statute gives the Personal Representative of an estate the ability to request access to or copies of electronic information stored by a custodian, as defined in the statute. This request also serves to obligate the custodian to maintain the information for an additional two years.

However, since very few states have laws of this nature, and none reach so far as Indiana’s, individual companies are unlikely to willingly comply, especially if their stated privacy policies or click-through agreements are in conflict. A Personal Representative may seek a court order from the probate court, but as we noted at the outset, this is a new area, and litigation on these issues should be anticipated in the coming years. Similarly, the interaction between digital assets and trust law is also an unsettled area in need of clarification.

So how should you plan for your digital assets? Create a list of all of the digital assets and accounts, and the corresponding access information. Carefully consider what you would like accessed and by whom (email in particular). Keep this list as a separate document, but consider referencing it and the statutory authority (if any, for your state) in your estate planning documents. Consider designating a trustworthy and tech-savvy person to deal with these assets. Update this information regularly, and be sure that someone (or an advisor) knows where the list is located.

If you have not updated your estate in some time you should consider what digital assets you own that should be made part of your estate plan. The attorneys at Tuesley Hall Konopa have the knowledge and experience to help. Call us at 574.232.3538 to update your estate plan.

Adam S. Russell, Estate Planning & Administration Attorney, Tuesley Hall Konopa, LLP

Author: Adam S. Russell is an estate planning attorney at Tuesley Hall Konopa, LLP. Practice areas include trust and estate planning, estate administration, tax planning, charitable planning, and charitable trusts, trust funding, special needs trusts and supplemental needs trusts, prenuptial agreements, and probate. Additionally, Adam is licensed to practice in both Indiana and Michigan and regularly meets with clients in our South Bend, Elkhart and Cassopolis offices.

You can contact Adam by calling 574.232.3538 or by email arussell@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.

Preserving the Family Cottage for Future Generations

Preserving the Family Cottage for Future Generations

“Family cottage” evokes images of idyllic summer days on the lake and evenings around the fire with those near and dear to you; often, these images are founded on multiple generations of memories. For families fortunate enough to have a cottage or vacation home, its role as a common gathering place for holidays and special events will likely contribute to the sense of intimate family bonds that overcome distance and time.

Few, if any, people (outside of lawyers) view this family haven as a risk of future discord and, possibly, litigation, but cottages, under typical ownership arrangements, present real legal and practical issues that tend to compound with each successive generation, as the number of owners increases (the more owners, the more opportunities for conflict). By typical ownership arrangements, I mean direct ownership, namely the ways in which most people are accustomed to owning and managing inherited real property: as tenants in common, and as joint tenants, which are similar, but not the same.

Our purpose here is not to provide detail on the largely archaic law of real property in the United States. Rather, our goal is to identify issues and encourage cottage owners to evaluate their own cottage succession plan. In the absence of a comprehensive cottage plan, most owners leave their property to their children, or other heirs, as tenants in common or in a form of joint tenancy. In Michigan, joint tenancy raises two very significant additional issues, both of which warrant and would require their own article: Michigan’s property tax uncapping law, and the fact that Michigan law recognizes two distinct types of joint tenancy, which can create dramatically different outcomes.

For purposes of cottage planning, tenants in common and joint tenancy share most of the same traits. The main difference, in simple terms, is that a typical joint tenancy with rights of survivorship is essentially a contest to see which joint tenant lives longest; the last survivor gets the whole pie. A typical joint tenancy can be severed into a tenant in common arrangement. Tenants in common, the default arrangement, means that each owner has equal rights to the use of the property, regardless of their ownership interest. There are a whole host of other reasons why it is not a desirable arrangement, but listing those reasons is outside the scope of this article.

What is important to understand about tenants in common (and one type of joint tenancy) is that each owner has the right to partition the property. With respect to a family cottage, this is truly the outcome we are seeking to avoid. An owner’s right to partition means they can demand that the court either physically divide the property, and failing that, order its sale, with the distribution of proceeds prorated among the owners.

In addition to preventing the very unpleasant reality of partition (which often permanently damages, if not outright destroys, family relationships), a properly assembled cottage plan can address or avoid the following issues, among others: family disagreement on matters relating to the cottage (including operation, maintenance, improvements, rental, usage, cost sharing, etc.); transfer of ownership to a spouse, through divorce or death; attachment of ownership interest by creditors, and the ability of owners to mortgage or sell their interest; inability or unwillingness of an owner to meet financial obligations of ownership; and, an owner who wants to cash out their interest.

A properly prepared cottage succession plan will be generally be designed to achieve these core goals: keep ownership in the line of descent; allocate ownership and control/decision-making authority; balance richer owners and poorer owners; create a structure and system for scheduling use; define how to handle holdout or free-rider owners; and, how to handle, or whether to allow, renting of the cottage.

I believe that the best way to achieve these goals is through indirect ownership, and especially through the use of a limited liability company (LLC) set up expressly for this purpose. One of the key benefits of indirect ownership is that it limits owners’ personal liability for accidents that may happen at the cottage. It is not hard to imagine situations where this would be important, so I will spare you any unpleasant examples. LLCs, in particular, offer numerous additional benefits, while providing more flexibility, tax benefits, longevity, and ease of use than other indirect ownership methods like trusts or corporations.

An LLC is a business entity whose operations can be defined and controlled, with great flexibility, in an Operating Agreement. This document can define ownership and place restrictions on who can be a member and how ownership interests can and cannot be transferred. As a sample, it can also prevent partition, provide mechanisms for collecting assessments and imposing sanctions on free-riders, allow for various voting and control schemes, allow for pass-through income and losses, hold an endowment (for instance, funds from a life insurance policy, to pay taxes and upkeep), provide a system for scheduling/allocating use and/or rental, and allow for amendment of its own terms. LLCs are typically less expensive and less formal than a corporation and are generally simpler to organize and maintain, as well.

Hopefully, this quick survey of cottage planning issues is useful for identifying areas in which your, or your family’s, plans could use additional attention. The overarching goal is to preserve the family cottage, within the family, while mitigating the risks of liability, future family disagreement, creditor issues, and so forth. A proper cottage succession plan will give your family its best chance at passing the cottage down to several more successive generations, where memories can continue to be made with minimal risk of unpleasantness or discord.

One very important cautionary note to conclude: as I mentioned, Michigan has a property tax uncapping law, which can be particularly troublesome for cottage owners. Transferring your cottage, into an LLC or to any other person or entity, may have significant property tax consequences, and I recommend you consult with an attorney before making any such transfers. Further discussion of this thorny issue will have to wait for a future issue.

Adam S. Russell, Estate Planning & Administration Attorney, Tuesley Hall Konopa, LLP

Author: Adam S. Russell is an estate planning attorney at Tuesley Hall Konopa, LLP. Practice areas include trust and estate planning, estate administration, tax planning, charitable planning, and charitable trusts, trust funding, special needs trusts and supplemental needs trusts, prenuptial agreements, and probate. Additionally, Adam is licensed to practice in both Indiana and Michigan and regularly meets with clients in our South Bend, Elkhart and Cassopolis offices.

You can contact Adam by calling 574.232.3538 or by email arussell@thklaw.com.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.

Estate Planning Changes – Opportunities for Married Couples

Estate Planning Changes – Opportunities for Married Couples

The bill passed by Congress in January to address the so-called fiscal cliff included changes to the federal estate tax system that offer married couples new and unique planning opportunities. Not only did the law establish a higher federal estate tax exemption for every individual (currently $5,250,000 with an annual increase for inflation) but it also made it so that a surviving spouse can utilize a deceased spouse’s unused exemption through a feature known as “portability”.

Portability is not entirely new; it was created under the 2010 tax relief act, but it was made a permanent feature of our tax system under the fiscal cliff bill. When initially introduced in 2010, portability did not receive as much attention as one would expect, in large part because the IRS took considerable time in promulgating the relevant regulations, and because the whole thing was set to sunset with the rest of the “Bush Tax Cut” provisions, and related extensions and expansions at the end of 2012. Now that portability is permanent, it’s time for married couples to consider whether they may want to make changes to their estate plan to take advantage of its opportunities.

The technical details of exemption portability, especially as it relates to subsequent spouses, are beyond the scope of this article. The basic concept is that a deceased spouse’s unused federal estate tax exemption is “portable” in the sense that the surviving spouse can elect to use both exemptions at his/her later death. Before portability, married couples with assets that exceeded the current federal estate tax exemption would typically use a classic “A/B,” or marital/credit shelter, trust structure.  Many couples found this approach complicated to understand and administer and contrary to their desire to own everything jointly with their spouse. One of the key purposes of such trust arrangements is to ensure that both spouses’ exemptions are maximized. This was especially the case when the exemptions were much lower than their current levels. The big question, then, is whether portability of exemption renders these split trust arrangements unnecessary. The answer is, in classic lawyer fashion, “it depends.” (more…)