A common concern among Michigan homeowners is the dreaded “uncapping” of real estate taxes. But the rules in this regard are somewhat confusing. In general, for as long as someone owns a parcel of real estate, the “taxable” value of that property remains “capped” and increases only incrementally from year to year. However, when property is conveyed to another party, a “transfer of ownership“ usually occurs and the property taxes are uncapped. Specifically, the transfer of property to children upon the death of the cottage owner is an uncapping event. In some cases, the uncapping can raise the property taxes so dramatically that the children cannot afford the property, effectively defeating a client’s attempt to keep the cottage in the family.
However, Michigan law currently contains several exceptions to the “transfer of ownership” rule. Most importantly for cottage planning purposes, a transfer of the property that creates or terminates a joint tenancy, if certain other conditions are met, will not uncap the cottage. The joint tenancy exception has two requirements:
- First, at least one of the joint tenants must have been an original owner – that is, that person must have owned the property before the joint tenancy was created and at the time the property was last uncapped.
- In addition, at least one person involved in the transfer must have been a joint tenant for the entire time that the joint tenancy was in existence.
The joint tenancy exception was recently confirmed by the Michigan Supreme Court in Klooster v. City of Charlevoix. In that case, Mr. Klooster’s father was the “original owner” of a parcel of real estate and later created a joint tenancy with Mr. Klooster by adding him to the title of the property. When Mr. Klooster’s father died, the entire property passed to Mr. Klooster by operation of the joint tenancy. The court held that Mr. Klooster’s father was an “original owner” and that his death, which terminated the joint tenancy, did not uncap the property taxes for the cottage. Because Mr. Klooster was not an original owner himself, however, his subsequent creation of a joint tenancy with his brother resulted in an uncapping.
So what does this case mean for cottage owners? In Klooster, the Supreme Court concluded that “original owners” of property may use certain joint tenancies as a means for transferring property without uncapping property taxes. However, people must be careful, because, as Klooster demonstrates, not every joint tenancy will allow parties to avoid uncapping. There is also the possibility that the legislature could change the law to avoid this result. For the time being, this approach can be an important part of a successful cottage planning strategy to keep your family cottage in the family. Yet, joint tenancy alone is not the silver bullet. It won’t solve the other problems related to cottage ownership such as who gets to spend which prime summer weeks at the lake and how the cost of the new roof will be divided among the owners. In many cases, the concerns regarding the future management of the cottage will outweigh any tax concerns. Therefore, while Klooster provides an interesting planning tool, one must consider various other options when planning for the family cottage.© 2014 Varnum LLP