Uncapping Continued: “Guidance” from the Michigan State Tax Commission
As we have mentioned earlier on this blog, the Michigan Legislature recently enacted a law, Public Act 497 of 2012 (HR 4753), that prevents the uncapping of property taxes on certain transfers of residential property. Much to the delight of cottage planners like us, the Michigan State Tax Commission (STC) issued a bulletin on May 13, 2013, which provides guidance about the new law. Regrettably, the bulletin only raises more questions and uncertainty.
Prior to the law, the property taxes for cottages often increased when parents passed their cottages to children because the taxable value of the cottage was "uncapped" due to the transfer. The new law provides that the taxable value of residential property will stay capped after a transfer so long as three conditions are met: (1) the transfer is made after December 31, 2013; (2) the transfer is to someone related to the transferor by blood or affinity to the first degree; and (3) the use of the property does not change.
The bulletin gives a short list of what the STC thinks "related by blood or affinity to the first degree" means. Relatives to the first degree are the transferor's:
• Spouse's parents
• Children (including adopted children and stepchildren)
The STC bulletin still leaves important questions related to cottage succession planning unanswered. Why are transfers to parents-in-law exempted but not transfers to sons or daughters-in-law? Similarly, why are stepchildren included but not stepparents? Or, what if property in a parent's revocable trust passes to a child's lifetime trust. This planning technique is certainly a transfer from a parent to a child, but the bulletin doesn't answer whether that extra degree of separation – the trust – causes an uncapping. And, lastly, how does the interaction with an LLC apply to this law?
We should note for you that the STC bulletin is not enforceable in court. Nonetheless, the STC will be using the bulletin as guidance when it assesses taxes on transfers of residential property. Therefore, the bulletin is important.
In the end, Public Act 497 of 2012 is a win for cottage owners because of the decreased tax burden on certain transfers of property. Other, more traditional cottage planning tools – like a Trust or LLC – may now be less attractive from a tax perspective, but cottage owners must do what is best for their family. Taxes should be a consideration, but may not override the need to create harmony in the family by setting forth rules for the next generation of owners through a Trust or LLC.