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June 24, 2015

Cottage Owners, Relax: New Law Can Help Keep the Family Cottage in the Family

As Michigan's cottage season gets into full swing, it is a great time to celebrate a bit of good news for Michigan cottage owners. Recent changes in the law have made it significantly easier for cottage owners to transfer a cottage to their family members without the significant jump in property taxes that might make the family cottage too expensive for successive generations to afford.

History of Michigan Property Taxes and "Uncapping"

In the past, property taxes in Michigan were levied each year based upon an assessment of the actual value of the property. This approach tied property taxes directly to actual value—as property values increased, property taxes increased proportionately. When property values rose sharply, the result was a significant increase in property tax from the previous year.

In 1994 the Michigan legislature adopted “Proposal A” which effectively “caps” an owner’s property tax liability. Under Proposal A, the property’s actual value is no longer the basis for taxation. The annual increase in the "taxable value" of real estate – the value upon which taxes are based – is limited, regardless of increases in the assessed value of the property.

However, a “transfer of ownership” will trigger a new assessment and a valuation of taxes based on market value. In general, any time property is conveyed to another party, a transfer of ownership occurs and the taxable value of the property may be uncapped. Historically, the transfer of property to children upon the death of the cottage owner was an uncapping event. In some cases, this would raise the property taxes so dramatically that the children could not afford the property, effectively defeating the parents’ attempt to keep the cottage in the family.

Prior to the recent legislative changes, Michigan law did contain some exceptions to the “transfer of ownership” rule, such as transfers among joint tenants when certain conditions are met. But these workarounds were cumbersome and sometimes risky. Fortunately, Michigan cottage owners now have a more convenient option.

The New Law: A Win for Cottage Owners

Effective December 31, 2014, PA 310 of 2014 allows an owner of residential real estate to transfer his or her property to eligible family members – either during lifetime or after death through a will, by intestate succession, or through a trust – without triggering an uncapping of the property taxes. This law is much simpler to use – and in certain cases more effective - to prevent an uncapping than the joint tenancy option described above (and the subject of prior discussions on our blog). Major changes helpful for cottage owners include:

  1. Eligible Family Members. 
    Who are "eligible" family members under this new law? The definition of eligible family members includes the owner's or the owner's spouse's mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson or granddaughter.
  2. Transfers During Lifetime
    Transfers during lifetime – by a gift or sale – to an eligible family member will not cause property taxes to uncap under the new law. (One caveat: for this exemption and all of the uncapping exemptions that follow, the cottage must not be used for any commercial purpose following the conveyance.)
  3. Trusts
    Transfers of property to and from a trust (during lifetime or after death) are now exempt from uncapping if certain conditions are satisfied. Before the recent change in the law, transferring property to and from trusts or changing the beneficiary of a trust would trigger an uncapping of the property taxes unless the transferee or beneficiary was the settlor or the settlor's spouse. The new law expands the exemption to cover other the eligible family members listed above. Additionally, changing the beneficiary of a trust will not trigger an uncapping event, so long as the new beneficiary is an eligible family member.
  4. Transfer by Will or Inheritance
    Finally, the new law also prevents uncapping when real property is transferred by a will to (or inherited in the absence of a will by) the same set of family members: the owner's or owner's spouse's mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson or granddaughter. Note, however, that under the strict language of the statute, a transfer through a probate estate to a Trust is not currently exempt from uncapping.

In sum, these changes to the law give cottage owners many more options for transferring their cottage to a wide variety of family members without triggering an uncapping of property taxes. While a cottage plan that uses joint tenancy to avoid uncapping is still effective under the new law (although perhaps for only one generational transfer), cottage owners may want to explore taking advantage of the opportunities the new law makes available.

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