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December 23, 2013

Michigan State Tax Commission Issues Clarification on New Uncapping Statute

As discussed previously on our blog, on December 14, 2012, the Michigan legislature enacted a law, Public Act 497 of 2012 (HR 4753), to prevent the uncapping of property taxes on certain transfers of residential property after December 31, 2013 between individuals related by blood or affinity to the first degree. As noted on our past blogs, there has been a lot of uncertainty surrounding this law. For example, what if a property is owned by a trust or a limited liability company, will this extra degree of separation cause an uncapping?  Well, the Michigan State Tax Commission (STC) has finally answered this question. Regrettably the STC has not provided the answer that cottage planners like us were hoping for. 

On December 16, 2013, the STC issued a bulletin that addressed two issues:  (1) what does "related by blood or affinity to the first degree" mean under the provisions of this law and (2) will properties owned by a trust, limited liability company or a probate estate qualify for the exemption. We should note that the STC bulletin is not enforceable in court. Nonetheless, the STC (and local assessors) will be using the bulletin as guidance when assessing taxes on transfer of residential property. Therefore, the bulletin is important.  

First, the STC has expanded the list of individuals who qualify as being related by blood or affinity to the first degree to include siblings. The list now includes the following individuals:

  • Spouse
  • Father or mother
  • Father or mother of spouse
  • Son or daughter
  • Adopted son or daughter
  • Son or daughter of spouse
  • Siblings

Second, and much to our disappointment, the STC has clarified that the transferor and transferee under this new law must be a person. Therefore, this exemption does not apply to a trust, limited liability company, or to a distribution from a probate estate. As such, you should proceed with utmost caution when utilizing this new law. 

Although this law is not perfect, it is a step in the right direction for cottage owners because of the decreased tax burden on certain transfers of property. As always, though, you should not let the "tax tail wag the dog"!  When entering into cottage planning you should consider what is best for your family, particularly if you plan to transfer the cottage to more than one family member. Taxes should not override the need to create harmony in the family by setting forth rules for the next generation of owners through a cottage plan. With that said, it is possible to create a plan that addresses both the tax considerations as well as creating harmony in the family for generations to come.   

If you have questions about the new law or about creating a complete cottage plan for your family, we would be happy to assist you.  In the meantime, enjoy a wonderful holiday season!

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