In October of 2014, Governor Snyder signed into law a bill that widened the scope of real estate transfer exemptions for relatives. All transfers made after December 31, 2014 have and will continue to be afforded such favorable treatment. Following passage, the Michigan State Tax Commission issued updated Transfer of Ownership Guidelines – further answering questions regarding the laws scope. Property intended to be kept in the family now enjoys much more favorable treatment for purposes of uncapping upon transfer.
Under Michigan law, property taxes are based on the taxable value. Generally, where real estate is owned for long periods of time, it is common for the taxable value of such to increase nominally compared to the assessed value. (the assessor is required to assess the property at 50% of true cash value). By law, taxable value increases are limited to the lower of inflation and five percent. Upon a transfer of ownership, the property would otherwise uncap, and the new taxable value would be the current assessed value. This often resulted in double or even sometimes triple digit increases in tax bills for the inheriting relatives. For many, the only option was to sell the property.
The family exemptions include grandparents, parents, siblings, and grandchildren. Transfers can now be made to trusts so long as the beneficiaries are any of the previously mentioned relatives. Also, a transfer from such a trust to a relative is qualified; including trust distributions. So long as all beneficiaries are qualifying (including those substituted at a later time), the exemption is available nonetheless. Furthermore, even if the transfer occurs by operation of a will by way of probate, if the distribution is to a qualifying relative, the exemption is still available.
As always, there are limitations on this rather expansive change in the law. Namely, any such transfer is only exempt if the property is used for non-commercial purposes. Thereby the entrepreneurial relative with a vision for utilizing the real estate as a rental property will not qualify. As previously written in “The Enhanced Life Estate Deed: The Good, the Bad and the Ugly,” neither the law nor the updated guidelines address the treatment of lady bird deeds. Whether or not such clarification will occur, only time will tell. If there is an existing lady bird deed in place, it may be prudent to consider alternatives where the intent is to keep the real estate in the family.
These exemptions can and will no doubt benefit many families in maintaining these much coveted family treasures. If you or a loved one plans to leave a legacy property to relatives, a knowledgeable attorney can assist in tying such into your existing estate and/or Medicaid planning.
Attorney Joseph C. Jones advises clients on estate planning, asset protection, business law, and real estate law matters. Joe can be reached at (906) 914-4181 or firstname.lastname@example.org. Jones Law PLC is a Michigan & Wisconsin based provider of legal services.