Estate Planning and Michigan Real Property Taxes

by Jerrold Bartholomew

Estate Planning often involves transfer of real property. Care must be taken to avoid incurring unnecessary property taxes as an asset protection plan is carried out.

One of the biggest obstacles to overcome is the so-called uncapping of property taxes. In Michigan, property taxes can only increase by a fixed percentage each year, regardless of the increase in fair market value of the real estate so long as the real estate is owned by the same person or joint owners. For those who have held real property for a long time, this rule has helped to keep their property taxes down.

When real property is transferred to another person, such as through a sale or a gift, the property tax values will generally be reset at the fair market value of the real estate at the time of the transfer. Knowing the exceptions to these rules and how to retain sufficient interest in the property by the grantor can be critical to obtaining the best possible asset protection result without incurring additional property taxes.

One example of how an uncapping of property taxes can be avoided is through the creation of joint tenancy. Under MCL 211.27a (h), the creation of a joint tenancy does not create an uncapping under most circumstances:

A transfer creating or terminating a joint tenancy between 2 or more persons if at least 1 of the persons was an original owner of the property before the joint tenancy was initially created and, if the property is held as a joint tenancy at the time of conveyance, at least 1 of the persons was a joint tenant when the joint tenancy was initially created and that person has remained a joint tenant since the joint tenancy was initially created. A joint owner at the time of the last transfer of ownership of the property is an original owner of the property. For purposes of this subdivision, a person is an original owner of property owned by that person’s spouse.

One way of reading this paragraph would allow for avoiding the uncapping of property taxes indefinitely. If Annie and Barrie own property that they transfer to Charlie by creating a joint tenancy, no uncapping results. Furthermore, if Annie, Barrie and Charlie convey to Annie, Barrie, Charlie and Danny as joint tenants, one could argue that Charlie is an “original owner” for purposes of MCL 211.27a(h) and that at the passing of Annie and Barrie, Charlie and Danny will continue to pay property taxes at the “capped” rate, i.e., without regard to the fully appreciated value of the property. So what prevents Charlie and Danny from conveying the property to Eve as joint tenants and continuing to avoid the uncapping of property taxes?

This technique is one example of how a careful understanding of Michigan’s property tax law can result in significant savings and maximize the value of an asset protection plan.

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