At least in our firm, the attorney meetings recently have been filled by an inordinate amount of real estate property tax uncapping issues. It seems that within a couple years, the uncapping rules have become dramatically more complicated. The fairly innocuous process of checking the appropriate box on the transfer affidavit has turned into an area of complex analysis – at least when dealing with appreciated real estate. Let’s review:
March 2010, the Michigan Supreme Court shocks the legal community by announcing that certain joint ownership arrangements can be used to avoid uncapping at the death of a joint owner. Klooster v City of Charlevoix.
December 2012, the Michigan legislature comes out of nowhere with Public Act 497, which took effect December 31, 2013. The Act announces that transfers of “residential” real property to persons related “by blood or affinity to the first degree” is exempt from uncapping. The legislation was written in a manner that seemed incredibly naïve with respect to the details of when and how the exemption applies. As a result, the rules appear to have been set by the Department of Treasury through subsequent interpretative memorandum, which interpretation is not surprisingly limiting on the use of the exemption.
Then in November 2013, the Court of Appeals finds, in an unpublished opinion, that real property in a family trust was uncapped when the settlor spouse died because the surviving spouse is not the sole beneficiary – which may not be a surprise, but which also implies (or at least reminds us) that taxing authorities could look at the lifetime management provisions of any trust agreement for language which allows anyone other than the settlor or settlor’s spouse to enjoy benefits from the trust as a basis for retroactive uncapping. Lamonte Durbrow III Trust v Township of Leelanau
In the end these changes can be good for some clients; but they place a significant burden on estate planners when appreciated real estate is involved; including the need to weigh capital gains (step up) issues against uncapping issues, outright lifetime distributions against transfers to trust or joint ownership. Estate planners and real estate issues have long been awkward bedfellows – we try to know enough to advise clients, fund trusts, and generally do our thing – without becoming real estate experts. At least with respect to uncapping issues, those days may be over.