08 January 2015

Cottage Succession: Family Transfer Exemption and New Transfer of Ownership Guidelines

In October 2014, Governor Snyder signed a bill expanding your ability to transfer your cottage to your family without uncapping the property taxes in Michigan. That law applies to transfers made after December 31, 2014. Some questions about the family transfer exception to uncapping remained even after the bill passed, and we promised to keep you updated as we received answers.

In late December, the State Tax Commission issued new Transfer of Ownership Guidelines. While the new guidelines do not answer all of the questions regarding the new law, we want you to have the most up-to-date information.

The Re-Written Family Transfer Exemption
As a brief reminder, the new family transfer exemption to uncapping allows you to transfer your cottage to people related to you or your spouse in the following ways:

  • Mother, father;
  • Sister, brother;
  • Daughter, son (biological and adopted);
  • Grandchild; or
  • Grandparent

The new law prevents uncapping when the property is transferred in the following ways:

  • Transfers to a trust as long as each of the current beneficiaries is your qualifying relative;
  • Transfers from a trust to a qualifying relative (regardless of whether your qualifying relative was also a trust beneficiary);
  • Distributions from a trust to your qualifying relative;
  • Changes in trust beneficiaries, as long as all current beneficiaries remain qualifying relatives; and
  • Distributions under a Will, as long as the cottage is distributed to one or more of your qualifying relatives.

Finally, the new law only applies so long as the property is not used for any commercial purpose following the transfer.

The New Guidelines
The State Tax Commission issues Transfer of Ownership Guidelines to help assessors determine when and how to uncap property taxes. The guidelines are not binding law, but assessors treat the guidelines as the final word on property tax uncapping.

We hoped that when new guidelines were issued, those guidelines would answer several questions. What qualifies as a commercial use? Does the new exemption apply to ladybird deeds? What kind of proof of qualifying relationships can the assessors require? Unfortunately, the new guidelines do not provide much additional information.

The new guidelines do not contain any additional guidance on what qualifies as a commercial use. An October 13, 2014 State Tax Commission bulletin defines “commercial use” as “used in connection with any business or other undertaking for a profit.” The definition is vague and could encompass a wide range of activities, from renting the cottage, to selling wood carvings out of your garage, to entertaining clients on a weekend. Different assessors will likely apply the commercial use requirement in wildly different ways. Without direct guidance from the State Tax Commission, we are not likely to see much consistency among the assessors.

The new guidelines do not address ladybird deeds. With a ladybird deed, the owner retains full rights to the property during his lifetime (including the right to sell, mortgage, or lease the property), and names beneficiaries to receive the property on the owner’s death. It remains unclear whether a transfer under a ladybird deed to qualifying relatives will uncap the property taxes. Because we have no guidance on the issue, we recommend that you utilize a different strategy to transfer your cottage to qualifying relatives.

What to Do?
As more information becomes available, we will continue to update you. Until then, we recommend that you check your cottage succession plan to ensure that it is consistent with the current law. If you have questions or would like to review your plan, please contact any member of Miller Johnson’s Vacation Home Planning Group.