The re-assessed property taxes on family transfers have created a tough situation for some families looking to pass on residential property upon death — particularly family cottages.
“What happens a lot with these family cottages, in the past anyway, if you left them to your children, a lot of times they can’t even afford it, because the property taxes go so high they decide we are going to have to sell it. It’s too expensive,” explained Neil Kimball, a Grand Rapids-based attorney with Mika Meyers Beckett & Jones.
Thanks to Public Act 497 of 2012, which took effect last month, families now have the option of transferring residential property without uncapping property taxes.
The new law is limited to first-of-kin relationships and applies to residential property only.
“Now you can leave it to kin of the first degree, spouse, parents, brothers and sisters and your children,” Kimball said.
Kimball expects the law to help a lot of families retain their family cottages that wouldn’t have been able to do so previously, because a re-assessment of property taxes would have resulted in a sky-high jump in cost that they couldn’t afford.
Since the law is new, Kimball said there continues to be some questions about how to ensure the property qualifies for remaining uncapped.
“For example, certainly, if you deed it to your children, it is going to qualify,” Kimball said. “But if you leave it in the trust for the benefit of your children, they don’t get it outright in their own hands, but it’s maintained for them for a number of years — does that qualify or not? We don’t know.”
Kimball expects that the Department of Treasury will eventually respond by issuing more specific guidelines, but for the time being, he is suggesting to many clients a “ladybird” deed as the best route to ensure qualification.
“I’m being really conservative and saying if you have a family cottage where the uncapping is a big issue, let’s do a deed to the kids that is effective at your death — a ladybird deed — so we know that you keep control of it during your lifetime, but when you die, it passes to your kids without probate, and it will certainly qualify to avoid the uncapping,” Kimball said.
Kimball added that a ladybird deed works great in some instances, but if the family is large or if there is friction between the siblings, that might not be the best choice.
So far, Kimball has seen interest in the new law from several of his estate planning clients who want to ensure their family cottage will live on and are eager to take advantage of it.