Transferring Property Without Uncapping Property Taxes
What if you could transfer your home or vacation house to your children without an increase in your property taxes? Last year the Michigan Supreme Court allowed just that, unanimously ruling that Michigan's Property Tax Act allowed property owners to add their children as joint tenants without the property's taxable value becoming "uncapped."
Further, the children could retain the property after the death of their parents without uncapping the property's taxable value. While this decision provides a great opportunity for transferring real property to the next generation without an increase in property taxes, consideration must be given to the potential disadvantages before taking action.
It is important to recognize that the ability to delay the uncapping of property tax assessments will only exist as long as our legislature doesn't amend the Property Tax Act to eliminate it. The question of whether you should take advantage of delayed uncapping, however, depends on whether the risks of joint ownership outweigh the benefits of delaying increases in property taxes.
The primary risk is in the loss of flexibility with respect to the property. Putting a child (or any third party) on the title to real property means that the child or third party must consent to a sale or mortgage of that property. Similarly, you cannot change your mind and take the property back, or gift it to someone else, without the consent of your joint owner.
Adding a child to the title could also allow creditors of that child to attach the property through liens or judgment sales. While doing so during your lifetime may be unlikely, upon your death the property would be fully available to any of your child's creditors. Moreover, the IRS may be able to attach a joint owner's portion of the property even during your lifetime.
Finally, thought must be given to whether the property will be used only by the original owners, or by all owners. As a joint owner is entitled to use and possession of property, thought must be given to whether your child or children will be able to use the property during your lifetime. Even after your death, if you have added two or more people to the title, there still may be questions regarding the future use of the property, as well as questions regarding the division of the ongoing expenses of the property
In conclusion, while preserving low property taxes for the next generation is and should be a consideration, doing so through the creation of a joint tenancy may end up being more costly in the long run. Be sure to review all of your options with an expert before undertaking any property transfers, particularly any transfers that affect your ability to use and manage your property.
Brian L. Johnson, a partner of the law firm of Dingeman, Dancer & Christopherson, PLC, is an estate planning and transactional attorney practicing in the areas of estate planning and wealth transfer planning, business matters, and land use and development. For more information please visit www.ddc-law.com or call 231.929.0500.