Friday, March 9, 2018

Property Tax Primer

Our practice focuses on estate planning, but because estate planning deals with finance, property, taxes, and a host of other complex concepts we also have knowledge and experience with those areas, which allows us to better assist our clients. As attorneys we are frequently called upon to explain things to our clients that fall outside the strict boundaries of the law. Recently a client called me with question that a bit of informal research indicates a lot of people need help answering. That question, "What does the Notice of Assessment, Taxable Valuation, and Property Classification, that IS NOT A TAX BILL, tell me?"

Understanding about their property tax liability is not simple. Many homeowners pay their property taxes via an escrow account connected to their mortgage and therefore the only time they think about property taxes is when a local election includes a millage resolution. In many cases, homeowners do not understand exactly how a millage will affect their property tax liability, except to know that it is likely to increase their property tax bill. 
Local municipalities, such as villages, cities, and townships, assess property taxes based upon the value of real estate. The “millage” is the rate of tax on real property and municipalities calculate that liability by dividing the value of the property by $1,000 and multiplying that number by the millage rate. This means that a piece of property valued at $200,000 subject to a millage rate of 30 will have a property tax liability of $6,000. On a tax bill, millage rates are broken out by what they fund, including schools, public safety, and other services provided by the municipality. Winter and Summer rates vary because municipalities collect millages for different services at different times of the year.
Since the municipality calculates property tax liability based on the value of property it is also important to understand how the municipality calculates that value. This is where the Notice of Assessment, Taxable Valuation, and Property Classification (the “Notice”) becomes relevant. The Notice is how the municipality informs the property owner of the taxable value of their property. The Notice also contains other information about the value of the property in addition to the taxable value and this information frequently surprises and confuses homeowners.
In addition to documenting whether a variety of property taxes exemptions exist for the property, the Notice includes a table showing the following information:

1. Taxable Value
2. Assessed Value
3. Tentative Equalization Factor: 1.0000

4. State Equalized Value
5. There WAS or WAS NOT a transfer of ownership on this property in 2017: WAS

Taxable Value is the value the municipality uses to calculate the property tax liability, depending on circumstances Taxable Value may change dramatically from one year to the next.
Assessed Value is the value of the property as determined by the Tax Assessor, the Assessed Value of the property is frequently different than the Taxable Value.
The Equalization Factor is part of a calculation that helps to ensure uniform property assessment across the state.
The State Equalized Value is the result of multiplying the Assessed Value times the Equalization Factor.
Knowing whether ownership of the property was or was not transferred in the prior year is relevant to understanding changes in values from one year to the next.

The municipality's Tax Assessor determines the Assessed Value of the property and the process used by the Assessor to make this determination is beyond the scope of this blog but in general, the Assessed Value for a property should be approximately half of the fair market value of the property. The Taxable Value for property differs from the Assessed Value due to legislation capping the amount the Taxable Value of property may increase from year to year as long as the same owner owns it. Thus if the property values in a particular area dramatically increase over time, the taxable value of a given property will not increase proportionately. However when ownership of a property is transferred (with certain exceptions) the limitation on allowable increase in Taxable Value goes away and the Taxable Value “uncaps” increasing to the Assessed Value of the property. In the example above, the transfer of ownership in 2017 allowed the 2018 Taxable Value to increase substantially.
The system is imperfect and it is possible to challenge the Tax Assessor’s valuation of the property, but doing so requires the homeowner to produce evidence substantiating their claim, it is not sufficient to simply request that the Assessor change their original Assessment. Under many circumstances, it is necessary to go beyond the local Assessor to a Tax Tribunal in order to receive significant changes in the valuation created by complex circumstances.
I hope that this information allows you to better understand a complex document or at least remind you that your attorney can be of assistance regarding a variety of subjects. As we remind our clients, taking the time to speak with an attorney can help address a problem the right way the first time, as opposed to calling an attorney after trying to handle a problem on your own and then needing assistance to correct mistakes. Much like calling a plumber under similar circumstances, it is likely to cost more for the attorney to correct a problem than it would have cost to get proper guidance in the first place.

Tuesday, February 27, 2018

When to Update an Estate Plan

We advise that estate planning is an ongoing process and that our clients should not simply put documents in the drawer and forget about them. Part of that ongoing process is a need to review and, if necessary, update documents on a regular basis. Our clients often ask us, "How often should I update my documents?"

When it comes to keeping an estate plan up to date, there is no one-size-fits-all answer, because a client’s need to update documents is related to when things change in the client's life. For some clients there is a need for annual review and updating the documents to reflect changes in asset ownership, gifting to loved ones, charitable inclinations, or desires to change their beneficiaries. For other clients, for example those with young children, fewer changes may be necessary though it is important to ensure that the designees named to serve as Guardians and Trustees remain current with the people that a client wants to raise and provide for their children.
There are a number of life events that may give rise to the need for amendments or other changes to estate planning documents, including births, deaths, changes in employer/retirement, and in geographic relocation. Depending on how documents are structured and whether various life events were taken into account in the drafting of documents, any of these events can create the need for significant updates.
While most estate plans automatically take into account the birth of additional children, unless the client has designated successors, the death of a successor trustee, attorney in fact, or patient advocate means that it is time for an update. The same is true if the client simply no longer wants their original designee involved. Failure to update designees may delay or derail the administration of an estate or Trust.
As we touched on previously, in general estate planning documents do not “expire”. A Will drafted in 2018 is as good as one drafted in 1968, but documents can get “stale.” A stale document is one that has not been updated in many years and especially in the case of Powers of Attorney and Patient Advocate Designations, a stale document can make administration more difficult. Financial institutions, doctors, and others may be reluctant to follow the instructions of a designee relying on a ten year old document, worrying that the Principal may have executed a contradictory document in the interim or, because of time, may not want that person designated to exercise power. Refreshing documents regularly keeps them current with laws and helps avoid conflicts with anyone accepting the documents as proof of authority
We recommend reviewing documents at least once a year to confirm whether or not changes are necessary. When in doubt if a change is needed, an experienced estate planning attorney can provide you with the guidance you need to avoid putting yourself or your loved ones into a difficult position.

Matt and Al