As the temperature slowly inches upward, indicating the actual arrival of Spring, it is a good time to discuss vacation homes and cottages. These properties are common in Michigan and frequently represent a substantial portion of an estate's assets. With the substantial increase in property values over the past 30 years, long-held vacation properties purchased decades ago now likely have substantial resale value.
We posted previously about keeping a vacation home in the family. For those who wish to see a family vacation property enjoyed by future generations there are concerns about the best way to structure such a transfer. Clients need to balance their desire to make a well-intentioned gift that has provided so many positive memories with the possible unintended burden on beneficiaries that may cause strife among loved ones. Additionally the transfer of such high-value assets brings with it potential estate and gift tax implications. While the current estate tax exemption creates a situation where risk of potential tax liability is very low, few people wish to use up any more of that exemption than necessary. Therefore, strategies that take advantage of the annual gift exclusion and allow for transfer of the vacation home over time rather than at death remain popular.
One result of a current real property transfer is the possible increase of property taxes for a new owner because the value of the property for determining property taxes may increase following the transfer. Michigan law places limits on the amount that the appraised value of a piece of property may increase for the purposes of calculating property tax liability while an owner continues to own property. The county, however, reassesses the value of the property when the property is transferred to a new owner. This reassessment is commonly known as "property tax uncapping." Certain transfers of property, such as between husband and wife or to the current owners’ living trust, are exempt and do not cause the property to uncap. In addition, as long as a husband and wife own more than 50% of the property, there will be no property tax uncapping.
Until recently, the list of exempt transfers did not include the complete transfer of property between parents and their children. While clients could reap potential benefits by transferring real estate during their lifetime (and avoid estate tax at death), the consequences in terms of increased property taxes outweighed the benefits of the transfer. Late in 2012, the Michigan legislature approved a change to the list of exempt transfers that goes into effect on December 31, 2013. Starting on that date, transfers to a first generation blood relative, that is from an individual to their children or to their parents, does not cause the property to uncap for the purpose of determining property tax liability. This new rule allows the transfer of a greater portion of the property to other family members without increasing property taxes.
This change creates the opportunity for clients to transfer vacation property to their children, whether via gift or through direct sale, without exposing their children to substantially higher property taxes. Any clients considering transferring vacation homes should wait until the end of the year to do so. As with any other tax or gift planning strategy is important to understand each client individual circumstances and consult with their professionals to ensure that the planning will not have unforeseen consequences.