Wednesday, December 31, 2014

Life and Family

At the Dilbert.com blog, Scott Adams has this to say about his recent experience:
Last week my parents' estate finally got settled. My mother passed first, a few years ago, and as these things so often go, my father slid downhill fast and joined her. When the final distribution checks arrived to the three siblings, I emailed my sister in New York and my brother near Los Angeles to call out something extraordinary: The three of us had navigated the distribution of the estate, and a million decisions, (with my sister in the lead) without a single disagreement. Not one. If you have witnessed sibling behavior during this sort of situation, you know it is unusual to have no disputes. Sometimes you don't know what your parents taught you until you DON'T have a problem. I was deeply impressed with whatever they did to make the three of us so reasonable.
As lawyers, we naturally deal with strife and conflict between family members on a regular basis. It is good to see that these matters can be resolved between family members without grief and misery.

Read the rest of the posting to see how an old chair can become an important part of someone's life.

Happy New Year to all.

Monday, November 3, 2014

New limits on uncapping property taxes

A recent law signed by the Governor (Public Act 310) has once again amended MCL 211.27a, the statute which determines when a transfer of real estate will "uncap" the taxable value and allow property taxes to rise.

Under Proposal A, passed in 1994, increases in the taxable value of a parcel of land are "capped" at 5% per year. Over a period of time, if the home increases in value at a higher rate, the "capped" taxable value can be much lower than the "assessed value," which is supposed to be 50% of the home's true value. A home worth $100,000 when it is bought, for example, and worth $200,000 now, may have an assessed value of $100,000 (one-half of actual value) but a taxable value of only $68,000. Since property taxes are calculated as a percentage of the taxable value, the cap results in significant tax savings. Often, the owner is an elderly person, living on a fixed income, who could not afford to pay a higher property tax.

Under the statute, transfer of the land, whether by sale or gift, will often "uncap" the taxable value, allowing it to once again match the assessed value. But there have always been exceptions to uncapping. Early on, exceptions were provided for limited categories of conveyances, including conveyances to and from certain trusts and conveyances creating or ending joint tenancies in certain cases.

A couple of years ago, though, the statute was amended to provide that a transfer (whether by gift or by sale) to certain family members would also be excepted from the uncapping rule. The new section (s) read:
(s) Beginning December 31, 2013, a transfer of residential real property [does not uncap] if the transferee is related to the transferor by blood or affinity to the first degree and the use of the residential real property does not change following the transfer.
This language was far from clear. What was meant by "the first degree"? The reference was obviously to the "first degree of consanguinity" but still needed explanation. Certainly the parent-child relationship was included, but what about transfers between siblings? Some sources say these are also first-degree, but that is not a unanimous view. And what was meant by "change of use"? A change from residential to commercial use is obvious; a change from year-round residential to seasonal use, or vice versa, is less so. In several cases, homeowners have had to go to court to get an answer, resulting in a lot of expense and uncertainty.

On the "first degree" criterion, one source said:
Relationships, through either blood (consanguinity) or marriage (affinity) were recorded, and marriage dispensations were granted, by "degree". A first degree relationship would indicate siblings; a second degree relationship would indicate first cousins. . .
Another source:
The percentage of consanguinity between any two individuals decreases fourfold as the most recent common ancestor recedes one generation. Consanguinity, as commonly defined, does not depend on the amount of shared DNA within two people's genome. It rather counts the number of meioses separating two individuals. Because of the effects of pedigree collapse, this does not directly translate into the amount of shared genetic substance.
There was the answer: simply count the meioses.

The new provision, which will apply to conveyances after December 30, 2014, is much more understandable and has been expanded:
(t) Beginning December 31, 2014, a transfer of residential real property [does not uncap] if the transferee is the transferor’s or the transferor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the conveyance. . .
Not only is the relationship criterion made more understandable, the provision now more simply states that the capped taxable value will continue after the transfer as long as the land is not used for "any" commercial purpose.

Whether occasional rental of a cabin would be characterized as a "commercial" purpose will no doubt, once again, have to be decided by the courts when a case arises.

Sunday, October 12, 2014

Control over a decedent's information

An article in P.C. World reports that Yahoo is voicing opposition to Delaware's new "Fiduciary Access to Digital Assets and Digital Accounts Act," which gives executors of estates (called "personal representatives" in Michigan) broad access to the online messages and accounts of a decdent. The statute provides: "A fiduciary with authority over digital assets or digital accounts of an account holder under this chapter shall have the same access as the account holder." Yahoo's terms of service instead call for the information to be deleted when it is notified of the death. This approach, it says, is more compatible with the wishes of its users. Unlike money or physical property, Yahoo notes, it is incorrect to assume that the decedent would want his information turned over to his executor.

The article reports that Google and Facebook have generally expressed agreement with Yahoo's stance.

Note, however, that Delaware's new provision would still permit the individual to designate a person other than his executor to carry out any special directives he may have with respect to digital assets, accounts, and information.

Thursday, October 9, 2014

Reasons not to do it, part 2

We previously posted an item providing several reasons not to add children as joint tenants on real estate as a probate avoidance technique. Recently we heard of an incident that raises a similar issue when it comes to bank accounts.
Elderly dad, age 84, placed his son's name on his checking acct for convenience. Recently, when he checked his account, he found that the State had swooped in and withdrawn a substantial amount of his money because of son's child support arrearage.
There are ways to avoid this result, with proper planning, if it is desired to have a child or other family member have access to an account for convenience. This scenario underscores the point that you should not "go it alone," without professional advice and guidance.

Saturday, September 20, 2014

Digital assets and planning

Recommended: The Care and Preservation of Your Digital Assets, a three-part series posted at the Los Angeles Estate Planning Attorneys weblog. This is an area that needs more attention from many of us.

Thursday, September 11, 2014

Use the power

Cool Tools today features GoodRx.com, a web site that provides online comparison shopping for prescription drugs.

Sunday, September 7, 2014

Keep things organized

We have previously noted* on these pages that an important part of succession planning is gathering your key information such as account numbers, contact information, passwords, etc. so that members of your family can find what they need when the time comes. We recommend Erik Dewey's Big Book of Everything, available without cost in either PDF or Excel format, to help with this endeavor. If you use it and you like it, as he says, buy one of his books.

* See our October 11, 2011 post entitled A Real Bucket List

Saturday, September 6, 2014

Prepare now for future emergencies

LifeHacker posted How to Create an In-Case-of-Emergency Everything Document to Keep Your Loved Ones Informed if Worst Comes to Worst. It offers several key steps and then links to additional resources.

Step 1: Gather Your Vital Records to Keep in the Master Information Kit
Step 2: Export Your Accounts Information
Step 3: Share Your Master Information Kit and Vital Documents
Step 4. Regularly Update Your Everything Document

Tuesday, July 1, 2014

Discouraging life settlements

Bill Boersma, at his niche blog On Life Insurance, comments on life settlements in life insurance contracts. This thoughtful piece brings up an issue for those who advise clients on personal planning issues. 
  • Many people who have bought whole life or universal life policies years ago now find that it is difficult, as their financial condition has changed, to keep up with premium payments.
  • They may find the need to make the hard decision to discontinue paying the premiums, and taking the current cash value of the policy. If they do so, however, they forfeit the death benefit under the policy, which will often be much higher than the cash value.
  • They will often consult with the agent who sold them the policy about what their options may be.
  • The agent may not tell them, and often is directly forbidden under his agency contract from informing them, that a life settlement is an option.
A life settlement (sometimes called a "viatical" settlement) is an agreement between an insurer and an insured to take an early buyout of the death benefit under the policy, in exchange for which the insurer receives a discount. This is often a very useful alternative for someone who has a terminal illness and pressing financial and medical needs as a result.

An example scenario: Jane Carter has a policy that she has held for the last 12 years, and for which she has paid nearly $250,000 in premiums over that time. The policy obligates the life insurer to pay a death benefit of $1 million to her three children. Unless the policy is paid up, where no further premium needs be paid, she still has to pay the annual premium of $16,500. This was feasible when she was working and earning $140,000 per year, but now she is retired and living on her social security and pension benefits.

Jane has been diagnosed with cancer and the prognosis is grave. She has perhaps 2-3 years to live. The medical expenses have been high, and she is strapped for cash. She does not think that she will be able to afford to pay the premium this year.

If approached, the life insurer may well be willing to negotiate an early life settlement, paying her perhaps $800,000 in satisfaction of her policy. This saves the company $200,000 off the death benefit and puts a significant sum of cash in Jane's hands. Both sides would see a significant gain as a result of such an agreement.

But if the agent she speaks with is not allowed to tell her about this option, she probably will not learn about it. The insurer would prefer that she default on the policy, take the cash value that has built up - maybe $100,000 or so - and go her own way. Her children, on her death, will receive only whatever is left of the cash value, if anything.

Boersma's piece notes a harsh reality: The agent represents the company, not the client, and his loyalties lie with the company. Someone who has a fiduciary responsibility to the client, such as an independent fee-based advisor or an attorney, has an obligation to advise her of the reasonable alternatives. The agent has no such responsibility.

Thursday, June 12, 2014

Inherited IRAs not protected

The U.S. Supreme Court has ruled, in the case of Clark v. Rameker, that inherited IRAs cannot be protected in a bankruptcy filing. As a result, IRAs that have been inherited from a deceased worker (the "participant") are available as assets to pay creditors.

The opinion for a unanimous court, written by Justice Sotomayor, focuses on key differences between IRAs owned by the participant and inherited IRAs:
"Inherited IRAs do not operate like ordinary IRAs. Un­like with a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time, with­out paying a tax penalty. §72(t)(2)(A)(ii). Indeed, the owner of an inherited IRA not only may but must with­draw its funds: The owner must either withdraw the entire balance in the account within five years of the original owner’s death or take minimum distributions on an annual basis. . . And unlike with a traditional or Roth IRA, the owner of an inherited IRA may never make con­tributions to the account. 26 U. S. C. §219(d)(4)."
The code, she noted, does not define the term "retirement funds." Considering the ordinary meaning of the term (a Scalia-like endeavor, it would seem), it would mean funds set aside for the owner's retirement. Disregarding a particular owner's subjective intention, and focusing on the objective characteristics, she noted three factors:
"Three legal characteristics of inherited IRAs lead us to conclude that funds held in such accounts are not objec­tively set aside for the purpose of retirement. First, the holder of an inherited IRA may never invest additional money in the account. . .  
"Second, holders of inherited IRAs are required to with­ draw money from such accounts, no matter how many years they may be from retirement. . .  
"Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time—and for any purpose—without penalty. . . "
IRAs that are owned by the participant continue to be protected to the extent provided by Federal or state law. (Both must be considered under the Bankruptcy Code.) In Michigan, that law is MCL 600.5451-1-k. Qualified retirement plans, including 401-k plans, are exempted under MCL 600.5451-1-l and under provisions of Federal law.

Saturday, April 19, 2014

The legal basis of the "no asset test" rule

We noted in our March 2 post that CMS's web-published materials announce that asset limits will not apply to disqualify persons newly eligible for Medicaid on the basis of their Modified Annual Gross Income - i.e., the "Obamacare" Medicaid expansion applicable in many but not all states. Michigan is included.

The legal basis for this position is the new 42 USC 1396a-e-14, added by the Affordable Care Act and effective January 2014, which includes as its subparagraph C:

(C) No assets test.—A State shall not apply any assets or resources test for purposes of determining eligibility for medical assistance under the State plan or under a waiver of the plan. 

The statute goes on to make exceptions under subparagraph D, however, for those who were previously eligible on other bases. Just to be clear, it also specifically exempts anyone over the age of 65. Thus, we will still have resource limits for those who wish to qualify for Medicaid coverage for nursing home care for the elderly.

(D) Exceptions.—
    (i) Individuals eligible because of other aid or assistance, elderly individuals, medically needy individuals, and individuals eligible for medicare cost-sharing.— 


Subparagraphs (A), (B), and (C) shall not apply to the determination of eligibility under the State plan or under a waiver for medical assistance for the following:
       (I) Individuals who are eligible for medical assistance under the State plan or under a waiver of the plan on a basis that does not require a determination of income by the State agency administering the State plan or waiver, including as a result of eligibility for, or receipt of, other Federal or State aid or assistance, individuals who are eligible on the basis of receiving (or being treated as if receiving) supplemental security income benefits under subchapter XVI, and individuals who are eligible as a result of being or being deemed to be a child in foster care under the responsibility of the State.
       (II) Individuals who have attained age 65.



Saturday, April 12, 2014

Why use a lawyer?

"Why should I pay a couple hundred dollars to a lawyer when I can get this online form for $35?"

This is a fair question. A few recent examples will help to illustrate the answer.
  • Clients came in with a will prepared by Quicken WillMaker. The first several pages of the will provided detailed instructions for their funeral services, how their bodies are to be handled, etc. I explained to them that this may be useful as their requests to their children, but that none of this is binding on anyone. In Michigan, decisions on the handling of a dead body are made by the next of kin, not by the personal representative of the estate.
  • A quit-claim deed done years ago to transfer a cabin, using a form found at an office supply store, was ineffective because the grantor was a married man at the time, and his wife did not join in the deed. The fact that the man had been single and the only grantee when he acquired the land did not change that outcome.
  • In a recent reported case coming out of Florida, Ann Aldrich created a will using an "EZ Will Form" in 2004. The form did not include a residuary clause, a provision directing what should happen with the remainder of the individual's property after specific bequests are made. As a result, after her death, her two nieces received a substantial sum of money, even though the rest of the will showed that her brother was her intended beneficiary.
The answer to the question: Yes, you can do it for $35, but you can do it right for a little more. A simple quit-claim deed done in our office may cost $100, for example. When your transaction involves property worth several thousands of dollars, spending what it takes to do it right makes much more sense.

Tuesday, March 11, 2014

Increase in estate tax exemption

The federal estate tax exemption will increase from $5,250,000 in 2013 to $5,340,000 in 2014. A single person who dies with less than that amount in taxable assets will not have a concern about Federal estate taxes.

Sunday, March 9, 2014

The talk of the town

NPR does a story on Lacrosse, Wisconsin, “The Town Where Everyone Talks About Death.” About 96% of the residents of Lacrosse have executed advance directives; by comparison, about 30% of adults nationwide have done so. This is the result, the story says, of one man’s efforts to train nurses to begin the discussion with patients and their families well in advance of a serious illness.

In Michigan, a statute [MCL 700.5506] provides for a person to prepare and sign a Designation of Patient Advocate form to permit another person “to exercise powers concerning care, custody, and medical or mental health treatment decisions for the individual” when the need arises. Under section 5508, the patient advocate is authorized to act only if the person is unable to participate in medical decisions for himself.

The patient advocate form is essential for unmarried couples, same-sex couples, and others who do not wish to rely on their nearest relatives to make these decisions for them.

Another available document is the advance directive, sometimes known as a “living will.” This one is not based on a statutory provision, but rather is based on a Michigan Supreme Court decision that held that a family member may only request that extraordinary medical interventions be discontinued if there is “clear and convincing evidence” that this is what the patient wished. A writing signed by the patient, specifying when and how he does not want (and does want) such interventions is the clearest and most convincing evidence.

We normally recommend that both documents be prepared. The advance directive is an excellent reminder to the Patient Advocate of what the individual wants and does not want when the time comes to act. We also make available a special optional form of advance directive, for interested clients, to direct that these decisions be made in conformance with the teachings of the Catholic Church.

It is also important that these issues be discussed in advance, with all interested family members or others, so that the individual’s wishes are known.

Sunday, March 2, 2014

CMS addresses issues for newly eligible Medicaid beneficiaries

If you have been following the Affordable Care Act, you know that Michigan is one of the states which elected to expand its Medicaid program, effective April 1, 2014. Previously, Medicaid coverage was available only to those who were poor enough to qualify and who met certain category requirements, the most prominent being pregnant women, children, the elderly and the disabled. A person between 18 and 55, not disabled, but just poor, did not qualify.

The ACA introduced a new concept of eligibility based on what it defines as the person's "Modified Annual Gross Income" or MAGI. If your household MAGI is under a specified level, essentially 138% of the current year's Federal Poverty Level, you can be eligible for Medicaid coverage. Importantly, the "MAGI individuals," as the Centers for Medicare and Medicaid Services (CMS) calls people newly eligible under these rules, are not subject to asset or resource limits. Formerly, a poor person who was in one of the permitted categories would be eligible only if he had less than $2,000 in countable assets. Under the MAGI criterion, a person can have thousands of dollars in the bank and still qualify for Medicaid as long as his MAGI is under the limit.

On February 21, 2014, Cindy Mann, Director of CMS, issued a letter to all of the state Medicaid agencies (PDF) addressing several questions that have arisen under this new program, as it concerns persons receiving Long-Term Supports and Services (LTSS) such as nursing home care. Few people will be eligible for LTSS under the MAGI criteria. The letter observes that "The vast majority of people in need of Medicaid-covered LTSS will qualify under eligibility categories related to age or disability." But for those who will become newly-eligible, some of the MAGI rules will be different from those that apply to persons eligible based on age and disability.

We can paraphrase the letter's conclusions as follows:

Estate recovery - States will not be able to assert claims for estate recovery for medical assistance paid to persons eligible only under MAGI, since they are regarded as exempt under the new law. States may continue to assert claims for estate recovery for those over the age of 55 for nursing home care, home-based community services, and some other benefits, as previously.

CMS has announced that it "intends" to eliminate or limit estate recovery for any benefits other than LTSS; just how it plans to put that intent into practice is not clear.

Asset transfers during a 5-year lookback period - will apply to MAGI individuals.

Annuities, promissory notes, life estate interests - will apply to MAGI individuals.

Special needs trusts - At least as they concern self-settled trusts, CMS considers that the current rules will apply to MAGI individuals. The letter is silent as to third party trusts.

Home equity limitations - As with other beneficiaries, MAGI individuals will only be able to exempt the first $543,000 to $810,000 of the value of the home. (Why CMS has arrived at this conclusion is unknown; it does not seem to be consistent with the "no asset test" stance of the new law.)

Post-eligibility income - CMS has determined that its regulations "as currently written" cannot be applied to MAGI individuals, but it is considering new regulations on this topic. It does believe that it has the authority to do so under the Medicaid statute.

For additional information:

Saturday, February 22, 2014

New ruling in ongoing Rosa Parks Trust dispute

Another chapter, perhaps the last chapter, in the ongoing disputes regarding the Rosa Parks Trust has now been written. The Michigan Court of Appeals issued its unpublished decision in the case entitled In re Rosa Louise Parks Trust on February 20, 2014. This is the third time that the parties to the dispute have been before the appellate courts. The parties to this appeal included Elaine Steele and the Rosa and Raymond Parks Institute for Self-Development, founded by Parks and Steele in 1987.

In the earlier decisions, the Supreme Court had upheld and ordered enforcement of a settlement agreement that the parties had previously negotiated and consummated, in particular the reinstatement of Elaine Steele and former judge Adam Shakoor as trustees and co-personal representatives of the estate, as nominated in the trust agreement. There had also been litigation over attorneys fees exceeding $120,000 incurred by a law firm.

After remand on the earlier decisions, the attorney for Steele and the Institute, not named in the opinion but identified in a Detroit Free Press article as Steven G. Cohen of Farmington Hills, Michigan, filed a petition naming the probate judge as a respondent, and charging that he had engaged in a conspiracy with the attorneys for other parties to disregard the trust's nomination of Steele and Shakoor and to replace them with "long-term probate court cronies." He then petitioned the probate judge to order his own disqualification based on claims that he was not impartial and that he was now a party to the proceedings. Other petitions followed.

In May 2012, the judge advised that he was taking the disqualification motion under advisement, and postponed the other petitions pending a decision on that motion. Thereafter, Cohen filed a proposed default and default judgment, submitted interrogatories (written questions) to the judge, and served him with a subpoena for deposition.

The probate judge ultimately denied the disqualification motion, dismissed the petition alleging conspiracy, and made rulings on other petitions.

The decision by the Court of Appeals includes the following rulings:
  • The dismissal of the conspiracy petition was affirmed. The probate court had no jurisdiction to hear the conspiracy claim, since the issues in question had previously been ruled upon by the court, with no appeal filed. 
  • The challenging parties had advanced no evidence to support claims of conflict of interest or inappropriate conduct which would warrant disqualification. Naming a judge as a party and then seeking his disqualification would open every litigated case to manipulation by any party, if permitted. 
  • The court still had authority to make rulings on issues other than those directed by the previous appellate decisions reversing and remanding the case with instructions to enter one particular order. 
  • The issues raised regarding the accountings filed by the fiduciaries were unsupported by legal arguments and thus were not preserved for appeal. 
In addition, on its own initiative, the Court of Appeals made a finding and ruling that Cohen's actions in seeking disqualification of the probate judge and pursuing the present appeal were entirely improper and that he had engaged in a vexatious appeal. The case was remanded for consideration of the proper sanction, which would involve the assessment of costs, attorneys fees, and punitive damages, and whether that sanction should be imposed on the client, the attorney, or both.

Friday, February 7, 2014

The lion cub, revisited

We recently posted our commentary on the use of a so-called “lion cub” deed, noting that two or more people who are granted ownership of real estate “as joint tenants” in unequal shares cannot be regarded as true joint owners under the common law. The common law interpretation of a joint tenant is, by definition, someone who has an equal and undivided interest in the real estate in question.

A colleague has recently brought our attention to a case decided by the Michigan Court of Appeals in 1984. The decision was In re Ledwidge Estate, 136 Mich App 603, 358 NW2d  18 (1984). In that case, the original owner of a parcel died in 1948, leaving it to his six surviving children in equal shares. Some of the children bought out the interests of others, and by 1968 Veronica Ledwidge was the owner of two shares and John C. Ledwidge was the owner of four, as tenants in common between them. In 1968, the two of them joined in a deed purporting to convey the land to themselves as joint tenants with rights of survivorship between them, with a recitation “and not as tenants in common” with a specified ¼ interest held by Veronica and a ¾ interest held by John.

On the death of John Ledwidge in 1979, the probate court held that the joint tenancy was valid and effective, and that it operated to pass the fee interest to Veronica, free of any claim of any other person.

This decision was challenged by the “residuary beneficiaries”, the persons to whom the remainder of the estate passed after other specific gifts had been made. They argued that the attempt to create a new joint tenancy in 1968 had been ineffective, because of the attempt to create unequal shares of ownership, and that they continued to own the land as tenants in common. The ¾ interest owned by John Ledwidge, they argued, should be an asset of the estate and distributed to them.

The Court of Appeals disagreed. The court recognized the common law rule that the interests of the owners had to be equal – using arcane legal parlance, the owners had to have a “unity of time, title, interest, and possession” – but it held that the enactment by the legislature of MCL 565.49 abolished that common law requirement.

MCL 565.49 provides:
“Conveyances in which the grantor or one or more of the grantors are named among the grantees therein shall have the same force and effect as they would have if the conveyance were made by a grantor or grantors who are not named among the grantees. Conveyances expressing an intent to create a joint tenancy or tenancy by the entireties in the grantor or grantors together with the grantee or grantees shall be effective to create the type or ownership indicated by the terms of the conveyance.”
We are not convinced that the court’s analysis was accurate. The apparent intent of MCL 565.49 was to abolish the then-needed practice of conveying a parcel of land from one owner to a “straw man” who would then convey the land to the original owner and one or more other persons as joint tenants. The legislature does have the power to abolish or modify common law rules, but unless this is done, the Michigan Constitution of 1963 provides that the common law rules continue in force and effect in Michigan. It is not clear that the Legislature so intended in this instance.

There is also a highly technical rule, MCR 7.215-J, which provides that decisions of the Michigan Court of Appeals rendered before November 1990 do not have the same precedential authority as decisions rendered after that date.

Nonetheless, it is true that Ledwidge specifically recognized and gave effect to a declaration of joint tenancy in unequal shares, and declared that the established intention of the grantor will control over the rules applied at common law. No other court in Michigan has followed Ledwidge, but no court has rejected it, either.

The concept of the unequal joint tenant has thus been given a blessing by one court of record in Michigan and may well be found valid for planning purposes. The client who wishes to utilize this approach should be familiar with the possible drawbacks.

Monday, January 27, 2014

Tax Commission addresses uncapping amendment

The Michigan Tax Commission has issued an updated version of its Transfer of Ownership Guidelines, dated December 2013, to address issues raised by the adoption of the amendment to MCL 211.27a under Public Act 497 (2012). The amendment applies to conveyances that take place after December 31, 2013.

MCL 211.27a incorporates the limitations on property taxes adopted with Proposal A, specifying the exceptions to the otherwise-applicable rule that a conveyance of real estate will "uncap" the limits on taxable value. 

Our initial posting on this amendment was made just over a year ago. The language used in the Public Act is that a conveyance is not subject to uncapping "if the transferee is related to the transferor by blood or affinity to the first degree." Our shorthand description of that exception in the post was "from a parent to a child (or vice versa)." While that is accurate, the exception turns out to be broader than that.

The phrase is not defined in the statute or anywhere else in the Michigan Compiled Laws. There appears to be some uncertainty and lack of agreement about which relatives are regarded as "first degree," so the MTC decided to address this issue.

It should be recalled that the statute uses very stilted language in declaring that certain conveyances are or are not a "transfer of ownership," triggering an uncapping of the property tax under Proposal A. The phrase is intended to have a precise technical meaning. A conveyance of land does indeed transfer ownership of the land, but the statute provides that certain transfers will not be called a "transfer of ownership" for Proposal A purposes.

The Guidelines include a section regarding conveyances to "Children and Other Relatives." The pertinent provisions under are:
Is a transfer of property from a parent to a child a transfer of ownership?
No, beginning with transfers occurring on and after December 31, 2013. However this is true only for property classified residential real and if the use of the real property does not change following the transfer of ownership.

Does this include adopted children?
Yes, P.A. 497 of 2012 indicated that beginning December 31, 2013, a transfer of residential real property is not a transfer of ownership if the transferee is related to the transferor by blood or affinity to the first degree and the use of the property does not change following the transfer of ownership. See MCL 211.27a(7)(s).

Does this include relatives other than those related by blood?
Affinity to the first degree includes the following relationships: spouse, father or mother, father or mother of the spouse, son or daughter, including adopted children, son or daughter of the spouse and stepchildren, stepmother or stepfather.

What is the definition of relationship by blood?
The State Tax Commission offers the following definition: a first degree blood relative is a person who shares approximately 50% of their genes with another member of the family. First degree blood relatives include parents, children or siblings.

Does this exemption apply to a trust, limited liability company or to distribution from probate?
No, due to the blood or affinity to the first degree relationship clause, the State Tax Commission has defined transferee and transferor as both being individuals.

Is a change in use limited to a change in property classification?
No, there are numerous changes that could be considered a change in use and a change in use is not limited to a change in property classification.
Further, Bulletin 23 was issued on December 16, 2013, and provides:
The Commission’s position is that it was legislative intent that the phrase “related to the transferor by blood or affinity to the first degree” intended to apply the first degree test to both affinity and to blood relationships. Therefore, the Commission is including the following definition:

A first degree blood relative is a person who shares approximately 50% of their genes with another member of the family. These relatives include parents, children or siblings.

Simply put, a transfer of residential real property is not a transfer of ownership if the transferee has one of the following relationships to the transferor and the use of the property does not change:

1. Spouse
2. Father or Mother
3. Father or Mother of the Spouse
4. Son or daughter
5. Adopted son or daughter
6. Son or daughter of the spouse
7. Siblings
We have found the Genetics Home Reference, published by the U.S. National Library of Medicine, which provides two accepted definitions and which may be the source of the definition adopted by the MTC:
Any relative who is one meiosis away from a particular individual in a family (i.e., parent, sibling, offspring)
Definition from: GeneReviews - from the University of Washington and the National Center for Biotechnology Information

A first degree relative is a family member who shares about 50 percent of their genes with a particular individual in a family. First degree relatives include parents, offspring, and siblings.
Definition from: Talking Glossary of Genetic Terms - from the National Human Genome Research Institute
Note that the MTC Transfer of Ownership Guidelines do not have the force of law. They are of persuasive value and are commonly followed by assessors and equalization departments in implementing the provisions of the property tax laws.

Thursday, January 2, 2014

Lion Cub deeds - myth vs. reality

The Lion Cub deed is an elusive creature. It is fleetingly mentioned on the web sites of some Michigan estate planning and real estate attorneys, but there is very little detail provided at any of them.

The idea, it appears, is to structure real estate ownership so that one party (the "lion," typically the parent who originally owns the land) owns a high majority share of real estate, 90% to even 99%, while the small conveyed percentage passes to the other (the "cub," typically the child or children of the original owner). This conveyance is an event that would generate a divestment penalty if done within the 60-month lookback period that applies for Medicaid coverage for nursing home expenses, but the fact that only a small fraction of ownership is divested means that the disqualification period would be quite short. If the land in question is worth $400,000, for example, conveying a 1% interest would result in a divestment penalty of $4,000, well under the cost of one month of nursing home care.

The problem is that these conveyances may not be made in a manner which is effective under Michigan law. The strategy does not work if done using joint tenancy as the ownership vehicle. The "lion" and the "cub" must take ownership as tenants in common, not as joint tenants, if they want to create a proportional ownership. Yet we have seen promotional materials in attorneys' offices which say that the deed will be done to convey the land "in joint tenancy" with a 90-10% or 99-1% split. The promise is that the client can get the best of both worlds - probate avoidance and avoidance of Medicaid divestment penalties.

The concept described simply does not exist under Michigan real estate law. There is no such thing as a joint tenancy with an assigned ownership percentage. The interests of each co-owner must be equal under a joint tenancy. Further, although clients may think otherwise, two people who own land in joint tenancy do not each own 50%. Four joint owners do not each own 25%. (The fact that taxing authorities or the agency administering the Medicaid program might treat it that way does not change this rule.) Instead, each owns an equal and undivided interest in the entire parcel of land, with a right of survivorship among all co-owners. As each joint owner dies, his or her interest in the parcel ends. The survivor among all joint owners emerges as the full owner of the entire parcel.

It is hard to understand what benefit a landowner would derive from conveying a tiny percentage of ownership, as a tenant in common, to one or more of the landowner's children. Joint ownership of real estate is a method that is widely used to avoid having the land pass by will or intestacy in probate court - see our earlier posting entitled "Reasons Not to Do It" - but it is entirely inconsistent with the idea of fractional or proportional ownership of real estate. Conveying a parcel of land to a parent and child as tenants in common, with a significantly disproportional ownership balance, may be effective to avoid Medicaid penalties when nursing home care is needed, but it does nothing to avoid probate. The 90% or 99% interest of the parent, owned by him or her as a tenant in common with the child, would still have to be assigned under a will or pass by intestacy, and this would require a filing in probate court. Depending on how many children are involved in the two transactions, the end result could be quite complex.

Each of these approaches may work to achieve a desired result, and each should be explained by counsel. But confusing the two is likely to lead to unexpected and unplanned consequences.