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.

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.