Grand Rapids Attorneys & Counselors

616.828.1195

44 Grandville Avenue SW, Suite 200 Grand Rapids, Michigan 49503

Changes in Law Present Planning Opportunities

Andrew Rassi

Posted: July 20th, 2011

Author: Andrew Rassi

Categories: Real Estate, Lake Michigan Property, Business & Corporate

It is often the case that a change in the law (either through a Court ruling or a modification by the legislature) can present planning opportunities for those in the right circumstances.  This Spring, there were two such changes in Michigan that may provide some planning opportunities for individuals and businesses that find themselves in the unique situation to take advantage of them. 

The first involves a Michigan Supreme Court case that may provide an opportunity for families to maintain a low property tax base on the family cottage for generations and the other involves the repeal of the Michigan Business Tax (“MBT”) that may allow some older, closely held C Corporations the opportunity to save some income taxes. 

1.  Property Tax Planning Opportunity for the Family Cottage

Klooster v. City of Charlevoix

This is a Michigan Supreme Court opinion ruling on a property tax “uncapping” case revolving around the question of whether the creation of a joint tenancy allowed the local assessor to “uncap” the property.  In a nutshell, the Supreme Court held that neither the creation of a joint tenancy nor the termination of that joint tenancy would create an uncapping event. *Caveat – this is a simplification of the holding for purposes of highlighting this planning opportunity. 

Property Tax Capping – Where did it come from and why is it important?

The issue of capping and uncapping of property taxes stems from the 1995 Amendments to the General Property Tax Act (GPTA) of the State of Michigan which put a cap on the amount of increases that an assessor could add to the taxable value of a piece of property.  The cap was set at the lesser of 5% of the assessed value of the property for the previous year, or the increase in the rate of inflation from the previous year.  Although this does not become much of an issue for the first several years of ownership typically, if a family has owned a desirable and quickly appreciating property (typically a lake cottage) for a long time, then it is likely that the cap on assessment of property tax may play a significant role in the family’s ability to continue to own the property after transfer from the first generation.  For example, a lake cottage that was purchased 25 years ago for $250,000 may, because the increase in taxes have been capped, be taxed at the equivalent of a $400,000 property value, even though the actual value of the property may be closer to $1,250,000.  So, if the transfer to the next generation “uncaps” the property, then instead of being taxed like a $400,000 house, the property would be taxed like a $1,250,000 house, more than tripling the annual tax payments on the property.  Often, this uncapping event makes it impractical, if not impossible, for the family to continue to own and use the lake cottage as a family cottage, and necessitates the sale of the family cottage in order to get out from under the heavy property tax obligation. 

Potential Planning Opportunities after Klooster

  1. Family Cottages. The Kloostercase provides a potential planning opportunity to avoid the uncapping of the property tax on the Family Cottage through the creation of an ownership with the next generation through joint tenancy instead of straight gift from the parents’ (the original owners) trust or estate.  The Klooster case interpreted the creation of joint tenancies by original owners to avoid an uncapping event.  So, if one of the parents (the original buyer/owner) creates an ownership by joint tenancy with one of their children and then the parent dies, the property tax would remain capped even though the original owners (the parents) no longer own the property. This scenario should also work with multiple children becoming joint owners, but would also create additional estate planning issues that should be dealt with at the same time.
  2. Third Party –Step Transaction.  The case also appears to open the door for a third party step transaction whereby an unrelated third party could “buy” a joint tenancy interest in the property (creating a joint tenancy with the original owner) and then at some later date (maybe the next day) buy the remaining joint tenancy interest from the original owner (thus terminating the joint tenancy).  It appears from the Klooster case and the GPTA that neither of these separate transactions would uncap the property, which would have the effect of continuing the low property tax rate on the property for as long as the buyer owned the real estate.  This type of transaction stretches the holding farther than the Family Cottage example.

It must be noted that this change in the case law has not yet been thoroughly tested. It is always possible that either the courts will reverse themselves, or the legislature will step in and revise the underlying statute.  However, at the moment it appears that this case provides significant opportunity to structure real estate transactions in such a way to maintain a low property tax basis for at least one additional  generation.

2.  Corporate Tax Planning after MBT Repeal

The repeal of the Michigan Business Tax was a great relief for pass through entities (LLC’s and S-Corporations) throughout the State of Michigan.  The Michigan Business Tax will be replaced by the Corporate Income Tax (the “CIT”), which will levy a tax only on C Corporations within the State of Michigan.  Since we are now entering a period where only C Corporations are taxed at the state level, it may be a good time for some older, closely held C Corporations to again review whether converting to an S Corporation may be beneficial.  If the owners of the C Corporation are all individuals, and the C Corporation does not have any NOL carry-forwards on its books that it needs to use, it may be beneficial in avoiding the CIT to convert to an S Corporation as of January 1, 2012.  Your accountant should be able to help you run the numbers on this situation to see if such conversion would be of benefit to you.

We are always willing to help our clients take advantages of the planning opportunities presented by changes in the law.  Call us for a consultation.