Recently, the legislature again acted to change the exemptions to uncapping transfers. Property This time legislators amended the most recent provision (see previous article) to cause it to terminate on December 31, 2014. Then, beginning on January 1, 2015, a new provision specifies that transfers between certain specified relatives, as well as trusts of those relatives, of residential property will not cause uncapping, unless any commercial purpose is made of the property.
2014 PA 310
General Property Tax Act—amended to (1) exclude from the definition of transfer of ownership certain conveyances involving residential real property conveyed to a parent, a sibling, a child, an adopted child, or a grandparent of a transferor; the settlor of a trust; a decedent; or the spouse of a transferor, settlor, or decedent, beginning December 31, 2014; and (2) put a sunset date of December 31, 2014, on a provision that exempts from a “transfer of ownership” a conveyance of residential real property to a person related within the first degree by blood or marriage (HB 5552; eff. 10/10/14).
Our Approach for Now (Until the Law or State Tax Commission Forces Us to Change Again)
Currently, we have three separate and distinct ways of passing real estate from one generation to another:
(1) The “Klooster Method.” This works with any type of real estate (not just residential), making it the method of choice for family farms and when the “use” of residential property may be changing from personal use to rental or vice versa. However, the obvious drawback remains in that a transfer using this method can only involve one child.
(2) The Transfer of Ownership Exemption that became operative on December 31, 2013 Method, but which expires on December 31, 2014. This is very useful for more than one child, provided that: (a) the property is residential (farms need not apply); (b) the use of the property is not going to change . . . ever; and (c) the transfers involve only one generation at a time and do not involve siblings. We carry out this transfer by what is commonly referred to as a “Deed with reserved life estate,” allowing the property to pass at the time of the grantor’s death outside of probate.
(3) The Transfer of Ownership Exemption that became operative on December 31, 2014 Method, but which prohibits commercial purposes (arguably any rental at all). The most recent legislation that allows transfers between family members and their trusts, but prohibits ANY commercial purpose.
Overall, if you are among the many individuals in the area who have some precious family property (be it a cottage, a home, or a farm) that you wish to pass on to the next generation with a minimum of real estate or other tax consequences, there are effective options at your disposal. But as this series of articles has highlighted, applying those options is not the most straightforward thing in the world. Here at Cunningham Dalman, we have studied this problem carefully and advised many clients on these issues. Call us today if you wish for us to assist you.