One of the biggest barriers to passing a cottage to your children is affordability and more specifically property taxes. If transferring a cottage isn’t done in certain ways, the property taxes will be adjusted to the current value (or “uncapped” as we call it). This could result in a small change, but it more often will lead to a massive tax increase. I’ve worked with clients who would have otherwise seen property taxes increase between 200% and 1,100% upon their passing.
These are a few tips to keep in mind to avoid this property tax increase and make the cottage affordable for your children:
- Avoid Planning with an LLC. When the Michigan legislature changed the property tax laws, it didn’t make the LLC a favorable entity to use. When the ownership of an LLC changes by more than 50%, the property taxes for any real estate in that LLC will be 100% uncapped. LLCs can be an effective planning technique for transferring ownership in a way to avoid estate as well as gift taxes and limit liability from lawsuits. However, a change of ownership by more than 50% can lead to an unexpected property tax increase in the cottage.
- Avoid Ladybird or Transfer on Death Deeds. These types of deeds have become very common to protect real estate from creditors or Medicaid. However, current Michigan property tax law isn’t clear on whether a ladybird or a transfer on death deed is exempt from uncapping and this property tax increase. Until this issue has been clarified, it’s best avoid using these deeds for transitioning the ownership of a cottage.
- Do Not Plan to Rent the Cottage. Michigan law allows a cottage to be transferred to children or a trust that eventually benefits children and the property taxes will remain capped. However, this exemption no longer applies if the cottage is rented for 15 or more days a year. Also, this is an ongoing requirement of ownership. In other words, if renting is part of the financial plan for a cottage, the property taxes will increase and be uncapped.
If you have any questions regarding property taxes and transferring the cottage to children, feel free to contact me at phmulder@cunninghamdalman.com.
