Real Estate Transfers: Avoiding property taxes from “uncapping”
By: Danelle E. Harrington
Any Michigan real property owner is familiar with paying their property taxes each year and have probably noticed two values shown on their property tax bill, the State Equalized Value (SEV) and the Taxable Value. The State Equalized Value (SEV) of the property is equal to 50% of the true cash value of the property. The Taxable Value of the property is equal to the SEV, but subject to a “cap” in the annual increase equivalent the inflation rate or 5%, whichever is lower. The Taxable Value is the value used to determine the property owner’s tax liability each year. Therefore, even if the true cash value of your property doubled in a given year, the increase in the taxable value of your property would be limited to the inflation rate or 5%, whichever is lower, which would prevent your property taxes from doubling.
So long as the ownership of the property remains the same, the taxable value will remain to be capped each year. However, when there is a “transfer of ownership” it will cause the property taxes to “uncap.” This means the annual cap imposed on the increase in the Taxable Value of the property is lifted and the taxable value will be increased to equal the SEV of the property the year following the transfer. This will cause an increase in property taxes, sometimes drastically.
Michigan law currently contains several exemptions to the “transfer of ownership” rules. The exemptions allow property to be transferred without causing the taxable value of the property to uncap. A few of the most common uncapping exemptions follow:
- Conveyances of residential property occurring between family members, so long as the property is not used for any commercial purpose following the conveyance. Family members are defined as “a mother, father, brother, sister, child, adopted child, or grandchild.” The exemption also includes conveyances from a trust or a decedent’s estate.
- A conveyance creating or terminating a joint tenancy, so long as one person was an original owner of the property.
- A transfer from one spouse to another spouse.
- A transfer of qualified agricultural property, so long as the new property owners continue to use the property as qualified agricultural property and files an affidavit attesting to that with the Register of Deeds.
- A transfer of property that is subject to a life estate, but only until the life estate terminates.
- A conveyance to a trust if the sole present beneficiary of the trust is the Settlor or his or her spouse, or both.
- A transfer pursuant to a court order, so long as no monetary consideration is ordered for the transfer.
Michigan law concerning the uncapping of property taxes upon a transfer of ownership is continuing to evolve. Every property owner’s situation is unique and I recommend contacting an attorney to help evaluate your particular situation before proceeding with any real estate transfer.
How Do You Hold Title to Real Estate?
By Sharon A. Burgess
How title is held to real estate requires a review of the actual deed of conveyance to you. The legal terms used on a deed: “Tenants in Common”, “Joint Tenants”, “Joint Tenants with Rights of Survivorship” and “Tenants by the Entireties” determine the interest that you own.
Owners of property held as Tenants in Common have distinct and separate interests in the real property. Each owner, as tenants in common, shares a right of possession. Either owner may convey their interest in the property to another person without the consent of the other tenants in common owners. There are no rights of survivorship to property held as tenants in common. When an owner dies, their share does not automatically vest or transfer to the surviving owner. Their property is required to transfer to their heirs pursuant to their estate plan. If the deed is silent as to how the property is held, the statutory default is that the property is held as Tenants in Common.
Owners of property held as Joint Tenants hold equal and undivided interests in the real property. As a joint tenant they are entitled to a right of survivorship. When a joint tenant dies, their interest automatically transfers or vests with the surviving joint tenants. A joint tenant may also transfer its interest in jointly held property without the consent of the remaining joint tenant owners. A transfer by a joint tenant will sever the joint tenancy and the resulting ownership interest will be tenancy in common as described above. (Interestingly, if there are three owners to jointly held property and only one owner conveys its interest in the jointly held property, then multiple tenancies are created. For example, if A, B and C are joint tenants and A’s interest is conveyed to a third person, then the third person is a tenant in common with respect to the one-third interest. B and C remain joint tenants with respect to the undivided two-thirds interests.)
Owners of property held as Joint Tenants with Rights of Survivorship hold equal and undivided interest in the real property. As a joint tenant with rights of survivorship, their interest automatically transfers or vests with the surviving joint tenants. An owner as joint tenants with rights of survivorship, however, cannot sell or pledge their interest without the consent and signature of the other joint owners.
The final ownership interest, Tenants by the Entireties, is joint ownership in real property held exclusively between spouses and includes a right of survivorship. Only spouses may hold property as tenants by the entireties. This characteristic of tenancy by the entireties property provides certain protection from judgment creditors. For example, a judgment creditor of one spouse generally may not levy against the entireties estate to satisfy a debt unless the judgment is against both spouses. Entireties property, similar to joint tenants with rights of survivorship, prevent either spouse from transferring or encumbering the interest in the entireties property without the other spouse’s consent.
Transfers in real property by quit claim deed and warranty deed, are common within the framework of estate planning. However, it is extremely important to be precise in the selection of the “tenancy” created. Incorrect tenancy descriptions may leave the intended transfer subject to challenge. Therefore, it is important to understand the limitations of each type of tenancy.
This article is not intended to replace individual legal advice. For more information, contact Sharon A. Burgess of Smith Bovill, P.C. at one of the firm’s three convenient office locations in Caro, Frankenmuth, and Saginaw.
Care Contracts for the Elderly?
By Sharon A. Burgess
Care Contracts for the Elderly
Caring for our loved ones as they age is difficult for many families, and the best decision can be made after exploring all available options. Due to the many changes in the laws that are affecting our seniors, it is important to seek the advice of an elder law attorney to determine what benefits are available to assist in their care.
Many families wish to obtain and provide the needed care for their families in their own homes. Without long term care insurance to assist with the cost of 24-hour care, this may not be an option for a loved one. When family members choose to provide the care that is needed for their parents, grandparents, or loved ones, this could have a financial impact on them. If a family member is required to quit their job, or take a family leave, they are not able to receive the income that their own family depends on.
In deciding whether a family member should be paid for the services that they are providing, it is important to take into consideration the various government benefits that may be needed in the future in assisting with their care. The Aid and Attendance benefit offered by the Veterans Association allows for children or family members to be paid for providing the care needed. They have specific forms and care giver contracts that need to be completed for a care giver to obtain payment; however, they allow the payment to be made to a family member.
The Department of Human Services, however, in applying for Medicaid for an elderly person who has entered a nursing home, may determine these payments to children or family members as gifts. Any gifts made in the five-year look-back period would cause the person applying for Medicaid to be penalized for the dollar amount gifted. There are specific requirements for care giver contracts, doctor forms, and medical records that are required prior to a family member being paid to care for a loved one. Even when these requirements are met, the payments could be determined to be gifting when a Medicaid application is submitted.
A person wishing to stay in their home will want to discuss all of these options with not only their medical care provider, but also an elder law attorney. Sharon A. Burgess practices in the areas of probate/estate planning, long term care planning and elder law, and business and real estate transactions at SMITH BOVILL, P.C.
Farmland Development Rights Agreement (“PA116”)
By Danelle E. Harrington
A Farmland Development Rights Agreement (known as “PA116”) is a temporary restriction on the land, where the landowner voluntarily agrees to preserve their land for agricultural use in exchange for certain tax benefits.
How to qualify? In order to qualify your farmland must fall into one of the categories that the State has set. The most common two eligibility categories are: 1) 40 acres or more with at least 51% of the land devoted to agricultural use, or 2) 5 acres or more with at least 51% of the land devoted to agricultural use and that produce an annual income of $200 or more per tillable acre.
“Agricultural use” is defined as the production of plants and animals useful to humans, but does not include the management and harvesting of a woodlot.
Limitations and Benefits of Enrollment. When you enroll your parcel into PA116 you must choose a number of years to not develop your property, 10 years being the minimum and 90 years being the maximum. During this time you cannot build a structure on the property unless it consistent with farm operations and can only build a residence if it is for an individual essential to the farm operation. The property owner benefits from this restriction on the land by receiving income tax credits on their Michigan state income tax return. The credit is equal to the amount of property taxes paid on the property minus 3.5% of the landowner’s household income. Another benefit is that the land subject to the PA116 agreement is exempt from special assessments for sanitary sewers, water, lights, or non-farm drainage.
Transferring Agreements. A landowner must keep in mind that the PA116 program is a contractual agreement that runs with the land. Landowners intending to buy or sell farmland should be aware of any PA116 agreements that are in place. In order for the land to be transferred to a new landowner, the new owner will need to assume the existing PA116 agreement or the PA116 agreement will need to be terminated.
Release of Part or All of an Agreement. A landowner also needs to keep in mind that a PA116 agreement is not easily terminated. In order for a landowner to remove all or part of a property from the PA116 program the property must fall into one of several categories. The most common two categories are: 1) death or disability of an agreement holder or someone essential to the farm, or 2) a parcel of up to two acres with a structure that predates the agreement. When you remove a parcel from the PA116 program you are required to pay back the last 7 years of property tax credits plus 6% interest (exempt from interest if due to death or disability). The calculated pay-back amount becomes a lien on the property until it is paid.
In sum, PA116 is a very beneficial tax credit program for landowners. However, a PA116 agreement is a long-term restriction on the land and you should not enter into an agreement without knowing all of the specifics.
Lady Bird Deeds
By Sharon A. Burgess
Lady Bird Deeds
Many of us have heard mention of a “Ladybird Deed” and are not sure what exactly this is. The concept of a Ladybird Deed is that ownership of the property is not transferred until the death of the last of the grantors. With a life estate deed, ownership is transferred at the time the deed is executed, and the grantor reserves the right to occupy the real estate until death. Many times the grantors are Mom and Dad, and they no longer have control over their homestead, the ability to mortgage it, or to protect it from their children’s creditors.
With a Ladybird Deed, these problems are avoided. The Grantors (usually Mom and Dad) retain the ability to sell, mortgage, gift, lease or dispose of the property without the involvement of the “remaindermen” (which is usually the children). The property is not subject to probate on the death of the last Grantor, and the transfer to the remaindermen is completed with the recording of the death certificate. A Ladybird Deed is also being used to convey property to t the Grantor’s Revocable Living Trust on their death, again allowing the property to remain titled in their individual names with the transfer to the Trust being completed at the death of the last grantor.
While this form of deed is being used by many in the community, it is important to discuss this with and elder law and estate planning lawyer familiar with the document. Please feel free to contact Sharon at one of the Smith Bovill, P.C.= s three convenient office locations in Caro, Frankenmuth, and Saginaw.
Michigan Achieving a Better Life Experience (ABLE) Program Act
Planning for Disabled Individuals and Individuals with Special Needs
By: Elian E. H. Fichtner
On December 19, 2014, President Obama signed the Achieving a Better Life Experience Act (ABLE Act) and signaled a monumental development in disability and special needs planning. The ABLE Act amends Section 529 of the Internal Revenue Code which is the section that provides for college savings plan programs. The ABLE Act essentially broadens IRC Section 529 to permit individuals with disabilities to save using a tool similar in concept to the 529 college savings plan.
The significance and appeal of ABLE accounts is that they do not affect an individual’s eligibility for public benefits or participation in programs such as SSI (Supplemental Security Income) and Medicaid which traditionally limit participation based on strict financial eligibility requirements.
Since the passage of the federal legislation, Michigan has been working on enabling legislation to integrate ABLE savings accounts under the existing framework of the state’s 529 college savings program. On October 28, 2015, Michigan Lieutenant Governor Brian Calley signed legislation to allow eligible individuals with disabilities and their families to establish tax exempt savings accounts that allow disbursements of income tax-free for qualified disability expenses. Michigan Achieving a Better Life Experience (ABLE) Program Act, Act 160 of 2015 effective January 26, 2016 (MCL 206.981 et seq) is available on-line at <<http://www.legislature.mi.gov>>
Eligibility is limited to individuals determined disabled by the Social Security Administration including individuals with disabilities developing prior to reaching age 26 years. Only one account may be established per individual and annual and overall contribution limits are similar to the rules governing 529 college savings accounts.
ABLE savings accounts may be used for “qualified disability expenses” including education, transportation, housing, obtaining /maintaining employment, personal support services, acquisition of assistive technology and health and wellness. The Michigan Department of Treasury is working on regulations to implement and guide management of ABLE savings accounts. The regulations will address control and management of the accounts as well as address post-death issues including funeral expenses of the beneficiary and any required pay-back provisions (whether balances remaining in the account at the time of the beneficiary’s death will be required to reimburse the State of Michigan for benefits received). Disability and special needs planning attorneys anticipate the use of ABLE savings accounts as a welcomed option in the estate planning, disability and special needs planning toolbox.
Corporate Formalities: Maintaining Liability Protection for Business Owners
By: Danelle E. Harrington
Is your business organized as a Michigan Corporation? One reason for forming your business as a Michigan Corporation was to take advantage of the liability protection afforded to that entity. However, you must maintain several “corporate formalities” in order to maintain that liability protection. The consequence of losing the limited liability shield is that owners of the corporation may incur personal liability for corporate obligations.
Below is a list of several common pitfalls that corporate owners make, jeopardizing their limited liability shield:
Failing to sign in your official capacity. When signing contracts or other documents for the business make sure to sign in your corporate capacity (as director or officer). The form for a corporate signature is usually the name of the business being listed before your signature and your name and title with the company listed afterwards. Otherwise, you may be signing in your individual capacity, and the agreement could be enforced against you personally.
Another area to think about is when the business is incurring debt. A lot of times banks will require one or more corporate owners to sign a personal guaranty for the debt. Many times this is not avoidable. But, it is important for you to be aware of the guaranty and to know the terms of your guaranty.
Failing to maintain annual minutes. Under Michigan law corporations are required to hold annual meetings of shareholders. The annual meeting requirement applies to all corporations, even very small corporations. Corporations are also allowed to satisfy the annual meeting requirement through written consent resolutions signed by all of the shareholders. Whichever method your corporation chooses, you should make sure you are documenting your annual meeting with minutes or sign a consent resolution each year.
Failing to use your official name. Many times, business owners fail to use their corporate name that is registered with the State of Michigan. If you do not use your corporate name or an assumed name that is filed with the State of Michigan (even just omitting “Inc.” or “Corp.” at the end) you are opening yourself up to personal liability.
Failing to keep adequate records. It is important to maintain good records for the business finances in order to distinguish your personal assets from the assets of the corporation. If the company’s finances and yours as owner are not kept separate and distinct, creditors can seek recovery from the owners of the corporation.
If your business is organized as a Corporation it is important to maintain corporate formalities. It is a good idea to consult with an attorney if you are unsure if your Corporation is taking the proper steps to protect its owners from personal liability.
Eligibility for Long Term Care Medicaid
By: Elian Fichtner
In 2016 the average monthly cost of nursing home care in Michigan is anticipated to be $8,282/month – nearly $100,000 year. Consequently, more and more people will apply for Medicaid benefits to pay for their nursing home expenses.
Medicaid is a joint federal-state social welfare program designed to pay for the long term care costs of impoverished seniors. The program is administered by the Michigan Department of Community Health (MDCH) and more locally through the Department of Health & Human Services (DHHS). There are asset and income eligibility limits. Generally, if the applicant owns more than $2,000 in “countable assets,” he will not be eligible for Medicaid. However, some assets are not “countable.” These may include a home, a prepaid funeral, a car, and household goods and furnishings, among others.
There are additional financial eligibility rules that apply to cases involving married couples. The spouse in the nursing home is the “Medicaid applicant”. His or her spouse living at home is considered the “community spouse”. When applying for Medicaid, the couple is required to disclose the total amount of their combined assets. Under the eligibility guidelines, the community spouse is permitted to keep one-half of the couple’s total countable assets up to a maximum of $119,220 (for 2015). This amount is considered the “protected spousal amount”. The remaining assets are subject to a “spend down” or other planning techniques in order to qualify for Medicaid benefits.
Additionally, for both singles and married couples, the applicant’s monthly income (Social Security benefits, pension, etc.) is considered. A portion of the applicant’s monthly income is applied to the cost of care in the nursing home and is referred to as the “patient pay amount”. This is similar in concept to a “co-pay”. It is the portion that the nursing home resident is required to contribute to his or her cost of care each month.
Becoming eligible for and applying for Medicaid can be a complex process. It is appropriate to consult with an experienced elder law attorney to understand the eligibility requirements as well as to assemble and submit the application for Medicaid benefits. There is no “one size fits all” approach for purposes of Medicaid eligibility. Accordingly, if you or a loved one is experiencing health problems or considering moving into an assisted living facility or a nursing home, you should consider meeting with an experienced elder law attorney to determine what options are available.
Buying and Selling Property: An Attorney’s Role
By Danelle E. Harrington
Are you prepared to buy or sell property? This article will cover the basic legal issues that should be considered when buying and selling property in Michigan.
The first document prepared in any real estate transaction is usually a Purchase Agreement. It is important to carefully review the purchase agreement to ensure that all material terms are included. In most cases, the Purchase Agreement should be a detailed, multiple page document that not only includes basic terms about the purchase price, parties, and property, but also identifies details about the transaction such as what items are included with the property, who is responsible for closing costs, and contingencies for the buyer and seller.
Before closing, the property Seller is usually obligated to provide an Owner’s Title Commitment to the Buyer which will protect the Buyer against any financial loss if there are any challenges that arise as to the integrity of the legal title to the property. It is important for the Buyer to carefully review the Title Commitment in order to ensure there are no exceptions or defects to the title policy that should be removed or dealt with prior closing, in order to ensure they are receiving clear title.
One part of property sale transactions where I see an increasing number of problems is Land Divisions. A land division usually arises when a Seller seeks to sell less than all of their property. For example, if someone owned a 40 acre parcel with a home on it they may wish to separate the farmland from the house in order to sell the house while keeping the farmland. Unless there is an exception, a person must submit a request to have their property divided to the local assessor before the property can be sold. If a person sells a piece of property without going through the proper land division process, the Buyer of the property has the option to void the transaction.
The last area of real estate transactions where it is often helpful to seek the legal advice of an attorney is the type of deed by which you give or obtain title to the property, along with how you hold title to the property. There are several types of deeds: Warranty Deeds, Covenant Deeds, and Quit Claim Deeds. Each type of deed contains a varying level of warranty for claims against title, with Warranty Deeds providing the most and Quit Claim Deeds providing none. If there is more than one owner of the property there are several ways to hold title to the property, including tenants in common, joint tenants with a right of survivorship, or tenants by the entireties. You should consult with an attorney to decide which type of ownership is appropriate to your particular situation.
In sum, real estate transactions can be very complicated. You should meet with an attorney well versed in real estate issues prior to buying or selling property to discuss your available options and to help you review and prepare the necessary legal documents for the transaction.