Higher Real Estate Taxes After Inheritance? No Thank You!

The uncapping of real estate taxes is a concern for many people when including the family home or cottage as part of their estate plan. The Michigan Legislature recently amended the General Property Tax Act to exclude enhanced life estates (commonly known as “Ladybird Deeds”) from what qualifies as a transfer of ownership. Normally, taxes are uncapped and reassessed when a transfer of ownership occurs. The new owner would then be charged a tax rate based on the value of the property at the time of transfer, which can lead to a substantial increase in taxes. With the new amendment, a Ladybird Deed has the ability to ensure your close family members enjoy the tax rate associated with your cost basis.

In the past, many people used what has become known as Cottage Law to avoid uncapping. While this can be a useful tool, the transfer under Cottage Law must occur during the lifetime of the person transferring the property. The need to transfer the property during your lifetime can be less than ideal, for many reasons, and is not always aligned with the desired outcome of an estate plan.

There are restrictions included in this new amendment. The transfer must occur between close family members as referenced in the amendment, and the property must not be used for any commercial purpose after the transfer. The definition of what constitutes a “commercial purpose” is still being molded, so the tax assessor will have leeway to decide what qualifies as commercial until a clear definition emerges.

Depending on your circumstances, a Ladybird Deed can be an excellent complement to your estate plan.