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New Year Brings New Uncapping Rules

As addressed in a prior post, the laws about uncapping real estate taxes have become more complex and significant. Recent additional changes in the law have dramatically improved the situation. The law is MCL 211.27a.

As of January 1, 2015, certain types of property that passes to certain related individuals will not uncap if the property passes at death through a probate estate or trust.

Specifically, the type of property included in this exemption is “residential real property.” This term is defined in MCL 211.34(c), which states:

(e) Residential real property includes the following:

(i) Platted or unplatted parcels, with or without buildings, and condominium apartments located within or outside a village or city, which are used for, or probably will be used for, residential purposes.

(ii) Parcels that are used for, or probably will be used for, recreational purposes, such as lake lots and hunting lands, located in an area used predominantly for recreational purposes.

(iii) For taxes levied after December 31, 2002, a home, cottage, or cabin on leased land, and a mobile home that would be assessable as real property under section 2a except that the land on which it is located is not assessable because the land is exempt.

(f) Timber-cutover real property includes parcels that are stocked with forest products of merchantable type and size, cutover forest land with little or no merchantable products, and marsh lands or other barren land. However, when a typical purchase of this type of land is for residential or recreational uses, the classification shall be changed to residential.

Accordingly, the term “residential real property” is a much more expansive than property that would qualify as a personal residence for property tax purposes. However, and this is important, to avoid uncapping, the “residential” property cannot be used for “any commercial purpose.” This would seem to eliminate things, such as apartment buildings, that would otherwise fall within the definition of residential real property as defined in MCL 211.34(c).

Specifically, the individuals to whom such property may pass without uncapping are as follows: a parent, sibling, child, grandchild, or grandparent of the person who owned the property or of that person’s spouse.

The details regarding the application of these new rules are set out in guidelines prepared by the Michigan State Tax Commission. To read those guidelines, click here. This bulletin answers a number of questions about how the law applies to specific situations.

Notably, the increasingly popular “ladybird deeds” are the odd man out. That is, property passing by ladybird deed (or any other reserved life estate deed) will uncap. For reasons I have previously addressed, in my opinion, the routine use of ladybird deeds as a basic estate planning tool is already a bad idea. This law should give planners additional reasons to consider whether it makes sense to use a ladybird deed in a traditional estate planning context. Of course a ladybird deed to trust could still accomplish the same objective – but outside of situations in which the individual owner is receiving long term care Medicaid benefits, there would seem to be no reason to engage in such planning.

These new rules supplement, and do not supplant, the expansion of uncapping exemptions addressed in my prior blog post on this topic – which exemptions apply to lifetime transfers of the same type of property to the same class of persons.

This law is a great gift to estate planners, but let’s not be overly giddy about it. In many cases, uncapping property taxes is a negligible concern, and other planning objectives will trump the benefit of preparing an estate plan designed solely or primarily to avoid property tax uncapping.

SBO Policy Change Update

The question most frequently asked of me when I am out and about is:  What’s the status of the SBO Trust? I haven’t written about this issue on this blog sight before, although I have written and spoken about it a number of times in recent months.

The SBO Trust (or “solely for the benefit trust”) was the primary planning tool for married persons seeking Medicaid benefits in long term care situations for nearly two decades.  I am proud to say it was first created by two attorneys now with Chalgian and Tripp:  David Shaltz and John Bos.  The SBO Trust allowed assets above the community spouse “protected spousal amount” to be sheltered for the benefit of the community spouse. (The community spouse is the person married to the Medicaid applicant.)  It worked great for a long time.

In August 2014, the Department of Human Services (“DHS”) began treating SBO Trust assets as available resources, essentially negating any benefit to their use.  This was done without any policy change, by announcing a new interpretation of existing policy.

As a result of this change two things happened:  (1) Applications pending with SBO Trusts were denied, and (2) This helpful planning tool was made unavailable for future clients.

With respect to the first issue, litigation was initiated by the Elder Law Section of the State Bar in the Michigan Court of Claims.  Chalgian and Tripp attorney David Shaltz led that effort.  If successful, the lawsuit would have protected those clients who had applications pending at the time of this change, and would have required the DHS to take appropriate steps to implement a formal policy change before changing the way it treated SBO Trusts.  Earlier this week that lawsuit was dismissed by the Court of Claims on Summary Disposition.  That means this case was unsuccessful. To read the opinion from the Court of Claims, click here.  As a result, the only protection for people with applications pending at the time of the change would be to appeal through the administrative appeals process.  It is uncertain whether the decision from the Court of Claims will itself be appealed, or whether such an appeal would have any likelihood of success.

With respect to the second issue, there is a potential for litigation in federal court.  Such litigation would essentially sue the state to force them to require DHS to allow SBO Trusts to be treated in the same manner they were treated before the change in August 2014.  The Elder Law Section of the State Bar is still considering whether it will initiate such an action.

So, in conclusion, an important tool in Medicaid planning, the SBO Trust, is not currently viable and those who were impacted by the change will not have relief except potentially through the appeal of individual cases.  Whether this tool might ever return in the future is speculative at best.