Assignment of Membership Interest in Property-Owning LLC From Parents to Child Is a “Transfer of Ownership” That Uncaps Taxes, Appellate Court Says
If you own real property in Michigan and want to transfer title to a spouse, child, or other first-degree relative – whether as part of your estate planning or otherwise – you can do so without “uncapping” its taxable value. This means you – and the loved ones you convey property to – can avoid a substantial increase in tax liability that would otherwise occur upon a transfer of ownership.
If you do it right.
Unfortunately, as a recent Michigan appellate court decision illustrates, the law regarding capping and uncapping a property’s taxable value is full of traps that can easily ensnare unwary owners. If you fail to consult with experienced counsel to ensure that you structure your conveyance in a way that steers clear of these traps, you could be saddled with a huge, avoidable tax burden.
Uncapping Taxable Value Upon “Transfer of Ownership”
Michigan property owners are fortunate to live in a state where the law limits — or “caps” — how much the taxable value of their property can increase each year. But that limit — 5% of the taxable value or the inflation rate, whichever is lower — goes away upon a “transfer of ownership.” When that occurs, the property’s value is “uncapped,” and the property is taxed at its state-equalized value, which is generally 50% of the property’s true cash value. That’s a big difference.
Under the applicable law, however, a conveyance to “relatives by blood or affinity to the first degree” does not uncap the taxes. But according to the Michigan Court of Appeals in its recent decision in Jeff Props. v. City of Warren, transferring interests in a property-owning limited liability company (LLC), even if that transfer is between such blood relatives, results in an uncapping of the property’s value.
At issue in Jeff Props. were two pieces of property in Warren, Michigan, owned by an LLC in which John Andler and Mavis Andler held membership interests. The Andlers assigned 100% of their interest in the LLC to their son, who then executed property transfer affidavits for the two properties.
The taxing authorities in Warren notified the son that these property transfers constituted a “transfer of ownership” under Section 211.27a of the General Property Tax Act (GPTA) such that the taxable value of the properties would become “uncapped.” That statutory section defines a variety of transactions that constitute a “transfer of ownership” for uncapping purposes, including:
“a conveyance of an ownership interest in a corporation, partnership, sole proprietorship, limited liability company, limited liability partnership, or other legal entity if the ownership interest conveyed is more than 50% of the corporation, partnership, sole proprietorship, limited liability company, limited liability partnership, or other legal entity.”
The son appealed Warren’s decision to the Michigan Tax Tribunal (MTT), arguing the assignment of the parents’ LLC membership interests to their son did not uncap the properties’ value because the statute specifically provides that it is not a “transfer of ownership” if “the transferee is related to the transferor by blood or affinity to the first degree…” (MCL 211.27a(7)(t))
The MTT agreed with the City of Warren that the transfer of LLC interests constituted a “transfer of ownership” that uncapped the properties, and the son appealed the MTT’s decision.
The Court of Appeals affirmed the MTT’s decision. It held that because “the conveyance of the two properties was a transfer of ownership in the context of the limited liability company, the transfer is subject to uncapping under subsection (6)(h) and the MTT did not err when it concluded as such.”
Rejecting the son’s “blood relative” argument, the court noted that although “the parents and [son] are certainly related ‘by blood or affinity to the first degree,’ the transfer between the parents and [son] was of the type of property that was subject to uncapping.” That is, the parents “conveyed the holding company that owned those properties,” not the properties themselves. Accordingly, the value of the properties was appropriately uncapped.
The transaction in Jeff Props. is just one illustration of how the law regarding uncapping and “transfer of ownership” can thwart the tax and estate planning objectives of property owners. Similar results can happen in conveyances involving trusts. For example, the transfer of real property from a husband’s trust to a wife’s trust – even though it seems like a transfer between blood relatives – is not exempt from uncapping. To effectuate the transfer in a way that keeps the cap, the husband would have to transfer the property from the trust to himself, then transfer it to his wife, who would then need to transfer it to her trust. Needlessly complicated? Yes. Needed to ensure the taxable value remains capped? Absolutely.
For property owners who want to convey their property to their children and other statutorily designated close relatives such that they can keep the value capped, consulting with counsel beforehand is the best way to avoid the mistakes that the law makes all too easy.