Attorney & Mediator
Attorney & Mediator

Property Taxes – New in Michigan

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Michigan Property Taxes

In Michigan, the value of your real property is assessed by the local municipal assessor.  This State Equalized Value is 50% of the value of the property.

Prior to 1994, the taxable value of your property went up and down on a yearly basis depending upon the increase or decrease in value of the home and/or the neighborhood.

The biggest problem was created for individuals who held their property for many years. While their property remained as is, others near-by could build new homes or greatly remodel the home so that the value of the neighborhood went up dramatically.  This was especially true with waterfront homes.  In more underdeveloped areas, cottages were eventually replaced with very large homes.  As the values around the lake went skyrocketing, so too did the tax bill for the small cottage that remained unchanged.  Many individuals were faced with selling the property because they could no longer afford the property taxes.

In 1994, the voters of Michigan approved Proposal “A”.  This capped the amount that property taxes could increase on an annual basis.  Therefore, the property tax upon a parcel of real property cannot increase more than 5% per year.

This leads to two separate values for a parcel of real estate:  the state equalized value (actual value) and the taxable value.  For parcels held on a very long term basis, the difference between the two values can be dramatic.

The property taxes are uncapped (or pop-up) upon the sale or transfer of the property by the owners.  This included the transfer of property by gift or at death to children or siblings.

Often long held farms or family cottages which the owners wanted to pass down to their children had to be sold after the children found an increase in taxes of up to three or four times what their parents had been paying.

Effective December 31, 2013, this has changed.  Now, the transfer of property by the original owners to individuals who are children, parents or siblings, will not uncap the property taxes.

Lady Bird Deeds – Part II

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In Part I, I discussed the use of Lady Bird Deeds as a Probate avoidance method to transfer property from the original owners to their family.

There are other reasons that individuals might select a Lady Bird Deed:

Revocable (Living) Trusts

As a part of funding a revocable trust, real property is usually transferred into the revocable trust.  Property held in a Revocable Trust which transfers the property to children/family upon the death of the Grantor/Owner will not get the benefit of property taxes remaining capped.

The law requires that the transfer be from individuals, to other individuals (within one degree) to qualify.  A revocable trust becomes irrevocable upon the death of the Grantor(s) and is then an entity.  Even if the terms of the trust call for an outright transfer of real property to the Grantor’s children, the property will become uncapped.

This may not matter if the property will be immediately sold, or if the property has not been held for very long.

This result will be damaging if the property was purchased long ago and is meant to be held by the children – a family farm or a family cottage.  The uncapping of the property tax could force a sale of the property if the children are unable to afford to pay.

This leads to the use of Lady Bird Deeds.  The property is transferred out of the trust back to the original owners.  It is then transferred by the owners to themselves and their family as joint tenants with full rights of survivorship.  At the owners’ deaths, the property will belong to the children, the property taxes will not uncap, and the children will get a stepped up basis in the value of the property for federal tax purposes.

Medicaid Planning

Lady Bird Deeds have become important for Medicaid Planning today.

A married couple is able to claim their homestead as exempt property when one of them enters a nursing home and they apply for Medicaid.  In this way, the property may be held and used by the spouse who does not receive nursing home care.

In the last few years, Michigan has gotten on board with the federal mandate for estate recovery.  What this means is that the state government is permitted to seek reimbursement for sums expended on nursing home care.  Since the marital home was claimed as exempt property, this is the largest asset upon which the states could recover.

In Michigan, it was decided that the estate recovery would only be against the exempt homestead at the death of the second spouse to die, if the property goes through probate court.

Since a homestead is not exempt if it is held in a trust, the real property would pass to the children and/or family through a Last Will and Testament.  Since this would go to Probate Court, this would enable the state of Michigan to pursue recovery against the value of the homestead.

The alternative currently used is a Lady Bird Deed.  The property is still considered an exempt asset for purposes of Medicaid qualification.  Since the property passes to the children and/or family without the need to go through Probate court, the state of Michigan does not then have the ability to recover the value of care.

As with many regulations concerning Medicaid, this could change in the future.

Lady Bird Deeds – Part I

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What is a Lady Bird Deed? A Lady Bird Deed is a Quit Claim Deed from the owner of property, to him/herself and others – usually close family members.  It reserves a life estate to the owners and the right to sell without asking the permission of the family members. Why do people use them? Real property left to family through a Last Will and Testament will go through the Probate Court process.  Many individuals do not want their family to be forced to use this process due to cost and time expended on the process.    Therefore, owners sought a manner to transfer their property to their family (usually children) without using the probate process. Years ago, it was common for individuals to execute a Deed from themselves to their children – but they would not record it.  It was to be kept with the Will and other documents, to be recorded at the death of the owners.  This often created problems as the deed would be lost or destroyed. The next phase of probate avoidance style deeds was a Quit Claim Deed from the owner to him/herself and the children as joint tenants with rights of survivorship.  This accomplished the goal of having the property pass to the children upon the death of the owner. There were, however, draw backs with this type of arrangement.  The children were actual joint owners during the lifetime of the original owners.  Therefore, when the original owners wanted to sell the property, it was necessary to obtain the signature of every one of the joint owners on the transfer documents.  Additionally, if one of those individuals did not want the property sold, the original owner was blocked from selling. Now, owners are using the Lady Bird Deed.  It accomplishes the goal of removing the matter from Probate Court and it gives the right to sell to the original owner. Under a Lady Bird Deed, the property actually transfers at the death of the original owners.  It therefore gets a stepped up basis for federal tax purposes.  In other words, the children’s “purchase price” is the date of death value, not the amount their parents paid for the property. Additionally, under the Property Tax changes in Michigan, the transfer at death to the children prevents the property from uncapping the property taxes. To summarize – the Lady Bird Deed accomplishes the following:

  • Avoids the Probate process
  • Leaves the property to family without a trust
  • Gives the owner the right to sell during his/her lifetime without interference of children
  • Children get a stepped up basis (fair market value at owner’s death)
  • Property taxes are not uncapped
  • All children have to do is to file a death certificate

 

Leaving a Road Map for your Family – At your Death

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In the prior article, I examined the ways to leave your family a road map in the case of your disability. Many of the same issues apply when you are doing your planning for end of life.

Execution of a Last Will and Testament or a Revocable Trust is necessary to pass your estate to those you care about at the time of your death.  As with the issue of disability, it is important not only to leave those documents, but to organize the other financial components so that they are readily accessible.

As with disability planning, you will need organize all of the papers into one location:

Income.  What are your sources of income and how are they paid? Are there direct deposits?  Into which account?  When is the money deposited?  If you receive social security, caution your family that the last payment can be taken from the account electronically without prior notice if the department determines that it should not have been paid.

Monthly expenses:  What are your monthly reoccurring bills?  List them: mortgage, utilities, auto payment, auto insurance, homeowners insurance, credit cards, etc. Some of these will need to be paid until your estate is settled.

Next show what the name of the company, the account number, the date of the month the bill is due and how the amount is paid.  Is it automatically deducted from your checking account?  Is it automatically charged to your credit card?  Must it be paid by check? Or paid on line?  If it is paid on line, include the user name and password for the account.

With the information listed above, your family will be able to continue paying those bills that are necessary.  Additionally, they will have the information necessary to cancel some of the bills such as cable television or internet services as they will no longer be required.

Financial Assets. The list of assets is critical for your family and/or Trustee or Personal Representative. If he or she does not know what you own, it is virtually impossible to get the bills paid and to distribute your trust or estate.

Place a copy of the quarterly statement for each asset account (savings, checking, financial institution) into one folder.  The balance in the account is not the critical piece of information here – the account number, contact information and institution is the key.

Real Estate. Make a listing of all real estate you own or have an interest in.  If there is a deed or land contract, place this with the listing.

Accounts Receivable.  Does anyone owe money to you?  If so, list this together with the documents that establish the debt.  In this manner, your Trustee or Personal Representative will know the details so that the money can be collected.

Accounts Payable.  Do you owe anyone money?  Are there any loans or loan documents which establish that you owe others a debt?  Place copies of this with your other estate planning documents.

Physical Assets.  Make a listing of the large personal property items that you have such as boats, automobiles, coin collections, wine collections, jewelry, etc.  What is their value?  Where are they located?  Who should they be distributed to?

Life Insurance Policies.  Put these in one folder.  If you can’t find them, neither will your Trustee or Personal Representative.

Outstanding Lawsuits.  Are you either a Plaintiff or Defendant in a lawsuit?  Put a copy of the pleadings with your estate planning documents.  While individuals pass away, the lawsuits will continue until they are concluded.  It may be that your estate may owe money at the conclusion or alternatively, money may be due to your estate.

Cash.  If you have hidden money, you need to put this information with your estate plan.  Otherwise, it may be over looked.  Is there money hidden in books?  Under rugs?  In boxes?  In pipes? Behind ceiling tiles?  It would be a shame for your hard earned money to be given away in a garage sale or thrown away because it was in an unlikely place.

Funeral Plans.  Do you have a prepaid funeral contract?  If not, have you pre-planned your funeral.  Leave details.  This will assist your family in following your wishes.

Past Employers.  If you have worked for any companies that had benefits due to you, leave a listing of the company, its address, the years of service with the company.  In this way, if there are death benefits due, your family will be able to access them.

Veterans Benefits.  Are you a Veteran?  If so, place your DD 214 and other relevant information with your estate plan.  In this way your family can obtain any benefits to which you are entitled at death.

 

While your estate planning legal documents are a critically important part of your estate plan, it is also very important to leave a road map to all of the assets and benefits that you have accumulated during your lifetime.  This will make a very difficult time for your family just a bit easier.

Leaving a Road Map for your Family During a Disability

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Traditionally, when we think of Estate Planning, we think of Trusts, Wills, and Durable Power of Attorneys.  There are equally important steps to take to assist your family to assist you.

In the case of your disability, you may have executed a Durable Power of Attorney for Financial and Legal affair; however, if you haven’t left a road map of those affairs, your agent may not be able to adequately assist you.

First – organize all of the papers into one location.  It could be a safe, a notebook or a filing cabinet drawer.

Prepare a monthly “budget”.  Not the type that shows how much you spend per month on milk or coffee but one that shows the following:

Income.  What are your sources of income and how are they paid? Are there direct deposits?  Into which account?  When is the money deposited?

Monthly expenses:  What are your monthly reoccurring bills?  List them: mortgage, utilities, auto payment, auto insurance, homeowners insurance, credit cards, etc.

Next show what the name of the company, the account number, the date of the month the bill is due and how the amount is paid.  Is it automatically deducted from your checking account?  Is it automatically charged to your credit card?  Must it be paid by check? Or paid on line?  If it is paid on line, include the user name and password for the account.

Without this information, many bills could be left unpaid if you do not receive a mailed billing each month.

Also create a listing of your assets.  This can be done easily by placing a copy of the quarterly statement for each asset account (savings, checking, financial institution) into one folder.  The balance in the account is not the critical piece of information here – the account number, contact information and institution is the key.

Create a listing of your medical information and providers.  The providers can easily be done by stapling a business card for each of your doctors, therapists, and dentists onto a sheet of paper.

Make a listing of all current medications that you are taking with a note as to the doctor who prescribed the medication.

Finally, make a notation as to where your original documents are located so that they can be accessed by those who need them.

This will go a long way to assist others in assisting you in a time of crisis.