- Planning Opportunities and Risks of Transferring Property Under Joint Ownership
- July 18, 2011 | Authors: Jeffrey S. Ammon; Raj A. Malviya
- Law Firm: Miller Johnson - Grand Rapids Office
Do you plan to transfer real property to your children or other loved ones as part of your estate plan? Do you intend to use joint ownership for this transfer? Would the “uncapping” of the property’s taxable value significantly increase your property tax bills or those of your heirs? Before using joint ownership (known as a joint tenancy) to transfer property, you need to know what uncapping means and understand the Michigan Supreme Court’s March 14, 2011 decision in Klooster v. City of Charlevoix. The Klooster decision provides much-needed clarification on the joint tenancy exception to the uncapping of your property’s taxable value and opens up significant estate and tax planning opportunities—and limitations.
What Is Uncapping?
Since 1994, the growth of your property’s taxable value has been limited, or “capped,” with annual increases of not more than the general rate of inflation or 5 percent, whichever is less, regardless of the actual increase in the state equalized value (SEV). But if you transfer ownership, the cap disappears, the property’s taxable value becomes the SEV, and if the SEV of your property is higher than its taxable value, your property tax bill goes up. The bigger the gap between the taxable value and the SEV, the bigger the property tax increase an uncapping will cause.
What Happened in Klooster
- In 1959, Mom and Dad bought a home in Charlevoix, Michigan.
- In 2004, Mom transferred her interest in the home to Dad. Dad then added Son as a joint tenant.
- In 2005, Dad died, which made Son the sole owner of the home.
- Later in 2005, Son created a new joint tenancy by adding Brother as a joint tenant.
- In 2006, the Charlevoix city assessor uncapped the home’s taxable value, causing the home’s property taxes to increase substantially.
What Issue Did the Court Review, and What Did It Decide?
The issue before the court was whether either of the 2005 transfers should have caused the assessor to uncap the home’s taxable value. The court held that the joint tenancy exception to uncapping has two requirements.
- At least one person creating or terminating a joint tenancy must have been an original owner of the property before the joint tenancy was created. Go back to the last uncapping event: only the owners at that time are original owners.
- If the property is already owned as a joint tenancy at the time of a transfer, at least one of the tenants must have been a joint tenant and remained a continuous joint tenant since the joint tenancy was created.
The court held that Dad’s death did not uncap the taxable value of the home. The joint tenancy exception applied because Dad was both an “original owner” and a “continuous” joint tenant. But Son’s addition of Brother as a joint tenant in the same year did uncap the taxable value of the home. The joint tenancy exception did not apply, because Son was not an “original owner.” That is, Son was not an owner at the last uncapping event.
The Impact of Klooster
Here’s what the ruling means for you.
- If you have transferred property under a joint tenancy or inherited property through a joint tenant’s death, ask experienced legal counsel whether there was an uncapping event. Klooster gives local assessors incentive to scrutinize inheritances, joint tenants, and other issues and decisions relating to the uncapping of property taxable value where a joint tenancy form of ownership has been created, altered, or terminated. And the assessor can go back many years—as far back as 1995, after Proposal A was passed, in some cases—depending on whether you properly filed a transfer affidavit.
- Creating a joint tenancy can be extremely beneficial for estate planning with highly appreciated property. If you do it properly, you can transfer your property to a child, grandchild, or loved one without triggering an uncapping of the property’s taxable value upon either creation of the joint tenancy or your death. However, as we have learned from Klooster, there are limitations on the number of successive joint tenancies that can be created without triggering an uncapping.
Although they’re not addressed in Klooster, there are potential federal estate and gift tax consequences to adding a joint tenant to property. This makes it important to have a tax professional review the transaction. You also need to consider the loss of control and creditor issues associated with creating a joint tenancy. And in addition to estate-planning benefits, there are potential asset protection opportunities as well.
Transferring property under a joint tenancy can be complicated, as it touches real estate, estate planning, estate and gift taxes, creditor rights, and asset protection.