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Why a Joint Tenancy May Be The Preferred Strategy

For 30 years our Firm has advised clients on the best ways to title cottages, camps and other non-homestead property. In those 30 years, the laws that impact this planning in the areas of federal taxes, state property taxes, and nursing home Medicaid have changed so many times it makes my head spin. The biggest risk that retirees face is losing assets including real estate at $7,000 to $8,500 per month if a nursing home admission occurs. Keep in mind that in general a cottage or camp is 100% countable in the Medicaid world. You cannot keep the cottage or camp in the family if it must be sold due to spend down needs. Most attorneys not experienced in Elder Law will miss this issue. Of course, nursing home spend down is not an issue for land owners who have adequate funds or Long-Term Care insurance to pay for nursing home care.

Due to Proposal A (the Headley Amendment), the death of a parent or parents who own a cottage or camp will cause the taxable assessment to pop-up to the state equalized value (SEV) except for joint tenancy deeds. Also, a new law effective on December 31, 2013, known as Public Act 497 allows for lifetime transfers of land to immediate family members without uncapping (discussed later). A pop-up in property taxes can be so high that the children cannot afford to keep the cottage or camp. To make matters worse, there has been a rising tide of disharmony and conflict among family members when the parental glue is gone. The plans we designed for clients 8 years ago need revising because of 7 law changes since then.

What Are Common Deed Strategies?

The possible deed strategies commonly used are:

  1. Joint tenancy with survivorship
  2. Tenants in common
  3. Limited Liability Companies
  4. Living Trusts
  5. Life Estate and Lady Bird Deeds
  6. Outright transfers

Impact of Recent Law Changes

Five-Year Look Back Period. In 2006, the Medicaid five-year look back period was enacted. Transfers within five years of applying for Medicaid create a divestment penalty causing Medicaid disqualification.

Part of Camp and Cottage is Countable. In 2011, Michigan Medicaid ruled that your fractional joint interest in a non-homestead cottage or camp is countable even if held more than five years in joint tenancy. For example, ten years ago a father adds a son to the title of a hunting camp as “father (50%) and son (50%) as joint tenants with survivorship”. Due to the new rule, the father’s 50% will be countable for Medicaid even if the son refuses to consent to sell.

Klooster Decision Approves Joint Tenancy to Avoid Uncapping. In 2011, the Michigan Supreme Court in Klooster v. Charlevoix approved the use of joint tenancy with survivorship to prevent uncapping the taxable pre-death assessment to the higher State Equalized Value (SEV) after death of a parent.

Anderson v Chocolay Township Decision Approves Lion Cub Deeds. On December 18, 2013, the Michigan Tax Tribunal held in Anderson v. Chocolay Township that unequal joint tenancies qualify for the Klooster exemption from uncapping, such as in a deed which names a parent as a 1% owner and a child as a 99% owner with survivorship. Our Law Firm was the principal firm which won this important taxpayer victory!

Public Act 497 Expands Uncapping Relief on December 31, 2013. Michigan Public Act 497 of 2012, effective on December 31, 2013, expands uncapping relief for lifetime outright transfers to immediate family members.

Example 1: Parents transfer 100% of a cottage to children. The existing cap on taxable value will continue.

Example 2: Parents add a child as a 50% joint owner with survivorship to a cottage. The Klooster holding will prevent uncapping upon death of parents. P.A. 497 will allow the cap to continue when the surviving children add their own children (grandchildren to original owners) to the cottage.

Conservation Easement Prevents Uncapping. Under Michigan law, placing a conservation easement on land will prevent uncapping forever.

Estate Tax Exemption. As of January 1, 2013, the federal estate tax exemption is $5.25 million.

The Pros and Cons of the Common Strategies

Joint Tenancy with Survivorship. Thanks to the Klooster and Anderson v Chocolay Township decisions, joint tenancy is a favored strategy to protect a cottage or camp from uncapping and Medicaid spend down. No other strategy offers solves both issues. A parent’s share can be 1% and a trusted child’s share can be 99%. If the deed is in place for five years due to Medicaid’s five-year look back period, 99% of the property will be exempt from Medicaid.

This strategy is not without disadvantages. It can expose the property to a child’s life issues of divorce, debt, disharmony, and disability, or the “four D’s”. The risk can be lessened by naming only the most trusted happily married child who signs an agreement to share with other children and gives back to parents a power of attorney.

Our Firm also recommends that all children sign a Harmony Agreement or set up a LLC to operate the family cottage or camp. The LLC will not own the land.

Joint tenancy also provides children with the ability to sell the land with no capital gains tax as to pre-death appreciation under stepped-up tax basis rules of IRC 1014(b)(9) and IRC 2040.

Tenancy in Common. This is the most common and least desirable method to hold cottages and camps. It exposes the property to probate, uncapping, increased property taxes, and disharmony.

Limited Liability Companies (LLC). The use of LLCs to own cottages and camps will expose them to high risk of uncapping and Medicaid spend down. The capping benefits of P.A. 497 are expressly not available to LLCs. The guidelines of the State Tax Commission and the Tax Tribunal take the general position that deeds for cottages and camps into LLCs will uncap. Also, the Proposal A statute provides that deeds out of a LLC to individual members will uncap. However, the biggest problem is that two Medicaid rule changes say that a transfer of a cottage or camp into a LLC is a divestment and that the property in a LLC is countable. See BEM 400, p. 7 and BEM 405, p. 2 and 3 (2014).

Living Trusts. We do not generally recommend the use of a Living Trust to own a cottage or camp. First, a deed into a Revocable Trust does not start the 60-month Medicaid look-back period against the State, and thus the property will never be exempt from Medicaid spend down risk. Upon death of the parents who created the Revocable Trust, the property will uncap. The capping benefits of P.A. 497 are expressly not applicable to trusts.

Life Estates and Lady Bird Deeds. We do not generally recommend the use of life estates and Lady Byrd deeds for cottages or camps. A Lady Bird deed never starts the 60-month Medicaid look back period to run against the State. As a result, property in Lady Bird deeds never becomes exempt from Medicaid spend down risk. Also, a retained life estate remains countable. Upon death of the parent in either a Lady Bird or life estate deed, the property uncaps to the higher SEV.

Outright Transfers. We generally do not recommend outright completed transfers to children.

First, children will lose capital gains avoidance under IRC 1014 if property is sold after death of parents because the parents did not retain any interest. The other problems are that the parent loses all control and the transfer exposes the property to the children’s “four D’s”.

However, under P.A. 497, they will not uncap. Another advantage is that after a five-year look back period, they will be exempt from Medicaid spend down risk.

When Medicaid and Uncapping Are Not Concerns

When Medicaid and uncapping are not concerns, then the use of a LLC or Trust may be preferred strategies.

How to Keep a Plan Updated As Laws Change

At our Firm we offer the Client Care Program as a cost-effective way to keep your plan updated as laws and circumstances change. The reasonable annual fee provides you with three newsletters per year on law changes and tax tips, you can call the office for free advice, and we will update your documents when laws change at no cost.

Each family’s situation is unique. Please do not rely on this article as it may or may not apply to your situation. It is critical to select an attorney who is experienced in Elder Law and taxation to do effective planning. Check out the National Academy of Elder Law Attorneys and the National Elder Law Foundation for qualified Elder Law Attorneys.

If you would like more information, please feel free to email upelderlaw@upelderlaw.com or call us at (906) 228-6212. We regularly see clients in Sault Ste. Marie, Iron Mountain, Marquette, Houghton, Menominee, Marinette Wisconsin and Escanaba.