Trust Transfers and Property Tax Uncapping: What Michigan Property Owners Need to Know
The legal implications of transferring property held in a trust can be confusing, especially when it comes to how those transfers affect property taxes. One of the most common questions Michigan property owners face is whether a transfer of real estate from a trust to a beneficiary will “uncap” the taxable value, potentially resulting in a significant property tax increase. Understanding Michigan’s “transfer of ownership” rules is essential to protecting the long-term affordability of family-held properties. In this post, the Michigan real estate attorneys at Thompson Legal will explain how property taxes may be uncapped during trust transfers and what exceptions may help preserve a trust property's capped value.
Please note that this post is not exhaustive, and every situation is unique. In the event that you have legal questions about working with a trust or property transfers, it's advisable to speak with a licensed attorney. Contact Thompson Legal to speak with a Michigan Real Estate or Estate Planning Attorney today.
What Is a “Transfer of Ownership” Under Michigan Law?
Under Michigan law, a “transfer of ownership” is a key trigger for the uncapping of property taxes, meaning the property’s taxable value can be reset to current market value in the year following the transfer. According to MCL 211.27a(6), a “transfer of ownership” includes:
Conveyance of title to property, or
Conveyance of a present interest in the property,
When such conveyance includes beneficial use equal to the value of a fee interest.
This means that not all property transfers are considered transfers of ownership—some are exempt under MCL 211.27a(7). If the transfer does not fall under one of those exemptions, the property’s taxable value may uncap, potentially leading to much higher taxes for the new owner. For a full list of what qualifies as a transfer of ownership, see the Transfer of Ownership Guidelines prepared by the Michigan State Tax Commission.
The "Uncapping" Rule and Its Exceptions
Another important concept in Michigan property taxes is that of "uncapping." Following a “transfer of ownership”, if the transfer is not exempt, the property taxes become uncapped. A property's taxable value is typically capped, limiting annual increases to the lesser of 5% or the inflation rate. However, when a "transfer of ownership" occurs, this cap is removed, and the property's taxable value is reset to 50% of its market value (State Equalized Value, or SEV). This "uncapping" can lead to a substantial increase in property taxes.
Is a Transfer to a Trust a Transfer of Ownership?
Yes—usually. According to MCL 211.27a(6)(c), a conveyance to a trust is a transfer of ownership unless certain conditions are met. The good news is that Michigan law provides several exemptions to allow for property to be transferred into or out of a trust, or for changes within a trust, without triggering an uncapping of the property's taxable value. MCL 211.27a(6) provides that a transfer to a trust is not considered a transfer of ownership if:
The grantor (or their spouse) is the settlor (creator) of the trust, and
The sole present beneficiary is the settlor, their spouse, or both.
Is a Transfer From a Trust a Transfer of Ownership?
A distribution of property from a trust is generally a transfer of ownership. However, it is not a transfer of ownership if the distributee (the person receiving the property) is also the sole present beneficiary of the trust or the spouse of the sole present beneficiary, or both.
Michigan law provides an important exception to the definition of “transfer of ownership” when it comes to certain family-based trust transfers. Specifically, if the settlor (the person who created the trust) or the settlor’s spouse conveys residential real property to a trust, the transfer will not result in an uncapping of property taxes—if certain conditions are met.
To qualify for this exception, the sole present beneficiaries of the trust must be limited to the settlor’s parent, sibling, child (including adopted children), or grandchild. In other words, the people who currently have the right to use and benefit from the property must be within this defined group of close family members. Additionally, the residential property must not be used for any commercial purpose after the conveyance. If the home is later rented out or used for a business, the exemption will no longer apply, and the taxable value may uncap.
What Is a “Present Beneficiary” of a Trust?
The term present beneficiary refers to someone who has the current right to use or benefit from the property held in trust. This is different from a contingent or future beneficiary. Michigan law emphasizes who has beneficial use of the property now, not just who might receive it someday. Present beneficiaries matter for purposes of uncapping status for transfers to or from a trust.
Principal Residence Exemption (PRE) for Trust Beneficiaries
Beyond uncapping, another significant property tax exemption in Michigan is the Principal Residence Exemption (PRE). This exemption reduces the amount of property tax by exempting a homeowner's principal residence from up to 18 mills levied by local school districts for operating expenses. Crucially, Michigan law extends the PRE to certain trust beneficiaries:
Ownership Through Trust: A person who owns property as a result of being a beneficiary of a will or trust, or as a result of intestate succession, can qualify as an "owner" for PRE purposes.
Sole Present Beneficiary of a Disabled Trust Beneficiary: The sole present beneficiary of a trust may claim the PRE if the trust purchased or acquired the property as a principal residence for that sole present beneficiary, and the beneficiary is totally and permanently disabled.
Equitable Ownership for Occupancy: Michigan courts have affirmed that a trust beneficiary who occupies a residence held in trust can qualify for the PRE, even if they do not hold legal title. If the beneficiary has the right to occupy the residence for their lifetime, rent-free, as per the trust's terms, they can be considered to have "equitable title" and therefore qualify as an owner for the PRE, provided the residence is their principal residence.
Conclusion: Get Help Navigating Property Transfers the Right Way
Transferring property from a trust can seem simple—but it has serious tax implications that families often overlook. Whether you're the trustee of an estate or the beneficiary of a family trust, it's important to understand how your actions may affect future property taxes through uncapping. Fortunately, Michigan law provides specific exemptions for trust-related transfers between family members—but they must be carefully executed with proper documentation. Need guidance on your family’s property transfer or estate plan? Contact Thompson Legal today to schedule a consultation.
This article is for informational purposes only. It is not intended as legal advice. In the event you would like to speak with a Real Estate Attorney, please Contact Thompson Legal at (734) 743-1646 to schedule a consultation.
