Life Estate Holder May Claim Personal Residence Exemption
A recent Michigan Court of Appeals opinion held that a life estate holder was a home “owner” and, therefore, entitled to a Principal Residence Exemption (PRE) under Michigan’s General Property Tax Act. Flowers v Township of Bedford, ___ NW2d ____ (2014). The PRE, often referred to as a “homestead” exemption, allows Michigan residents who own and occupy their homes as a principal residence an exemption from the tax levied by a local school district for school operating purposes up to 18 mills. While the PRE has long been granted to life estate holders who retained their interests as the property’s previous owner, the holding in Flowers extends the reach of what is considered “ownership” under the statute.
The facts of Flowers are as follows:
Helen Flowers’s husband owned a home before he and Helen were married. Although Helen lived with her husband in the home, she never jointly owned the property with him. When Helen’s husband died in 2011, his will provided Helen with a life estate in the home and provided his children (presumably by a previous relationship) with a future interest in it. Subsequent to her husband’s death, a deed granting Helen a life estate in the home was drafted and recorded. When Helen was denied a PRE after the property transfer, she appealed the denial. Despite a referee’s finding that Helen should be considered an “owner” for purposes of the exemption, the Michigan Tax Tribunal determined that she is not an owner under MCL 211.7dd(a)(v) because she was not a prior owner with her husband before the transfer.
Although the court agreed that Helen failed to meet the definition under the subsection of the statute cited by the tribunal, the court looked to another subsection, the dictionary and case law to hold that she does meet the definition of “owner” under the statute. MCL 211.7dd(a)(ii) provides that a “partial owner of property” is entitled to the PRE. According to Random House Webster’s College Dictionary, the definition of “ownership” includes “possession.” Furthermore, Michigan case law has held that a person does not have to own property in fee simple to claim a homestead exemption. The court reasoned that because Helen had a life estate interest in the property coupled with her right to exclusive possession of the property, she met the statutory definition of partial owner and was, therefore, entitled to the PRE.
This case is significant for estate planning purposes. A widowed or divorced homeowner can provide for both a subsequent spouse and his or her children from a previous relationship by using the same or a similar planning method as was used in this case. As this case illustrates, a property owner can provide, by will, a life estate and a remainder interest in the property. The surviving spouse then has the benefit of being able to stay in the home and keep the PRE, and the children retain a future interest to be realized upon the death of the surviving spouse.
Similarly, an instrument that is often referred to as a “Lady Bird” deed can achieve the same or similar results. A Lady Bird deed most often provides for the property owner (grantor) to retain a life estate coupled with an unrestricted power to sell, convey, mortgage, lease or otherwise dispose of the property in fee simple during his lifetime with the right to keep all the proceeds. If the owner has not conveyed the property before his death, then the deed provides for the transfer of the property to the named grantees upon the death of the grantor. A property owner could similarly retain an enhanced life estate for himself, grant a life estate to a non-owner of the property and ultimately convey the property in fee simple upon the death of the last life estate holder. Ladybird deeds are an effective tool to avoid probate, gift taxes and estate recovery.
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