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Putting a Michigan Cottage in an LLC Can Uncap It Anyway
Families put a Northern Michigan cottage into a trust or a limited liability company to share it across a generation without a partition suit. The structure solves the ownership problem well. It also moves the property under a different set of uncapping rules than a deed to a child, and the rules for an entity contain no relative exemption at all.
The provision is MCL 211.27a(7)(h). A conveyance of an ownership interest in a corporation, partnership, limited liability company, or other legal entity is a transfer of ownership of the property the entity holds where the interest conveyed is more than 50 percent of the entity. A cottage held by an LLC uncaps when more than half the membership interests change hands, whoever the members are.
The Entity Rule Counts Interests, Not Relatives
The relative exemption that protects a direct transfer to a child, at subdivision (u), lives in a different part of the section from the entity rule and does not reach into it. Subdivision (h) asks one question, which is whether more than 50 percent of the ownership interest was conveyed. It does not ask who received it.
The practical consequence surprises families who formed the LLC precisely to keep the cottage in the family. Parents who hold all the membership interests and transfer them to three children have conveyed 100 percent of the entity. The property uncaps, and the fact that every transferee is a child changes nothing under this subdivision.
Cumulative transfers are treated the same way. The statute measures the interest conveyed, and a series of smaller conveyances that together exceed half the entity is what the assessor will examine, which is why the timing of gifts of membership interests is a tax question rather than only a family one. Our Michigan cottage succession page sets out how the ownership structures themselves are drafted.
The Entity Has Its Own Notice Duty
Subdivision (h) attaches a filing obligation to the entity rather than to the members. Unless notification has already been provided under subsection (10), the corporation, partnership, limited liability company, or other legal entity must notify the assessing officer on a form provided by the State Tax Commission not more than 45 days after a conveyance of an ownership interest that constitutes a transfer of ownership.
That duty is easy to miss because nothing is recorded with the register of deeds when membership interests move. A deed triggers the monthly report the register of deeds sends to the assessor under subsection (10). An assignment of LLC interests sitting in a company binder triggers nothing external, and the entity’s own 45-day filing is the only thing that surfaces it.
An entity that misses the filing has not avoided the uncapping. It has delayed the assessor’s knowledge of it, and the assessment, when it comes, reaches back to when the transfer occurred.
A Trust Is Treated More Generously
The same section handles trusts differently, and the difference is the reason a cottage trust and a cottage LLC are not interchangeable on this issue. Beginning December 31, 2014, a conveyance of residential real property to a trust is not a transfer of ownership where the settlor or the settlor’s spouse conveys it and the sole present beneficiary or beneficiaries are the settlor’s or the settlor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter, and the property is not used for any commercial purpose afterward.
The trust provisions carry the relative list through each stage. A distribution of residential real property out of a trust to a listed relative is not a transfer of ownership. A change that adds or substitutes a listed relative as beneficiary is not a transfer of ownership. A distribution from a decedent’s estate to a listed relative is not one either. In each case the same non-commercial use condition applies, with proof to be furnished within 30 days on request and a $200 fine for failing to.
The LLC has none of that. The family that wants the sharing mechanics of an entity and the uncapping treatment of a trust is choosing between two statutory regimes, and the choice is made when the deed into the structure is signed.
The Commercial-Use Condition Reaches Rentals
Every relative exemption in the section, including the trust versions, is conditioned on the residential real property not being used for any commercial purpose following the conveyance. A cottage that the family rents to strangers for part of the season has a commercial use, and the exemption that depended on its absence is gone.
That condition interacts badly with the most common reason families share a cottage’s costs. Renting the property for a few weeks to cover taxes and upkeep is ordinary, and it is exactly the use the statute names. A structure drafted to preserve the cap has to be run in a way that preserves it too.
Whether a cottage should sit in a trust, an LLC, or a trust that owns an LLC is decided by weighing the sharing mechanics against subdivision (h), and that weighing is cheap before the deed is signed and expensive after. If that is where your situation sits, call us at (800) 525-6386.
Before the Cottage Goes Into an Entity
The entity form solves a real problem and creates a specific tax exposure, and the two have to be weighed together rather than in sequence. We build cottage succession structures at Neumann Law Group for families on Torch Lake, Glen Lake, Crystal Lake, and across Northern Michigan as part of our Michigan estate planning practice. Call our office at (800) 525-6386, or contact us online, and we will talk it through with you.