Klooster v. City of Charlevoix Uncapping: Conveying Property to a Joint Tenancy May Uncap the Taxable Value

The Michigan Supreme Court, in Klooster, decided a very important property tax uncapping question. Klooster highlights some of the property tax implications of certain transfers of jointly owned property and provides guidance to property owners with respect to circumstances in which the creation or termination of a joint tenancy will result in uncapping of a property’s taxable value.

I. Background

Klooster involved three transfers of the same property. In 1959, James and Dona Klooster purchased a home in Charlevoix and held it as tenants by the entirety. In 2004, Dona quit claimed her interest to James, who then transferred the home to himself and his son Nathan as joint tenants. When James died on January 11, 2005, Nathan became the sole owner by operation of law. In September 2005, Nathan conveyed the home to himself and his brother Charles as joint tenants. The Court held that only the transfer from Nathan to himself and Charles as joint tenants uncapped the property’s taxable value.

II. Key Points

The Klooster decision provides several important points to consider related to creating or terminating joint tenancies, especially in the context of intrafamily transfers. First, the Court held that a conveyance under the GPTA does not require a written instrument. Second, upon the creation of a joint tenancy, the property’s taxable value generally will not uncap if one of the joint tenants is an original owner (i.e., an owner as of the last uncapping event) of the property. Third, a termination of a joint tenancy caused by the death of a joint tenant who was an original owner does not uncap the property. Fourth, a conveyance from a non-original owner to himself and another person as joint tenants will uncap the property.

III. Practical Considerations

• For estate planning purposes, Klooster confirms that a parent may avoid uncapping a property by creating a joint tenancy with a child—or potentially a grandchild or other third party—as long as the parent was an original owner/purchaser of the home.
• Klooster also provides guidance as to the limitations of creating successive joint tenancies to avoid an uncapping event.
• Klooster did not directly address a transfer of property to multiple owners. The Klooster decision addressed specifically only the situation in which a joint tenancy terminates because one joint tenant dies, leaving the other joint tenant with sole ownership of the property followed by the creation of a subsequent joint tenancy. 

IV: Non-Property Tax Considerations

Klooster provides a planning opportunity to avoid property tax assessment uncapping. However, before entering into a joint tenancy with a child or other family member the non-property tax issues need to be considered. For example:

• As an owner, the property could not be sold or mortgaged (refinanced) without the consent of the new joint tenant.
• Creditors of the new joint owner could potentially file liens against the joint owner's interest in the property.
• There are estate and gift tax consequences for adding a joint tenant to the property.

The State Tax Commission has responded to the Klooster decision by issuing guidance to assessors. This guidance can be found in the attached document accessible via the below link.

Taxpayers with questions about these or other Michigan tax matters may contact any of the listed Dykema attorneys:

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