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George F. Bearup, J.D. Senior Legal Trust Advisor

4-Oct-18

Trust Beneficiary Claims Personal Residence Exemption (PRE)

Take-Away: The Michigan Court of Appeals held this past June that a trust beneficiary who occupies a residence held in the name of the trustee can have the residence qualify for the Personal Residence Exemption (PRE) for Michigan real property tax assessment purposes.

Source: Breakey v. Michigan Department of Treasury, Michigan Court of Appeals (June 7, 2018.)

Background: An individual who owns a residence in Michigan is entitled to have that residence qualify for the Personal Residence Exemption. A PRE classification is valuable in that it exempts a principal residence from up to 18 mills of taxes levied by a local school district for its operating expense purposes. The real estate must be the owner’s principal residence, which is defined as the one place where an owner of the property has his or her true, fixed, and permanent home to which, whenever absent, he or she intends to return, and that shall continue as a principal residence until another principal residence is established.

  • Owner: Key to this statutory exemption is the use of the word An owner who qualifies to claim the PRE can either own the residence in fee simple (100% of the title), if the individual is purchasing the residence under a land contract, and even if the individual owns only a fractional interest in the residence, e.g. a tenant in common ownership arrangement exists with other tenants-in-common.
  • Trusts: Moreover, the concept of ownership of the residence extends to the transfer of the title to the residence to a revocable trust, or a qualified personal residence trust (QPRT.) [MCL 211.7dd(a)(iii).]

Trustee As Owner: The question that came before the Michigan Tax Tribunal, and later the Michigan Court of Appeals,  is if a PRE is available to be claimed by an irrevocable trust where the residence is occupied [but not legally owned by]a trust beneficiary which is used as his/her principal residence.

Facts: A trust was created on the husband’s death for the benefit of his surviving spouse. The widow was given the right to occupy the residence for the rest of her life, rent-free, pursuant to the terms of the husband’s trust. Clearly the widow did not own the residence- the trustee did. The fact that the widow did not personally own the residence was why litigation ensued when the trustee claimed the PRE for the residence.

  • Michigan Tax Tribunal: The Tax Tribunal found that the widow-trust beneficiary did not meet the concept of owner for purposes of the PRE statutory exemption. A appeal was taken from that narrow interpretation of
  • Court of Appeals: This Court held that the widow qualified as an owner of the residence, even though she was not devised legal title to the residence on her husband’s death, and thus she was not the formal titleholder to the residence. The Court found that the widow qualified as an owner under the PRE statute since she held equitable title to the real property as a beneficiary of the irrevocable trust, despite her not holding legal title. While the words owner/owns are not technically defined in the statute, relying upon earlier decisions from Michigan courts, the Court  found that ownership includes more than holding a fee simple title to the residence.
  • Return to Tax Tribunal: The Court remanded the case back to the Michigan Tax Tribunal to determine the second aspect to the qualification to claim the PRE,  which is if the residence qualified as the widow’s principal residence? In Michigan one can only have one principal residence, not two (or more.)

Conclusion: While this is not an earth-shattering decision from the Michigan Court of Appeals, it does help to assure those families that establish irrevocable trusts to hold title to a residence to be used by a disabled child or other family member, that the real property tax bill paid by the trustee for the residence will be far less than would otherwise have been the case due to the availability to claim a PRE for the residence, since the real property will qualify as being equitably owned by the trust beneficiary. It may also help those families with legacy cottages and second homes, if one of their children or grandchildren is given the right to occupy the residence that is held in trust and that trust beneficiary treats the trust-owned residence as their principal residence.