Freeze the Taxes, Not the Memories: Guidelines for Avoiding the Uncapping of Michigan Property Taxes When Transferring the Family Cottage

As much as I enjoy all four seasons in Michigan, there is something special about the transformation from spring to summer. After months of snow and gray skies, the landscape slowly awakens – brown fields turn vibrant green, and Michiganders trade heavy coats for hoodies while venturing outside to experience Michigan’s beauty.

Spring is also a time when families return to their cottages, often closed or winterized since fall, to put in boat docks, clean the yard, and prepare for summertime fun. For countless Michigan families, the cottage is more than a vacation spot; it is a cherished link between generations. It is a place where children are taught to swim, card games stretch late into the night, and fireworks are watched from the dock- just like their parents and grandparents have done.

Preserving this family legacy isn’t always simple. One of the biggest challenges in passing down the family cottage is the risk of uncapping property taxes, which can dramatically increase the annual tax burden on families and make the property unaffordable for future generations.

Earlier this year, Michigan Representative Bradley Slagh (District 85) introduced House Bill 4014 of 2025, which passed on March 18, 2025 by a vote of 91-11, and is pending with the Senate Committee on Finance, Insurance, and Consumer Protection. If enacted, this legislation could provide significant tax relief for families when transferring property among relatives by broadening exemptions to include an additional classes of family members. These changes are intended to help to preserve generational wealth, and reduce the financial burden associated with property transfers.

So, What is Property Tax Uncapping?

In 1994, Michigan voters passed Proposal A, which fundamentally changed how property taxes are calculated. Here is the breakdown:

How It Works:

• A property’s State Equalized Value (SEV) is based on 50% of its market value.
• Taxable value is the value used to calculate property taxes. It is capped and can only increase each year by the lesser of 5% or the rate of inflation, as long as ownership doesn’t change.
• When ownership changes, the property’s taxable value is “uncapped” and reset to the SEV – often causing a massive jump in annual real estate taxes.

Example: A cottage purchased in 1995 for $100,000 might have a market value of $1,000,000 in 2025. If ownership hasn’t changed, the taxable value increases modestly over time based on the original purchase price. If the property is transferred to a new owner in 2025, the taxable value is reset (uncapped) to 50% of the current market value ($1,000,000)– potentially increasing the annual tax bill by thousands of dollars.

Is There Any Way to Avoid This?

Michigan lawmakers realized that this system could unfairly penalize families trying to keep cottages in the family. So, they created exemptions that allow certain transfers to family members to avoid uncapping. This key legislation is found in Public Act 497 of 2012, and Public Act 310 of 2014. These laws provide that residential real property can be transferred without uncapping if:

1. The recipient is a “qualified relative”,
2. The property’s use remains residential, and
3. The transfer does not result in commercial or rental use.

Who is a “qualified relative”? Under current Michigan law, the following relationships qualify for the uncapping exemption: spouse, parent, child (biological or adopted), sibling, grandchild, and grandparent.

Relatives who are NOT “qualified relatives” include: nieces, nephews, cousins, in-laws, and non-relatives. Transfers to this class of relatives or non-relatives will trigger uncapping of the taxes.

Controversy Over Interpretation of “Qualified Relative”

In recent years, interpretation of the existing language and definition of who is a “qualified relative” has been challenged. Controversial reinterpretation has led to the uncapping of some properties when they were transferred to a qualified relative and their spouse. Those in opposition of this interpretation say that this violates the spirit of the law.

To rectify the perceived injustice House Bill 4014 was introduced to expand the definition of qualified relatives to include sons-in-law and daughters-in-law. While this legislation is pending, it may be worth reviewing your own transition plan for the family cottage to determine whether the expansion would be a welcome opportunity for a revision.

Preferred Transfer Strategies to Avoid Uncapping

1. Place the Property in a Trust

You can place the family cottage in a revocable living trust or an irrevocable trust. The trust will continue to own the property, and the beneficiaries of the trust (who must be qualified relatives) can inherit the property with the tax cap intact. CAUTION: The trust must be properly drafted, and the beneficiaries need to be clearly defined and qualified. If the trust continues for multiple generations, there may be planning considerations for avoiding potential generation skipping transfer tax issues.

2. Transfer via Lady Bird Deed (Enhanced Life Estate Deed)

A Lady Bird Deed allows the owners to retain full control over the property during their lifetime (including the ability to sell it) while naming beneficiaries who will automatically inherit the property at death. Technically, this is not considered a transfer of ownership for tax purposes until death. At that time, if the beneficiaries are qualified relatives, the property can be transferred without uncapping.

3. Lifetime Gifting of Property

You can gift the property to a qualified family member (or members) during your lifetime so long as the transfer is made to a qualified recipient and the use remains residential. You may also need to file a gift tax return (Form 709), to track lifetime gifts, even if you don’t expect to owe gift tax.

Final Thoughts: Protect the Cottage, Protect the Legacy

The family cottage isn’t just another piece of real estate, it is a place where cherished family memories are made, and traditions endure. To ensure this legacy is passed down in a tax-efficient manner, careful planning is essential. A good place to start is by having a conversation with your Greenleaf Trust advisor. They’ll help you navigate the complexities of estate planning and work alongside your attorney to help safeguard your family’s legacy.

In the meantime, may your summer be filled with peaceful afternoons lounging in the hammock, joyful boat rides with grandchildren, and crackling bonfires under the stars.