Taxation & Estate Planning

ESTATE TAX LIEN NOT DIVESTED BY SALE

By Charles Rubin

When an individual dies, his or her assets are subject to a 10 year estate tax lien in favor of the IRS for any unpaid estate taxes. Many would think that the lien would be divested as to any third party purchaser of estate assets for fair value, since the purchaser would not have any involvement in the computation or payment of estate taxes. However, they would be wrong, as several title companies found out in a recent tax case.

In that case, a decedent died owning 3 houses. The 3 houses were deeded out to the appropriate heir and her spouse, and then they sold the houses to 3 purchasers. Ultimately, the IRS challenged the value of another estate asset, and assessed additional estate tax. Since it was unable to collect the unpaid tax from the estate, it came after the 3 purchases pursuant to its 10 year estate tax lien. Note that the purchasers didn't even buy the properties from the estate, but from a successor in interest to the estate (the heir and her husband).

Ultimately, the purchasers were held liable for the unpaid estate taxes (actually, the title insurers ended up paying the taxes pursuant to title insurance policies purchased by the purchasers). The case demonstrates that real property purchasers ignore the 10 year estate tax lien at their own peril, and that the IRS will come after unrelated third party purchasers when it cannot collect estate taxes from the estate. As an aside, the third party purchasers were not able to challenge the additional tax assessment that they ended up paying, because they were not the taxpayer.

Of course, knowledgeable purchasers are not without protection against estate tax liens. When a title search shows that property was owned by a decedent within the past 10 years, a purchaser can insist on the seller obtaining a release of lien from the IRS. The purchaser can also wait for a closing letter to be issued that demonstrates that estate tax has been satisfied. Further, if the executor had applied for and obtained a discharge of personal liability from Code Section 2204, the lien would have been released as to any purchasers.

FIRST AMERICAN TITLE INSURANCE COMPANY v. U.S., 101 AFTR 2d 2008-XXXX, (CA9), 03/27/2008

Full post as published by Rubin on Tax on April 01, 2008 (boomark / email).