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Understanding Federal Estate Tax Liens: What Title Agents Need to Know

Federal Estate Tax Liens
In: Blog

When handling property transactions involving deceased owners, title agents must navigate the complex world of federal estate tax liens. These liens can significantly impact the transfer of property, making it crucial for agents to understand their implications. Let’s dive into the key aspects of federal estate tax liens and how they affect property transactions.

What Are Federal Estate Tax Liens?

Federal estate taxes are imposed immediately upon a person’s death and become a lien on their estate. This lien remains in effect for 10 years unless the estate is exempt or the lien is released. It’s important to note that several states and the District of Columbia also impose their own estate taxes, often with different exemption amounts, rates, and rules.

When Do Federal Estate Tax Liens Attach?

The federal estate tax lien attaches to all property in the decedent’s estate immediately upon death. This lien continues for 10 years and, interestingly, is usually not recorded in real property records. However, it remains enforceable against third-party purchasers.

Estate Tax Exemptions

For U.S. citizens and residents dying after December 31, 2023, the federal estate tax exemption is $13,610,000. Estates valued below this threshold are not subject to federal estate taxes. For estates exceeding this amount, taxes are levied only on the portion above the exemption.

Non-U.S. citizens face a much lower threshold. If a non-citizen’s U.S.-situated assets exceed $60,000 in fair market value at death, their executor must file an estate tax return (Form 706-NA).

Options for Handling Estate Tax Liens

When dealing with property subject to a federal estate tax lien, title agents have three main options for insuring without exception:

  1. Satisfy the lien and obtain a release: Request an IRS estate tax closing letter to establish the payable amount. Once paid, agents can use the letter and payment evidence to insure without exception.
  2. Obtain a transaction-specific release: Apply to the IRS using Form 4422 at least 45 days before the transaction date. This process can be lengthy and may require additional filings.
  3. Handle transactions involving divestment: In certain scenarios, property may be divested from the federal estate tax lien:
  • Property held in tenancy by the entireties or joint tenancy with rights of survivorship
  • Individually held property where the surviving spouse is the sole beneficiary
  • Sales necessary for estate administration under probate court order

Small Estates Below the Taxable Threshold

For estates well below the federal exemption amount, title agents may often rely on an affidavit from the personal representative stating that the estate is not taxable. However, agents should be aware of any additional state-specific requirements.

Key Considerations for Title Agents

  1. Always be aware of the current federal estate tax exemption amount, which can change periodically.
  2. Remember that the 2017 Tax Cuts and Jobs Act is set to expire at the end of 2025, potentially affecting exemption amounts.
  3. Don’t rely solely on assurances from heirs or personal representatives regarding the estate’s ability to satisfy tax liens.
  4. For estates valued above the basic exclusion amount, a federal estate tax return must be filed, even if no tax will be owed after deductions.
  5. When relying on property divestment to insure without a lien release, obtain approval from underwriting counsel.
  6. Be aware of both federal and state estate tax requirements, as they may differ significantly.
  7. For complex cases or high-value estates, recommend that clients seek guidance from a tax professional.

Understanding and properly handling federal estate tax liens is crucial for title agents to ensure smooth property transactions and protect all parties involved. By staying informed about exemption amounts, filing requirements, and options for addressing these liens, agents can navigate this complex area of real estate law with confidence.

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