International Tax Accountants, Cross Border Tax Accountants, Canada US Tax Treaty, US & Canadian Tax Return Preparation

Title Insurance Agencies May Be Liable for Foreign Client's Estate Tax

November 20, 2017

Title Insurance Agencies May Be Liable for Foreign Client's Estate Tax

In our December, 2016 alert "US Estate Tax Liability Considerations for Executors and Heirs of Nonresident Estates with US Assets", we discussed the US estate tax return filing of a foreign decedent, the IRS estate tax lien, and the US federal estate tax liability of spouses, heirs, and other executors. The audience for this alert is title insurance agencies and real estate attorneys involved in real estate transactions by foreigners.

Title insurance agencies should be alert when dispersing funds for the sale of real estate by the surviving spouse of a foreign decedent, or by a foreign estate. You may be liable for the foreign decedent's US estate tax. Many agencies do not focus on their estate tax liability in such transactions, primarily because the estate tax rules for US citizens are different than those for foreigners.

For example:

  1. There is no estate tax exemption for property passing to a non-US citizen surviving spouse, as there generally is, in the case of a US citizen surviving spouse, and
  2. Nonresident alien decedents receive an estate tax exemption of only $60,000, (unless modified by tax treaty), unlike the $5.5 million gift and estate tax exemption (adjusted by inflation), generally available to US citizen decedents.

Are you a "statutory executor"?

Federal estate tax law considers you, the closing agent, to be a "statutory executor" of the estate when you handle funds for a foreign decedent, and considers you responsible for the estate tax. An exception can possibly apply in certain cases when there is a US court-appointed personal representative for court probate in the US.

Example: William and Ruth are Canadian nonresident aliens of the US and they purchase US real estate jointly in 2005. William passes away in 2010, but Ruth continues to use the property until she sells it for $250,000 in 2017. If you are a real estate title insurance agency handling Ruth's sale, you are potentially liable for William's estate tax, unless you obtain a release from the IRS.

There is also an additional important concern for you.

At the time of the death, an IRS estate tax lien automatically attaches to such property for ten years, even though it is not officially recorded in the county records. Thus, the new buyer takes title to the property not knowing that his/her property may be subject to an IRS lien. If that creates a problem for the buyer in the future, he/she may come to you for resolution.

How do you avoid liability?

The most conservative approach is for you retain the proceeds of the sale in escrow, until a US estate tax return has been filed by the estate, and you have received an IRS release. Recently, we have been receiving these releases within about 7 months.

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