Thanks to the well-known adage about two things that none of us will be able to avoid, death and taxes are forever linked in the public’s mind. For attorneys, a client’s death is often linked to another legal matter-selling the decedent’s home or other real property. An attorney representing an estate in the sale of real property must deal with a number of legal and title related issues that are not present in a sale of property when the seller is alive. The practitioner needs to have a firm understanding of these issues in order to properly represent the client.
The purpose of this article is to help the practitioner understand and navigate the various title issues that arise when selling a decedent’s real property. The article will provide guidance to the practitioner in the following areas:
Was There a Will?
Title issues related to the sale or transfer of real property by an estate or on behalf of a deceased person can be divided into two general categories. There are those transfers where the decedent had a will in place and those where the decedent died intestate.
Therefore, the first thing a real estate practitioner needs to do when she is retained to handle a real estate sale where the owner is deceased is to determine if their was a will in place at the time of death. If there was a will it will need to be probated in Surrogate’s Court and the attorney will need to speak to either the executor named in the will or the attorney probating the estate to determine the status of that proceeding.
A complete discussion of probate is beyond the scope of this article. However, the real estate attorney should know that when the Surrogate’s Court determines that the will is valid and was in full force and effect at the time of death it will then issue Letters Testamentary to the named executor under the will. The Letters Testamentary authorize the executor to carry out the specific terms of the will which may include the power to transfer the decedent’s real property.
The real estate attorney then needs to get a copy of the will from the executor or attorney for the estate. In examining the will the attorney should look to see if it contains a specific devise of the property in question. If, for example, the will states that the decedent left his country home to his favorite nephew that specific bequest must be honored and the executor’s only power under the will is to carry out this specific devise. The only exception to this rule regarding specific bequests is when there is not enough money to administer the estate in which case the specific bequest may not be carried out.
If there is no specific devise of the real property in question the attorney should begin assembling the documentation that he will need to effectuate the sale of the property. As soon as possible the practitioner should get a copy of the Letters Testamentary from the executor or attorney for the estate which evidences the executor’s authority to act on behalf of the estate.
Quite often the sale of a decedent’s property will move ahead at a quicker pace than the probate proceeding and permanent Letters Testamentary may not be issued by the time the closing takes place. In that case, the court may issue Preliminary Letters Testamentary. Preliminary Letters Testamentary are fully effective and sufficient to transfer real property so long as they specifically authorize the executor to transfer real property of the estate.
As the closing date of the transaction approaches, the attorney needs to make sure that a number of things are in place. First, the Letters Testamentary need to be in full force and effect at the time of the closing. At the closing the attorney will be required to deliver an original Certificate of Letters Testamentary to the title company. The Certificate, which is issued by the Surrogate’s Court, must be an original, must contain the raised seal of the court, and cannot be more than 6 months old on the closing date. Finally, the attorney must use an Executor’s Deed to transfer the property and the deed must recite the full amount of the consideration being given for the transfer.
As was briefly discussed above, once the Surrogate’s Court probates a will, and issues Letters Testamentary, title to any specific devise of real property described in the will automatically passes to the devisee named therein. Therefore, a title company will insure title in the name of the devisee without the need for any deed transferring the property from the estate to the devisee. If the devisee then wants to sell the property to a third party he can do so by merely executing a deed from himself to the third party.
This type of a third party transfer often occurs between family members who are all heirs of the decedent. A situation where one sibling buys the other out of his interest in a bequest is a fairly common transaction and the practitioner should be familiar with how they work. If, for example, a brother and sister were specifically devised a property by their father and they agree that the brother will buy the sister out of her share of the property they would do so by means of a direct deed from the brother and sister, as grantors, to the brother as grantee.
In this case there would be no need for a deed running from the estate to the siblings as they acquired the property by the specific devise in the will. Upon receipt of the deed from brother and sister, as grantors, to the brother, together with requisite documents related to the estate, the title company would then issue a title insurance policy to the brother since he received good and marketable title from the specific devisees of the estate.
The second category of transfers of a decedent’s real property involves those that occur when the decedent died intestate. When this happens the court can appoint an administrator to administer the estate.
The court, after reviewing the estate in administration, will, among other things, determine the legal heirs of the decedent and appoint an administrator of the estate. It will then issue Letters of Administration granting the administrator authority to take various actions related to the estate, which may include the power to transfer the decedent’s real property.
Just as in the situation where a decedent died with a will, the practitioner will need to contact the administrator or attorney for the estate and obtain a number of documents in order to carry out the sale of the property. The real estate attorney needs to obtain an original Certificate of the Letters of Administration, issued by the Surrogate’s Court, containing the raised seal of the Court, and being no more than 6 months old on the closing date. This Certificate must be delivered to the title company at closing. Finally, the attorney must use an Administrator’s Deed to transfer the property and the deed must recite the full amount of the consideration being given for the transfer.
A title company will also insure title to real property when the decedent died intestate but there was no administration of the estate. In those cases the attorney and title company in effect take on the role of determining who all of the heirs at law of the decedent are. Once the attorney and title company have satisfied themselves that they have identified all of the decedent’s heirs at law, those heirs can then convey the property to a third party. Such a conveyance requires all of the heirs to execute a deed conveying their interest in the property to the third party.
In order for the title company to insure title when the decedent died intestate and there has not been an administrative proceeding the title company will require that heirship affidavits be executed. In an heirship affidavit the affiant makes a number of statements including a description of his relationship to the decedent and a statement that he and the other heirs at law listed on the affidavit are the only heirs of the decedent. The affidavit also states that it is made in order to induce the title company to issue title insurance in connection with the sale of that specific property.
In addition to requiring heirship affidavits from all of the decedent’s heirs at law, the title company will also require that a similar affidavit be executed by someone, preferably a blood relative, who is not an heir (in title industry jargon this person is commonly referred to as a disinterested blood relative.) The reason for this is self evident. The heir has an obvious interest in the real property and, as such, has a motive to not be completely truthful in the affidavit. The disinterested blood relative has no such motive but is a valuable person to execute the affidavit because he knows the decedent and his heirs and can make a sworn statement about them.
In his affidavit the disinterested blood relative states that he is the cousin or nephew or other blood relative of the decedent as the case may be and he makes many of the same statements that the heirs make in their affidavits. Blood relatives are preferred for this affidavit but if one cannot be located a title company will often take affidavits of long time in-laws or family friends who have know the decedent and his family for many years. With these affidavits in hand a title company will insure title to the property and the conveyance can proceed to closing.
Of course, in every transfer of real property, from an estate or otherwise, a title company will not issue title insurance unless, and until, all liens on the property are removed or satisfied. The sale of property from an estate is no different in this regard, and the heirs will need to satisfy or remove any liens that affect the premises.
Since, upon death, the heirs step into the legal shoes of the decedent they become obligated to remove any liens or judgments that affect the property. Therefore, the heirs, with the assistance of counsel and the title company, will arrange for the payoff of any mortgages or the satisfaction of any judgments or liens affecting the decedent’s property. Accordingly, every method that any other seller of real property has available to him to remove a judgment or lien from title is similarly available to the heirs.
A final, but extremely important, issue that a practitioner must address when selling a decedent’s property is Federal and New York State estate taxes. Both the Federal government and New York State levy a tax on estates based upon their total value. New York State and the Federal government also both exempt estates from having to pay any taxes if the value of the estate is under a certain dollar amount. The exemption amount for Federal estate tax purposes is currently $5.43 million as of this writing in 2015 and is scheduled to continue rising until 2019. The New York State exemption is currently $3.125 million and is scheduled to continue rising until it equals the Federal exemption in 2019.
The imposition of estate taxes by the state and federal governments is extremely relevant to the sale of real property because the tax itself is a lien against all of the real property of an estate. In fact, the lien attaches to the property immediately upon the death of the decedent and remains a lien against the estate for 15 years from the date of death for New York State tax purposes and for 10 years from the date of death under federal law. Therefore, even though the dollar amount of the lien is unknown at the time of the person’s death the lien is in full force and effect against the real property at that time as if it had been recorded against the property when the person died and will continue for 10 or 15 years as the case may be for either federal or state purposes.
Accordingly, the practitioner first needs to determine if estate taxes will be due on the estate. If taxes are due she needs to make sure that they are paid. If, however, the attorney determines that no taxes are due she needs to provide evidence of this to the title company. In either event, proof will have to be delivered to the title company that the taxes have been paid or that no taxes are due.
The most effective way of providing the requisite proof to the title company is for the attorney to obtain an Estate Tax Release from both New York state and the Internal Revenue Service. The Release will be given to the attorney either when the tax has been paid or provided for or when the taxing authority has determined that no tax is due because the value of the estate does not exceed the exemption amount. Delivery of the state and federal releases to the title company will allow it to remove the estate tax liens from Schedule B of the title report and to insure title to the purchaser.
If the value of an estate is less than the federal and New York exemption a title company will often waive the requirement for state and federal Estate Tax Releases and will accept other documentation or proof that no taxes are due. In most cases title companies will accept the affidavit of the executor or administrator of the estate stating that the estate is exempt from estate taxes as sufficient proof and in certain cases will even take the affidavit of the estate’s attorney or accountant to that effect.
Regardless of whether the documentation is an affidavit or an Estate Tax Release the result is the same. The title company will omit the estate tax lien from the title policy and will insure good and marketable title to the third party purchaser of the property.
It is important for an attorney to understand the various issues that arise when a decedent’s real property is being sold or otherwise transferred. By having a good understanding of this area of law the practitioner will be better able to represent his client and to insure that the property can be transferred in a smooth and timely transaction to the third party purchaser with a minimum of delay and expense to the estate or the decedent’s family.