When a family member dies, there are many legal and financial things that need to be taken care of. That process is commonly called “estate settlement.” It is also called Probate. There are costs involved with the estate settlement process. Taking care of all that needs to be done usually entails a lot of work. It is quite reasonable to try to minimize costs and strive for simplicity. We sometimes see cases when the failure to do everything that should be done or the failure to do things properly creates problems. Those problems frequently are not discovered until years later. Everyone worries about taxes and most families will instinctively try to be compliant with probate court requirements. However, families rarely consider that they should also be concerned about making sure estate settlement is done properly to avoid problems when they try to sell real estate in the future.
Connecticut and Massachusetts are among the states that levy an estate tax. In Connecticut, an estate tax will only be due if the taxable estate exceeds $2,000,000. However, all estates no matter how small must file an estate tax return. By statute, both states impose an “inchoate” lien on real estate owned by a decedent. That means the State has a de facto first claim on sales proceeds if the property is ever sold and there are unpaid estate taxes due. That lien remains unless and until a document issued by the probate court is recorded on the land records as evidence that an estate tax return was filed and that any estate taxes have been paid.
Why does this matter? Because a prospective buyer will not purchase the property if a title search reveals that there is an unreleased estate tax lien on the property. And problems like that are often not discovered until a few days before a real estate sale is about to close. The irony in Connecticut is that an unreleased lien can delay or prevent a real estate sale even if the size of the estate concerned was quite modest. A few examples of actual matters we have handled in our practice will illustrate the issues.
One case involved a Massachusetts property purchased by “Dad” in 1957 for about $1,000. When Dad died eight years later, Dad’s family did not file an estate tax return and did little else to settle his estate. Since Dad owned the property jointly with his wife, the family thought there was nothing they needed to do. Then in 1995 the family was ready to sell the property. By that time, the property sold for $1,000,000.
A mere two days before the closing, we received a call from the buyer’s attorney. A title search had revealed Dad’s name in the chain of title but no documentation for what happened to him. No recorded explanation of why he was not a party to the sale. Although the sale did take place, some $250,000 had to be held in escrow for over a year. During that year we developed evidence and argued with the Massachusetts Department of Revenue over how much (if any) estate taxes needed to be paid. We did eventually win the argument and no estate tax needed to be paid. But a great deal of money was tied up for a long time and there was a significant amount of extra legal fees incurred simply because the family failed to properly settle Dad’s estate 30 years earlier.
In another matter, we set about obtaining a reverse mortgage so “Mom” could remain living in her home and avoid having to move into a nursing home. Just before the loan closing, a title search discovered that there was no recorded release for when her husband had passed away in 2004. Mom’s loan was delayed by over six months while the title problem was being solved. Mom ran out of money and had to move into a nursing home before the loan could be completed.
The sad thing in our view was in that case, the family had in fact paid an attorney to handle the probate administration in 2004. That attorney, a general practitioner, failed to obtain and record a certificate releasing the Connecticut estate tax lien. Years later Mom paid the price for that failure - which is perhaps impossible to measure in terms of dollars.
Apart from avoiding title problems, estate settlement can be a very useful way of establishing “basis” for income tax purposes. We prepared a tax return for a widower who had sold real estate a few years before. He had formerly owned the property jointly with his wife, who died in 1986. To properly file his income taxes, it was necessary to determine the fair market value of the property back when his wife died. If an estate tax return had been filed for her that could have been an easy inquiry. But there was no such filing, so trying to determine that value became very difficult. In fact, in that case we learned it was impossible since our appraiser could find no available records covering comparable real estate sales that old. Being able to establish the correct value could have saved tens of thousands of dollars in income taxes.
If you have any questions about the issues presented above or care to discuss any other planning issues, please call us at 860-769-6938 6938 or our website at http://weatherby-associates.com/practice-areas/planning-parent/ or email us at firstname.lastname@example.org.