IRC §6324(a) imposes a special lien for Federal Estate Taxes (Federal Special Estate Tax Lien), which arises automatically at death if there is estate tax liability. It is a lien upon the gross estate of the decedent for ten (10) years from the date of death. The lien is a secret lien since there is no statutory authority providing for recording notice thereof; no prior assessment, demand or notice of any kind is required. Death alone is the factor which triggers its creation.
There is no Federal Special Estate Tax Lien if the decedent’s gross estate, as defined in IRC §2031 is less than the exempt amount.
The title examiner may presume that real property is free of the Federal Special Estate Tax Lien:
- Ten years after death; or
- Where there is proof of payment of the amount shown due by the Internal Revenue Service Tax Closing Letter; or
- When the IRS issues, pursuant to IRC §6325 (b), a certificate of discharge of the property or a certificate of release or non-attachment of the lien; or
- When, in the case of non-probate property, there is a transfer to a purchaser or a holder of a security interest as defined in IRC §6323(h). In practice, an arms-length transaction for full value is a transfer meeting this test; or
- Final Decree of Distribution is issued by a Vermont Probate Court; or
- To the extent that the sale proceeds are used to pay expenses of the Estate. See IRC §6321.
Comment 1 The Federal Special Estate Tax Lien is different from the Federal General Tax Lien under IRC §6321 in both the notice requirements and in the enforcement. Enforcement of the Federal Special Estate Tax Lien may be by way of levy and sale or other process.
Comment 2 The lien attaches to all property included in the gross estate, whether or not the property comes into the possession of the Executor/Administrator; it includes non-probate property such as survivorship property, transfers in contemplation of death, transfers to take effect in possession and enjoyment at death and revocable transfers.
Comment 3 To protect mortgagees and purchasers from the secret Federal Special Estate Tax Lien, IRC §6324(a)(2) provides that this lien will be automatically divested when the so-called non-probate property included in a decedent’s gross estate is transferred to a purchaser or mortgagee. Generally speaking, “non-probate” property is that property which had not come into the possession of a decedent’s fiduciary because of transfers or transaction involving it during decedent’s life, though this same property is deemed part of the gross estate for purposes of computing the amount of the Estate Tax. The definition of “purchaser” in IRC §6323 (h)(1)(6) is expressly made applicable to this Federal Special Estate Tax Lien thereby including executory contract purchasers, optionees and lessees within the term “purchaser”. In addition, it is provided that a “purchaser” means one who for “an adequate and full consideration in money or money’s worth” acquires an interest which is valid against subsequent purchasers without actual notice. The elimination of the requirement that a purchaser be “bona fide” means that actual knowledge of a Federal Special Estate Tax Lien will not prevent an otherwise qualified purchaser from acquiring the property free from such lien.
Comment 4 While IRC §6324(a)(1) provides that “such part of the gross estate as is used for the charges of administration expenses allowed by the Probate Court shall be divested of the Federal Special Estate Tax Lien”, this has been interpreted not to mean that the property itself must be so used, but that such property may be mortgaged or sold and the proceeds therefrom so used. Hence, if the fiduciary sells or mortgages land included in the gross estate, and uses these proceeds to pay the expenses and charges approved by the probate court, then the land so sold or mortgaged will be divested of the Federal Special Estate Tax Lien. U.S. v. Security-First Nat’l Bank, 30 F. Supp. 113 (So. D. Cal.). It is only because of this interpretation that bona fide purchasers and mortgagees from the fiduciary acquire any protection at all against this secret Federal Estate Tax Lien.
It is not sufficient that the fiduciary merely sell or mortgage the estate property to a bona fide purchaser or mortgagee. This alone will not prevent the Federal Special Estate Tax Lien from continuing to attach to the transferred property in the hands of such bona fide purchaser or mortgagee. This is so whether or not the property is sold or mortgaged pursuant to authority contained in the will or to the authority of a probate court order. Detroit Bank v. U.S., 317 U.S. 329, 63 S. Ct. 297; Smythe v. U.S., 169 F.2d 49 (1st Cir). The bona fides of the particular transfer or mortgage will not divest the property of the Federal Special Estate Tax Lien. What is required is that the proceeds of the particular sale or mortgage be used as aforesaid.
Even though expenses for such items as funeral expenses and doctor bills incurred during the decedent’s last illness were proper and necessary expenses, if the payment of these were not approved by the Probate Court, then this payment does not come within the exception.
Comment 5 Mere issuance of a License to Sell is not sufficient to assure that the Federal Special Estate Tax Lien is extinguished because the License, by itself, does not guarantee the proceeds will, in fact, be used to pay expenses of the estate in the manner required under Federal Law. However, it may be helpful but not dispositive to obtain a License to Sell which provides that the License to Sell is issued for the purpose of raising funds for the portion of taxes and administration costs and that no interim distribution of funds be made without satisfaction of the Federal Special Estate Tax Lien.
September 26, 2008: This standard was added.