Inheritance Tax leaving a cloud on a title?

Question

Hi, I'm interested in a property available for a private sale in PA, I had a full title search done by my lawyer and basically there are a handful of small municple liens (2 actually) which I would be happy to pay off and old Credit card lien that over 5yrs and has expired. However, my lawyer says there's a possibility of lingering inheritance tax since the property was transferred to a son in 2014 who then never paid the taxes. She recommends not to purchase the house because there will be a cloud over the title if I try to sell it. She claims there is no way to clear the title and settle the (possible) overdue inheritance tax without the assistance of the current owner. I doubt he'll be willing to help if I've purchased his house from a tax sale.

It makes no sense at all to me that there is no possible way to clear a title of previous owner's inheritance taxes. Anyone have experience with this?

(Actually, I'm quite confident that the parents (grantors) are still alive so no inheritane tax should be due per PA law if the Grantor stays alive more than 1 year from the date of transfer. This question is mainly for future purposes.)

It makes no sense at all to me that there is no possible way to clear a title of previous owner's inheritance taxes.  Anyone have experience with this?

(Actually, I'm quite confident that the parents (grantors) are still alive so no inheritane tax should be due per PA law if the Grantor stays alive more than 1 year from the date of transfer.  This question is mainly for future purposes.)

Chris K. · Answer

@Bill Hughes Inheritance Tax Liens are created the moment a person dies. It's a "secret" lien in the sense that the Government doesn't need to take any action to make it valid. So a normal search doesn’t reveal these liens.

Note that such liens last a long time --- I don't have the exact statute in front of me, but I believe its 20 years plus additional time in some cases.

Because of the law, the Department of Revenue doesn’t have a strong motivation to actively keep track of these liens. If someone opens the estate at some point, the Department will probably find out about and get its payment. If no one ever opens an estate but someone later wants a marketable title, that person will contact the Department to sort out the issues. Thus, in the grand scheme of things, it’s likely that someone is going to pay the taxes. And so the Department can collect these taxes in a fairly passive manner.

There are many options to deal with these situations. In your particular scenario, one option to consider is paying the taxes. I will need to see the exact search and get all the relevant information, but if there is any chance that the parents died, you can simply acknowledge this possibility to the Department of Revenue, offer to pay the potential overdue taxes, and get a certificate. Based on the facts you gave, I'm assuming its going to be 4.5 percent plus interest. I don’t know what the fair market value of the property is, but I assume it’s not particularly high at this time---at least until you make the necessary repairs. .

But to go back to the big picture, you will likely face many title issues by virtue of buying it from a tax sale. That’s true regardless of whether you deal with the inheritance tax issue. So you'll need to figure out a game plan for what exactly you want to do with the property. After you determine that, your title company and lawyer can help you better under the risks. If you intend to refinance in the future, then your contacts at a bank can offer some advice on what they would like to see to make the bank feel comfortable lending money.

Bill Hughes · Answer

Chris, this is very helpful.

In the situation of inheritance tax, my lawyer claims that liens aren't generally filed and the overdue inherutance tax can linger until there is some action on the title.

This seems crazy to me.  I can't believe that tax would be due and no one would be looking for it.

For this specific property, there is no lien on file.

So i wonder, is there a first step where you check with the dept of revenue about inheritance tax if no lien exists? Or am i overthinking the whole thing?

Chris K. · Answer

Hi @Bill Hughes: you can definetly discharge it without the involvement of the current owner. You basically write to the PA Department of Revenue asking for a release of lien. When you make the request, you will need to let the Department know the "fair market value" of the property so that the Department can determine the amount you have to pay.

But in your attorney's defense, she may be generally correct that you may risk facing title issues. For example, it can be tricky obtaining title insurance for a property that you buy at a tax sale. Talk to your title insurance company about it, but many require you to meet certain conditions --- which may include bringing an action to quiet-title.

Without a title insurance, you really do not have a "marketable" title. That means you may struggle to resell, refinance, or do anything with the property except for rent it out to tenants.