Thomas C. Roberge & Company

June 10, 2005

Thomas C. Roberge, CPA
St. Petersburg and Sarasota

Telephone (727) 822-9393
Contact: TaxInfo@RobergeCo.com

Copyright, 2005, Thomas C. Roberge

We have experienced several situations recently where closing agents are not aware of their liability when handling a sale where a foreign decedent was on the title to the property at the time of his or her death. What makes this matter worse is that their Underwriters may be unaware of the special rules that the IRS has for these types of transactions.

The problem is that the closing agent (and the buyer) could be held liable by the IRS as a "Statutory Executor" if the foreign decedent was on the title to the property at the time of his or her death, and the executor did not obtain a Federal Transfer Certificate prior to the sale.

The typical situation goes like this. John and Jane Smith, citizens and residents of Canada, purchased a Florida condominium in joint name in 1991 for $65,000. John died in 1997 when the property had a fair market value of $120,000. Jane is now selling the condominium in 2005 for $340,000.

Many closing agents think that all they have to deal with is the 10% FIRPTA withholding since, under Florida law, the property automatically passed to Jane upon John's death in 1997 under the tenancy by the entirety rules. What many closing agents are not aware of is that, under the Internal Revenue Code, there is an automatic federal estate tax lien on the property and that the property cannot be sold without first obtaining a Transfer Certificate from the IRS.

The Transfer Certificate allows the sale to be completed with the restriction that the closing proceeds, net of closing costs and FIRPTA withholding, remain with the statutory executor (usually the closing agent or other designated person in the U.S.) until a federal estate tax return is filed and the IRS issues a "Closing Letter" accepting the return and subsequently allowing the funds to be released to the executor. There are relief provisions whereby a conditional release of one-half of these funds can be obtained once the estate tax return is filed.

What the IRS can do is collect any unpaid estate tax against the Statutory Executor who has closed the sale and disbursed the funds without first obtaining the Transfer Certificate and Estate Tax Closing Letter. Basically, a Statutory Executor is deemed by the IRS to be anyone who has access or control to the sale proceeds. A nonresident alien decedent only receives a $60,000 exemption from federal estate tax on U.S. assets compared to the $1.5 million exemption a U.S. decedent receives on worldwide assets (increasing to $2 million in 2006).

Most closing agents we work with are extremely competent and diligent in carrying out all the responsibilities that are placed on them in closing a real estate sale. They follow their underwriter's instructions exactly. Unfortunately, we are finding out that the legal departments of many Underwriters are not aware of the estate tax laws that apply to foreign decedents and, more importantly, the Statutory Executor rules that apply to closing agents.

As part of our international tax practice, we have extensive experience in obtaining Transfer Certificates and preparing federal estate tax returns for foreign decedents. We work closely with the IRS in obtaining Transfer Certificates so the sale can close timely and does not "fall through".

Feel free to contact us if you feel impacted by these rules. Also, we will be happy to put the appropriate person in your Underwriting Company on our distribution list so that they too are aware of the unique tax laws that apply to foreign persons and their closing agents who are involved in U.S. real estate transactions.