The Secret Federal Tax Lien
| Publication year | 1988 |
| Pages | 1521 |
| Citation | Vol. 08 No. 1988 Pg. 1521 |
1988, August, Pg. 1521. The Secret Federal Tax Lien
Many attorneys do not know that a pervasive federal tax lien exists which can encumber title to real property without evidence of such lien ever appearing of record. Section 6324 of the Internal Revenue Code of 1986 ("Code") automatically creates a lien against the gross estate of a decedent at the time of death.
The lien is valuable in ensuring the collection of estate taxes, but can be a trap for the unwary title examiner. Attorneys representing clients wishing to acquire an interest (whether by purchase, as security for a loan or otherwise) in real property passing through the estate of a decedent must exercise care that title is obtained free of the estate tax lien and that their clients will not lose their interest through foreclosure of the lien.
The estate tax lien is separate and distinct from the general tax lien created under Code § 6321. The rights granted under the two liens are cumulative, and a specific piece of property may be subject to both liens at the same time.
The estate tax lien arises and attaches automatically to every part of the gross estate as of the date of the decedent's death. It encumbers the estate property to the extent of the tax which is shown to be due on the estate tax return and for any deficiency in tax which may eventually be found to be owing.(fn1) By arising prior to the time at which the actual tax liability is determined, the lien protects the government's interest until the tax liability of the estate is known and a general tax lien can be processed.
To understand the scope of the estate tax lien, it is important to note that it attaches to the gross estate of the decedent. Therefore, it includes the decedent's interest in property which never comes into the possession and control of his or her personal representative, as well as the portion of the estate which passes through the traditional probate process.(fn2) As a result, the estate tax lien may have unexpectedly broad coverage. Property interests, title to which passes without going through probate but which are included in the gross estate ("nonprobate property"), include dower and curtesy interests, certain transfers made in contemplation of death, certain annuity contracts and jointly held property interests, property subject to certain general powers of appointment, and proceeds from certain life insurance policies.(fn3)
The broad scope of interests covered by the estate tax lien means that a title examiner must be concerned about the quality of title to any property previously owned by a decedent. It cannot be assumed that only property actually passing through the traditional probate process is subject to the lien.
Despite the broad scope of the estate tax lien, there are certain interests which will take priority over the lien. The lien is divested from any part of the gross estate used for the payment of charges against the estate and expenses of its administration.(fn4) Such charges and expenses must be allowed specifically by the probate court administering the estate if the involved property is to be freed of the estate tax lien.
In Kleine v. United States,(fn5) the U.S. Court of Appeals for the Fifth Circuit ruled that the state of Texas' system of independent estate administration, which allows the executor of an estate to approve and pay claims against the estate, does not constitute the judicial approval required to divest the estate tax lien. If the involved property is sold and the proceeds subsequently applied to approved charges and expenses, the lien is also divested.(fn6)
Great care should be taken to create a paper trail that will establish with certainty that the sale proceeds were ultimately applied to permitted charges and expenses. The burden of establishing that the sale proceeds were actually used to satisfy an obligation of the estate are on the party seeking to avoid the tax liability.(fn7)
There are certain other specific interests which will take priority over the estate tax lien. The lien is not valid against the holder of a mechanic's lien created under local law.(fn8) The Code specifically
provides that the lien will not be valid with respect to the holder of one of the "superpriority" liens described in Code § 6323(b).(fn9) The effect of such superpriority status is that even if an estate lien has attached, a qualifying claimant is protected from the federal interest. Generally, a party claiming priority under one of the superpriority categories must be without actual knowledge of the existence of the tax lien. These same superpriority lien items take priority over the general tax lien created under Code § 6321.
There is no requirement that the estate tax lien be recorded in order for it to be effective against either the subject estate or the interests of...
To continue reading
Request your trial