What to do when a title company requests a letter about estate taxes?

Executors and Administrators are often tasked with selling the Decedent's home. Prior to closing, the title company will sometimes ask the Executor for evidence that federal estate taxes are paid (or will be paid). They may also ask your probate attorney for a letter stating that the size of the taxable estate does not exceed the federal estate tax exemption. Why does the title company ask for this information and how do you respond?

Title companies issue title policies. The policy guarantees the buyer and any mortgage company tot he transaction that the buyer is receiving the property unencumbered by any claims or liens from any other person, company, or government. This often referred to as title insurance. Before agreeing to take that risk, the title company's underwriting department evaluates the potential for a third-party claim. They insist that any prior liens are cleared and all taxes (including property and income taxes) are paid. In the case of an estate, they also consider estate taxes.

The federal estate tax is a tax on a person's right to transfer property at death. It consists of an accounting of everything you own or have certain interests in at the date of death. This includes property that is subject to probate AND property that passes outside of probate, such as accounts subject to a beneficiary designation or property that is held in a living trust. The property that is subject to the tax is called the taxable estate.

The estate tax is paid by only a wealthly few. The estate tax applies only to those taxable estates valued at more than the exemption amount. For taxable estates worth less than the exemption, the estate tax does not apply. The exemption is quite generous. Effective January 1, 2024, the federal estate and gift tax exemption amount is $13.61 million per individual (a combined $27.22 million for a married couple). The Tax Policy Center estimates that of the nearly 2.8 million people that die in the United States each year, only 4,000 of those will have a taxable estate over the exemption amount and be subject to the tax. That is less than 0.2%. Nevertheless, the title company is asking the probate lawyer to write a letter that the decedent's federal estate taxes are paid or that the estate is not subject to the tax.

Most probate attorneys will not write such a letter due to the attorney's limited knowledge and the risk of being sued. A probate attorney is usually concerned only about the assets that make up the probate estate. The attorney may have no knowledge of the size and nature of the assets that bypassed probate, which is part of the taxable estate. By writing a letter, the attorney would be making a representation to the title company about which the attorney has no knowledge. Neverthless, the title company will rely upon this representation. This means the attorney can be sued by the title company if the estate is in fact subject to taxes. Thus, no attorney worth their salt would sign such a letter.

What can you do if the title company makes this request? First, every Texas Executor or Administrator has a duty to complete a sworn (before a notary) Inventory, Appraisement and List of Claims. Offer to deliver a copy of the Inventory to the title company. Second, if you are sure that the decedent's taxable estate is worth less than federal estate tax exemption amount, you can offer to indemnify the title company in the event federal estate taxes become due. You should only do this if you have a full and complete understanding of the decedent's assets and you are absolutely certain that the size of the taxable estate is worth less than the exemption amount. Third, you can find a new title company. Most purchasers are not wed to a particular title company. Ask your Realtor to recommend a title company that will not make such unreasonable demands.

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