Hey, why do I have to escrow money if the estate paid a deposit for PA inheritance taxes?

Hi, Diane,

I really enjoy your blog. 

My brother passed away.  We are selling his house.  As you have mentioned on your blog, the title agent is escrowing Pa Inheritance Tax.  The problem is, we have already paid the tax of $6546.  The title agent is escrowing $16,200.  There is no negotiating.  The buyer is a cash buyer and is not buying title insurance.  So when the title agent said "its the title insurance company" there is no title insurance company.  At least that's what I think I've learned from reading your blog.

We paid the tax with the 3% discount but can't file the return until the attorney gets some additional things done.  The attorney talked to the title agent but it didn't seem to matter.

I thought I would check with you to get your opinion.

Thank you for all your help,

J

Hi, J:

Cash buyers often buy title insurance so there may be insurance involved.  If they aren't buying insurance and they are working with an attorney, the attorney might be giving a personal guarantee of title.  If they are working with a non-attorney title insurance agent and that agent is not issuing a title insurance policy, the title insurance agent is acting outside of their license to conduct business.

All that said, we would also require an escrow if the inheritance tax return isn't filed even though a payment has been made.  You cannot believe how many returns are improperly filed or not filed at all.  We regularly have abandoned inheritance tax escrows.

Some title agents will accept an attorney letter of guarantee that they will file the proper return and pay all taxes.  This is a personal guarantee from the attorney.  We accept these letters if we have a high comfort level, but agents are not required to accept guarantees.

The bottom line is that until that inheritance tax return is properly filed and the title agent can surmise that all taxes have been paid, they have a right to refuse to insure.  The alternative to an escrow is to postpone closing until the return is filed. Most attorneys can hustle and get a return prepped quickly if they need to.  If your attorney can't get this done prior to closing, perhaps this gives an incentive to get it done quickly for the escrow release.

Hope this helps.  BTW The amount of these escrows are not the amount of estimated tax.  A title agent till guesstimate the tax based on the relationship of the heirs to the deceased, then they will increase the escrow to a point that provides an incentive to the estate to get the job done quickly.  No title agent wants to hold an escrow.  It's a bunch of work that we don't really get paid for.  So, on that note, they are actually trying to help you close, rather than postpone.  ;)

Diane

too bad the seller did not have title insurance

We have a title insurance order in process and our examination revealed that the seller bought the property from a bank who had foreclosed.  As usual, the our title examination included a review of the foreclosure to make certain that the bank had done everything correctly.  They did not.  Crap.  The bank's attorney had failed to give good service to a lien holder.  Crap.

The prior owner had a 2nd mortgage with Beneficial Consumer Discount Company. For some crazy reason the bank's attorney gave service to Household Realty Corp.  Now these two entities were under the same corporate family at the time, however, they are still two different entities.

Our seller is an estate. The deceased purchased the property from the bank for cash and did not opt to purchase title insurance.  Too bad.  If he had, someone might have noticed the flaw and fixed it a long time ago.  The estate attorney says his client probably thought the bank knew what they were doing and opted to forego any title examination - with or without title insurance.  Not a smart move. A buyer must always be savvy and have title examined and covered by a competent title insurer - even when paying cash for real estate. The first and primary purpose of title insurance is RISK AVOIDANCE. Look for problems and fix them before you buy.

Let's say the seller had purchased title insurance and his title insurer had missed the error in the foreclosure.  That's certainly possible.  A secondary - and just as important - reason for title insurance is that HUMANS MAKE MISTAKES.  The bank's attorney made a mistake and it's possible that a title examiner could miss it.  You could have a situation in which you are trying to sell real property and a problem isn't discovered until your buyer has a title insurance examination performed.

If our seller had an owner policy, we could have asked for indemnification and closed.  This is a reasonable circumstance for indemnification.  The error involved an entity under the same corporate umbrella.  Several years have passed and there has been no collection effort on the Beneficial mortgage.  It is reasonable to presume that Beneficial thought they had been served and were divested.  This is a technical flaw in title but a flaw none the less.  Indemnification coverage from a prior owner policy would have done the trick, but we have no title insurance to fall back on in our transaction, so what do we do?

In this case we offered our buyer - who is also paying cash - an option to allow us to put an exception in their owner coverage.  We did this with a suggestion that they negotiate with the seller for an escrow to be held pending the attorney obtaining acknowledgement of good service from Beneficial.  I don't want to insure over this because I'm not certain that the attorney will be successful.  Our buyer, however, is free to assume the risk.  The buyer decided to go for the escrow. They asked the seller to put $6000 aside for a few months during which the seller's attorney would attempt to get the acknowledgement.  If at the end of the period, the attorney could not, the buyer would get to keep the money.

Our seller stands to lose $6000 if this matter is not resolved.  They are lucky that they have a cash buyer willing to assume the risk.  Too bad the seller did not have title insurance.