Florida, where we are blessed to live and work, is arguably the number one destination for investors and retirees. As such, it is no surprise that we often deal with transactions that involve either deceased individuals or foreign investors. We have written numerous articles regarding the additional hoops parties and closing agents must jump through when we encounter either of these situations, from FIRPTA, to recording additional documentation regarding the deceased, to potentially even probate. Transactions involving one or the other occur with frequent regularity in our industry. However, there are rare occurrences that contain both situations mentioned. What steps are taken in a closing where the seller is a deceased nonresident?
Upon notification of deceased sellers, a series of title requirements will soon appear on the title commitment. Assuming probate was needed and completed, these requirements include the recordation of a certified copy of a death certificate, an affidavit establishing that the deceased was not survived by a spouse and minor child, and a Form DR-312. In the vast majority of closings, the party representing the seller’s estate can quickly obtain and execute the requisite documents paving the way to a smooth closing. However, in rare instances, Form DR-312 cannot be utilized and must be substituted for its sister Form DR-313, triggering an unfortunate circumstance.
Forms DR-312 and DR-313 confirm essential information as it pertains to the tax owed by the estate. Both documents operate to establish the decedent’s date of death and citizenship status, and both confirm that there is no Florida estate tax due. Federal changes on December 31, 2004, have resulted in the elimination of Florida’s estate tax. Where these two documents differ is whether the estate will owe Federal estate tax. Depending on the resident status of the deceased, the United States tax code contains different thresholds regarding when the estate tax is owed. Currently, in the year 2023, for United States citizens, the threshold is $12.92 million. This threshold is tough to meet and results in most closings utilizing the DR-312, confirming that the estate does not owe the Federal estate tax. Conversely, the threshold estate value for deceased foreign nonresidents sits at $60,000.00. When the estate’s value exceeds the threshold, an estate tax return is required, and sellers must furnish a tax clearance letter to the closing agent.
The IRS automatically attaches an estate tax lien on the deceased’s property for a period of ten years to ensure any estate taxes due are paid. To complicate matters further, the IRS does so without having to record anything in the Public Records. So what does this mean for your closing? If a closing agent does not catch onto these critical facts, buyers may very well be taking title to the property with an IRS estate tax lien attached. Most prudent title insurance underwriters will require title agents to withhold all sale proceeds until they receive a tax clearance letter from the IRS to prevent this unfortunate circumstance. This ensures the buyer is able to take the title free and clear of a potentially disastrous IRS lien.
Agents should be mindful of this information and set appropriate closing dates if their clients sign contracts with a foreign estate. It is important to note that these withholding rules do not apply to all foreign citizens but to foreign nonresidents not domiciled in the United States. As always, don’t hesitate to contact your local trusted real estate attorney if you have any questions.