08 Sep Death & Taxes: Closing on Time, Every Time
Part Three of a Six-Part Series
As a senior advisory escrow officer and escrow manager who has worked in this industry for more than 25 years, I can’t say I’ve seen it all, but I can say I’ve seen a lot.
If you as a loan originator haven’t found that very special someone who drives your trans-actions from open to close, pay special attention for the next few months as I continue to share tips with you to help you close on time, every time. The third tip is proactively managing the unavoidable — death and taxes — and still closing on time. I’ll be sharing the rest in future issues of the Originate Report.
The two most unavoidable things that can stop your closing in its tracks are death and taxes. We can start with when someone passes away during the loan process.
Real property with a clear title may pass to an heir if the previous owner has gone through the probate process in the county in which the property is located. The title must be examined by a title agent, who searches for any defects in the title (judgments, liens, mortgages, unpaid tax bills, etc.) within the last 60-plus years. If the title did not pass by virtue of having been probated or if any defect is found, there is a “cloud” on the title. When this happens, you cannot close a loan as no title insurance can be issued.
In most states, if a legal last will and testament or trust passes title to the heir, then title insurance can be obtained and you are clear to close. However, if neither trust, nor legal last will and testament exists, the property may only be passed to the heir via probate.
When a person dies owning real property, the title must be passed through the estate, via a formal probate, and a deed of distribution entered into the public re- cord. Any estate where the deceased died 10 years earlier can’t be probated. In that instance, a Determination of Heirs action has to be instituted to pass title to the heirs. The court order will act as the deed to pass the property to the heir.
However, in some states (Hawaii, Illinois, Nebraska, Nevada, North Dakota, Oregon, Arizona, Arkansas, Colorado, Indiana, Kansas, Minnesota, Missouri, Montana, New Mexico, Ohio, Oklahoma and Wisconsin), an asset-specific will substitutes for the transfer of property at death.
The owner may designate beneficiaries to receive the property upon the owner’s death without waiting for probate.
If your client has inherited a property, the key points that you as an originator need to clarify are:
• Was there a legal last will and testament? If not, this file will have to go through probate.
• If an attorney hasn’t already handled the transfer of title, then your client will need to
have a full copy of the legal last will and testament available for your title officer.
• Do they have an original or certified copy of the deceased’s death certificate? If not, obtain one. It will be a closing requirement.
• Was the deceased part of a trust? If so, a legal last will and testament is not required, but a full copy of the trust is required.
If your client is terminally ill and wants to button down financial details prior to their passing, the things that you as an originator need to remember are:
• Contact your escrow officer or settlement agent immediately. The sooner they know what is happening, the quicker the closing details can be cleared.
• In the case of a deed, make sure there are unrelated wit- nesses present to prevent post-death litigation against you as a lender (for charges of signings under duress, accusations of elder abuse, and whether or not the client had the mental capacity to execute documentation — these are the most commonly contested).
• If your client is in the hospital or hospice, then their doctor and someone from the hospital or hospice social services staff should be present at the time of signing.
I know from arranging these signings that they are difficult for all parties. However, they must be done to ensure not only your client’s safety, but also yours as the loan originator as well. We all know that even if a suit is brought that has no merit, you still have to defend your position.
This can be lengthy and costly, but with a little bit more preparation, it can be avoided.
Now on to the favorite subject of every closer across the nation: taxes.
Both federal and state tax liens are required to be paid in order to close. However some originators may not be aware of the timelines.
A federal tax lien can take anywhere from 14 business days (which is actually 3 weeks) up to 10 weeks. Keep in mind the IRS states that the turnaround time starts as soon as the correct paperwork has been received. The correct form (F8821) can be obtained at https://www.irs.gov/pub/ irs-pdf/f8821.pdf and the instructions (I8821) on how to complete it at https://www.irs.gov/pub/irs-pdf/i8821.pdf.
The only caveat with this payoff request is the IRS may not view the form you submit as complete. For example:
• Say your client is named Josh A. Smith and the original lien was filed as such. However, Mr. Smith’s last communication from the IRS is addressed to Josh Allen Smith. The file may be under either of those names. If you pick the wrong one, the application will be denied (you can get around this by submitting twice: once on Monday and once on Wednesday. Do not submit on the same day it will be counted as a duplicate.
• The type of tax form must be correct or the application will be denied.
• Have the Client provide you with a copy of the filed tax return. If anything on the form do not match their file (i.e. type of tax form that was originally filed or type of tax information), the application will be denied.
• If you are requesting the payoff, make sure you check the box for section 4, or you will be replacing their current tax representative. If you mark the box in section 4, you then skip sections 5 and 6.
• If the client’s signature does not match the IRS files, then the application will be denied.
State Tax Liens are very similar in timing and execution. Go to your state web site to obtain forms and instructions on ordering.
Again, keep in mind that each time you prepare in advance to avert the only two unavoidable closing delays of death and taxes, it gets easier to manage the next transaction the same way, until it becomes habit and each transaction runs smoothly. So eventually, you can close on time, every time.