Issue 7

Spring 1999

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

THE TITLE COMPANY OF NORTH CAROLINA, INC. - CHARLOTTE OFFICE CHANGES

 

The Title Company of North Carolina, Inc. is pleased to announce that Fred McPhail and Ed Urban have joined the Charlotte office as Senior Vice Presidents.  Ed Urban will also serve in the capacity of State Counsel for the Title Company, which has seven offices throughout North Carolina.  With Fred’s 25 years experience in residential and commercial real estate practice and Ed’s 25 years experience in the title insurance industry, The Title Company will offer real property expertise unmatched in the title insurance industry.  That experience level is only enhanced by Bruce Boney’s role as Senior Counsel. 

 

We will continue to provide escrow services through Veronica Trotter, who joins us with prior experience as a real estate legal assistant and law office administrator.  We will also continue our policy of providing back title information from our prior policy database, which we believe, is one of the most extensive in Charlotte.  Our highly professional staff, under the leadership of Branch Manager Kevin Abernathy, has many years of experience in underwriting and customer service. 

 

We at the Title Company of North Carolina appreciate your support, and we look forward to doing business with you in the future.  We are committed to providing you with the highest level of legal expertise, underwriting experience and prompt and efficient service. 

Alton Russell, President

 

TITLE INSURANCE – CONTINUATION OF COVERAGE UNDER OWNER’S POLICY

An owner’s title insurance policy will name the insured owner as of the Date of Policy.  “Insured” also includes those who succeed to the interest of the named insured by operation of law as distinguished from purchase including, but not limited to, heirs, distributees, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors – subject to the rights or defenses the Company would have had against the original named insured.  ALTA Owner’s Policy (10-17-92), Conditions and Stipulations, Par. 1(a).  The ALTA Residential Title Insurance Policy (6-1-87) states that it protects anyone who receives title because of the insured’s death.  Conditions Par. 2. 

Therefore, while the first policy mentioned above maintains coverage when, for example, insured Corporation “A” is merged into Corporation “B”, the policy does not insure against any defects in the merger since that would be a post-Date of Policy event excluded by paragraph 3(d) of the Exclusions From Coverage and paragraph 1(a) of the Conditions and Stipulations construed together.  And, any other transfer of title to a person or entity – for example, as a result of an original individual insured’s death – would be subject to paragraph 3(d)’s exclusion.  Therefore, defective probate of a will would not be covered.  However, defects attaching or created prior to the Date of Policy would be covered for the new insured.

While the ALTA Owner’s Policy (10-17-92) covers corporate successors, if the original insured is a partnership entity, a successor partnership entity is not expressly covered by paragraph 1(a) of the Conditions and Stipulations.  In Fairway Development Co. v. Title Ins. Co. of Minn., 621 F.Supp. 120 (N.D. Ohio, 1985), a general partnership was insured by an owner’s policy.  Two members of the partnership transferred their interests to a third partner and another party.  It was held that the first partnership was terminated, a second partnership was created and that the second partnership could not make a claim under the policy.  A Fairway endorsement is available.  The endorsement comes in various forms.  However, a typical endorsement states that a post-Date of Policy change of a partner’s interest will not forfeit policy coverage if the result under state law is that the insured partnership has not been dissolved or discontinued because of the particular event.  E. Urban and G. Whitney, North Carolina Real Estate Law, Sec. 28-47 (Harrison Co. 1996).  It would seem that a partnership agreement could provide that a partnership will continue to exist if one partner leaves and another partner enters the business.  G.S. 59-58(a); G.S. 59-61(a); G.S. 59-71; G.S.59-68; G.S. 59-47; G.S. 59-74.

It would seem that the same problems and possible solutions arguably exist with a limited liability company, but it is possible that above cited Conditions and Stipulations 1(a)’s reference to “corporate successors” might be held by a court to be applicable to a limited liability company.  However, this is doubtful since a corporation and a limited liability company are different from one another.

Neither the ALTA Owner’s Policy (10-17-92( nor the ALTA Residential Title Insurance policy (6-1-87) covers a successor owner acquiring title by purchase.  Also, see paragraph 2 of the Conditions and Stipulations of the ALTA Owner’s Policy (10-17-92).  Paragraph 2 of the Conditions and Stipulations of the ALTA Owner’s Policy (10-17-92) provides for continuation of coverage after conveyance of title.  The coverage continues as of Date of Policy.  The coverage continues for the named insured if the insured conveys title but the insured (1) holds an indebtedness secured by a purchase money mortgage or deed of trust given by the purchaser from the insured or (2) has liability by reason of covenants of warranty.  If the insured sells his purchase money instrument and indebtedness to an assignee, that assignee is not covered.  The above-cited Residential Title Insurance Policy has similar provisions. 

INHERITANCE AND ESTATE TAX – CHANGES IN STATUTES; ASSISTANCE IN CLEARING TITLE 

1.       Changes in statutes 

Effective August 1, 1998 and applying to estates of decedents dying on and after that date, G.S. 105-20 was rewritten to be much shorter and clearer. This is the statute, which imposes a lien on real property, and on proceeds arising from the sale of real property, and on proceeds arising from the sale of real property, for state inheritance taxes.  It stipulates that the lien is good for 10 years from the decedent’s death or until released.  The statute goes on to state that a lien is released when (1) the Secretary issues a tax waiver for the lien or an inheritance tax certificate or (2) the personal representative files a tax certification with the clerk of superior court.  A tax waiver may be filed in the office of the register of deeds office without the formalities of acknowledgment and probate.  Such filing is conclusive evidence that the property described in the waiver is not subject to inheritance taxes. 

However, Sec. 29A.2(a) of Session Law 1998-212, Senate Bill 1366, effective January 1, 1999 and applying to decedents dying on or after that date, has repealed Article 1 of Chapter 105 pertaining to inheritance taxes.  Sec. 29A.2(b) of that session law enacted Article 1A of Chapter 105, entitled “Estate Taxes.”  See G. S. 105-32.1 through G.S. 105-32.8. 

G.S. 105-32.2(a) imposes an estate tax on the estate of a decedent dying on or after January 1, 1999.  The tax is imposed when a federal estate tax is imposed under 26 U.S.C. Sec. 2001.  When the decedent was a resident of North Carolina at the date of death, the decedent was not such a resident but owned real or tangible personal property located in North Carolina, or intangible personal property having a “tax situs” in the state.  26 U.S.C. Sec. 2001 is a lengthy statute imposing a federal estate tax and setting forth the estate tax rate schedule. 

26 U.S.C. Sec. 2010 was amended effective for decedents dying on or after December 31, 1997.  For the following years, the applicable exclusion from estate taxes is as follows: 1998, $625,000; 1999, $650,000; 2000 and 2001, $675,000; 2002 and 2003, $700,000; 2004, $850,000; 2005, $950,000; 2006 and thereafter, $1,000,000.

G.S. 015-32.2.(b) states that the amount of the North Carolina estate tax is the maximum credit for “state death taxes” allowed under 26 U.S.C. Sec. 2011.  If any property in the estate is located in a state other than North Carolina, the amount of the tax payable is the North Carolina percentage of the credit.  A table setting out the amount of credit is set forth in 11 U.S.C. Sec. 2011(b).

G.S. 105-21.2(b) further provides that: “If the decedent was a resident of this State at death, the North Carolina percentage is the net value of the estate that does not have a tax situs in another state, divided by the net value of all property in the estate.  If the decedent was not a resident of this State at death, the North Carolina percentage is the net value of the real property that is located in North Carolina plus the net value of any personal property that has a tax situs in North Carolina, divided by the net value of all property in the estate, unless the decedent’s state of residence uses a different formula to determine that state’s percentage.  In that circumstance, the North Carolina percentage is the amount determined by the formula used by the decedent’s state of residence.” 

“The net value of property that is located in or has a tax situs in this State is its gross value reduced by any debt secured by that property.  The net value of all the property in the estate is its gross value reduced by any debts and deductions of the estate.” 

A person receiving property from an estate is liable for the amount of the tax attributable to that property.  G.S. 105-32.3(a).  There is liability on the part of the “P.R.” G.S. 105-32.3(b).  The same is true for the clerk of superior court if the statutory procedure is not followed.  G.S. 105-32.3(c).  The return is due when the federal estate tax return is due and must be filed by the P.R. G.S. 105-32.3(a), (b).  G.S. 105-32.4(d) expressly states that the P.R. can sell assets in the estate in order to pay the tax.

G.S. 105-32.6 states that the state estate tax constitutes a lien on the estate real property and on the proceeds of sale.  The lien is extinguished when one of the following occurs:  (1) the personal representative certifies to the clerk of court that no tax is due on the estate because the statute does not require an estate tax return to be filed for that estate; (2) the Secretary issues a certificate stating that the tax liability of the estate has been satisfied; (3) for specific real property, when the Secretary issues a tax waiver for that property; or (4) ten years have elapsed since the date of the decedent’s death. 

2.    Tips on Procedure from The Title Company 

Federal estate taxes create a lien which arises automatically without filing and which lasts for 10 years from the date of the decedent’s death.  26 U.S.C. Sec. 6324(a)(1).  There are various ways to discharge such a lien; a certificate of discharge can be given if there is a finding that the liability secured by the lien has been fully satisfied or provided for; under certain circumstances, the lien can be subordinated by certificate; or a certificate of non-attachment of the lien can be obtained.  26U.S.C. Sec. 6325.  Also, that part of the gross estate used to pay charges against the estate and expenses of administration, allowed by the court having jurisdiction, shall be divested of the lien.  26 U.S.C. Sec. 6324(a)(1).  That means that a sale by a P.R. without such a court order will not divest the property of the lien.  Entireties property is part of the estate of the decedent spouse.  26 U.S.C. Sec. 3040(b) provides that one-half of the value of a tenancy by the entireties is included in the decedent spouse's gross estate.  However, 26 U.S.C. Sec. 2056 provides for an unlimited marital deduction.  Such property was not part of the estate for inheritance tax purposes.  G.S. 105-2(7)(repealed); G.S. 105-3(10)(repealed); G.S. 105-4(a)(6)(repealed).

Due to the time involved in obtaining statutory documents from the federal and state taxing authorities which clear real property from tax liens, a title insurer can analyze the facts surrounding the estate and tax liability and be of assistance by insuring title without exception to estate and inheritance tax liens if the insurer obtains what it needs to do so.  For example, a title insurer will frequently accept a letter from the estate’s attorney stating that (1) the estate has been reviewed and an estate tax return has been filed and the tax paid or that the tax will be paid and the estate has sufficient funds to pay the tax creating a lien in a case where the lien is not divested, or (2) no estate tax liability exists after careful analysis.  Sometimes, the P.R. can add the comfort of an indemnity.  Sometimes business considerations prompt the title insurer to require the heirs or devisees to join in the indemnity.  Depending upon the estate and the title insurer’s confidence in the estate’s attorney, the title insurer might require an escrow to secure the indemnity, at least until a certificate of discharge is obtained.  E. Urban and G. Whitney, North Carolina Real Estate Sec. 13-51 (Harrison Co. 1996).  Call THE TITLE COMPANY for assistance in this area.

 

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