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Webinar:Taxes and Tax Liens: The What, Where, When and How of Taxes September 18, 2012

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Taxes and Tax Liens

Lisa. M BevilleVP, Agency Support Services andRegional Education CoordinatorFidelity National Title GroupSouthwest Agency Division

Tax Humor

Introduction Taxation in Texas is controlled by:

The Texas Constitution and

The Texas Tax Code

All property is subject to taxation, except for property owned by Governmental entities.

Entities that are authorized to assess taxes include governmental entities such as the State, counties, cities/towns, school districts and utility districts.

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Introduction Taxing entities set a tax rate each year, and assess the value of each property located within the boundaries of that taxing entity as of January 1st.

The tax rate is applied to the property’s value to determine the amount of tax that is due.

Because they are based on property value, real property taxes are often referred to as “ad valorem taxes.”

Introduction “Real property” subject to taxation in Texas includes land, improvements, minerals, standing timber, and other interests in land such as easements and leasehold estates.

Tax bills are sent out on or about October 1 of each year, and taxes become “due and payable” when the bill is received by the taxpayer.

Taxes are not considered delinquent until February 1st of the following year.

The Basics On January 1 of each year, a lien attaches to all taxable property to secure all taxes, penalties and interest that become due on that property.

The lien attaches by operation of law and requires no further action.

All property taxes are the personal obligation of the owner of the property on January 1st of the year in which the tax is imposed.

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The Basics Ad valorem tax liens remain as a lien against real property until the taxes are paid or until the lien is foreclosed.

However, if real property taxes have been delinquent for more than 20 years, a suit to enforce the personal obligation of the taxpayer may not be filed.

Tax Lien Priority “Super Priority Lien”: An ad valorem tax lien takes priority over all other liens on and interests in the property, no matter when the other liens or interests attached.

Tax liens take priority even over the owner’s homestead interest in the property. Thus, a homestead in Texas can be foreclosed on for delinquent ad valorem taxes.

ExemptionsWe’ve said that the taxing entity will apply the tax rate they’ve set to the value of the land to determine the amount of property taxes to be assessed.

Exemptions reduce the value of the land to which the tax rate is applied, thus lowering the taxes.

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Exemptions Taxpayer responsibilities

To receive = apply

When no longer qualify = notify

Residence Homestead General criteria

Types of homestead exemptions School, county, etc.

65 or older

Disability

Residence HS – General Criteria Tax payer must own the home on January 1.

The homestead may be owned by a Trust, as long as the trustor occupies the residence.

If the taxpayer temporarily moves away, the exemption is still available, as long at there is intent to return and no other HS is established.

General rule: you may only have the HS exemption on one residence in any year.

Residence HS – General CriteriaSection 11.13 of the Tax Code governs homestead exemptions.

The general exemption is established on January 1st and is good for the entire year, including the entire year of the homestead claimant’s death.

The exemption terminates on December 31 of the year of the homestead claimant’s death.

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Additional Benefits

For homeowners 65 or older or with disability

Transfer exemption

Tax ceiling

Installments

Defer tax payment

Over 65 – General Criteria

Effective as of January 1 of the year in which the taxpayer qualifies, regardless of when that occurs during the year.

It remains on the property for the entire year of the claimant’s death.

A surviving spouse who was 55 or older at the time of the other spouse’s death can piggy back on the exemption.

Disabled Veteran or Survivor Not limited to HS property; instead, can be applied to any one property owned by the veteran (or the veteran’s surviving spouse or child )on January 1st.

The property owner must be a veteran of the US Armed Forces, and must have been officially classified as disabled.

The disability must be service related and the veteran must be a Texas resident.

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HB 252 – New Law Effective 9‐1‐11 Homeowners who apply for a HS exemption must now provide proof that they live in the house they claim as their principal residence.

HS applications must now: List each owner;

State that no other HS is claimed;

Include copy of DL; and

Include copy of vehicle registration receipt.

HB 252 – New Law Effective 9‐1‐11

If the applicant does not own a vehicle, an affidavit to that effect must be signed by the applicant and a copy of a utility bill for the property subject to the claimed exemption in the applicant’s name must be attached to the application.

The address on the driver’s license and vehicle registration must match the address for which the homestead exemption is requested.

Supplemental Tax Bills

Several years ago Dallas County started to compare grantor’s names in deed records with death records;

Discovered many properties were not taxed correctly due to improperly claimed exemptions (homestead and over 65);

Other counties began to follow suit.

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Supplemental Tax Bills

Policy claims in this area led to changes in the promulgated tax exception, effective January 1, 2000. The new language clarifies that the standard tax exception in Schedule B, item 5 does not protect the title company from claims based on the retroactive removal of a Section 11.13 homestead exemption(s).

Valuation Market Value

All property must be appraised and taxed at its market value as of January 1st.

MV = the price a willing buyer would pay a willing seller when there is no pressure on either party to act.

Agricultural Appraisal Land that is designated as “agricultural use” is appraised at its value based on the land’s capacity to produce agricultural products.

Ag‐use Valuation Lowers the taxable value of the land, resulting in

lower taxes.

Land may qualify for this valuation (“exemption”) by meeting either “ag‐use” or “open space” criteria.

The Appraisal Office is required to determine and record both the market value and the ag‐use value of each property that has qualified for the ag‐use valuation.

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Ag‐use Valuation When ag‐use property is sold or the use

changes, “rollback taxes” equal to the amount of additional taxes that would have been paid in previous years had the ag‐use valuation not applied will become due.

Previous 3 years if ag‐use criteria was met.

Previous 5 years if open space criteria.

Ag‐use Valuation A tax lien attaches immediately upon the

sale or change in use. The tax assessor does not have to wait until January 1st of the next year to have a lien on the property to secure payment of the rollback taxes.

However, any rollback taxes, interest and/or penalties are not assessed immediately and cannot be collected and paid until a bill is sent to the taxpayer.

Title Insurance Concerns If the Tax Assessor has not delivered bill for the rollback taxes, a title company has no authority to compute the taxes on its own, escrow the amount, and insure against the risk. Note: See discussion of “rollback tax” coverage below.

The tax collector has no legal authority to accept payment of rollback taxes until a final determination of the amount due has been made and a supplemental tax bill mailed.

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Title Insurance Concerns

In 1995, the legislature enacted Sections 23.46 and 23.58 of the Texas Tax Code. These sections allow a lender to require that a borrower establish and maintain an escrow account to pay rollback taxes that may be assessed against ag‐use land or open‐space land.

Tax Bills and Payment of Taxes Tax bills are normally mailed out in October.

The bill is for the calendar year: Jan. 1–Dec. 31.

Taxpayers cannot withhold payment of taxes if the property’s appraised value is being disputed; or as a way to protest government spending; or for any other reason.

The deadline for paying the tax bill is Jan. 31; however, taxing units must allow taxpayers at least 21 days to pay after the original bill is mailed.

Failure to Pay Taxes Taxes that remain unpaid on February 1st are considered delinquent.

Penalty and interest charges will be added.

As a last resort, a lawsuit will be filed to foreclose the tax lien.

No clear title until all taxes are paid in full.

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Coverage Provided by Title Policy

What is covered? Loss or damage for unpaid taxes for all years prior to the date of policy – except taxes removed from coverage by an exception.

Taxes on real property only.

What is removed from coverage by standard exception–Schedule B, Item 2:


Standby fees, taxes and assessments by any taxing authority for the year ____ and subsequent years,

and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership,

but not those taxes or assessments for prior years because of an exemption granted to a previous owner of the property under Section 11.13, Texas Tax Code,

or because of improvements not assessed for a previous year.

Coverage Provided by Title Policy Standby fees, taxes and assessments by any taxing authority for the year ____ and subsequent years,

Ordinarily, if taxes are paid current or are being brought current at closing, you will simply complete the blank in the paragraph by inserting the next year.

The year you insert in the blank is for taxes that have not been paid. (So, if the tax certificate shows taxes paid through the year 2011, you type 2012 in the blank.)

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Standby Fee – Texas Water Code Section 49.231

(a) In this section: (1) "Standby fee" means a charge, other than a tax, imposed on undeveloped property for the availability of potable water, sanitary sewer, or drainage facilities and services.

(k) A standby fee imposed under this section is a personal obligation of the person owning the undeveloped property on January 1 of the year for which the fee is assessed. A person is not relieved of the obligation on transfer of title to the property. On January 1 of each year, a lien attaches to undeveloped property to secure payment of any standby fee, interest on the fee, and any penalty imposed under this section. The lien has the same priority as a lien for taxes of the district.

Coverage Provided by Title Policy and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership,

Remember, when a special valuations is removed (ag use or open‐space), the property is re‐appraised, new taxes are assessed and a lien is imposed.

The standard tax exception removes liability for rollback taxes from coverage because it occurs in the future (after the date of the policy).

However, P‐20 B allows us to delete the clause noted above from a Loan Policy or ICB (but not an OTP), which means we cover the risk.

Rollback Tax Coverage – P‐20 B.2. 2. A Company may not insure against rollback taxes unless:

a. The Company has satisfactory evidence in its file that the assessed taxes for the current year are not based on an agriculture or open‐space valuation; or

b. (i) The rollback taxes have been assessed by all of the taxing authorities;

(ii) The rollback taxes are collected at closing by the Company, and

(iii) The Company will pay the roll back taxes in the ordinary course of business.

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Reorganization of P‐20 and P‐29 re: Tax Coverages

Effective February 1, 2010

Places all rules relative to the treatment of taxes under one rule: P‐20 (and repeals P‐29).

What does revised P‐20 cover?

(A) Insuring taxes for the current year;

(B) Rollback taxes; and

(C) Taxes not yet due and payable.


but not those taxes or assessments for prior years because of an exemption granted to a previous owner of the property under Section 11.13, Texas Tax Code,

or because of improvements not assessed for a previous year.

Supplemental Taxes Supplemental taxes are covered by the title

policy.

So, the escrow officer must review the tax certificate for exemptions that might lead to supplemental taxes.

If the escrow officer believes that taxes for prior years were paid with a disallowed exemption, she must “blow the whistle” and require that the supplemental taxes be paid in order to avoid a tax loss.

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Lost Exemptions & Supplemental Taxes

If the tax office discovers that a property owner no longer qualifies for an exemption, the tax office may remove the exemption and issue a supplemental tax bill.

Interest and penalties will also be due.

The same is true for missed improvements.

Property Not Previously Taxed

The assessor can go back 5 years and assess taxes on property that was omitted from the tax rolls;

If we are made aware of this issue, either pay the assessed taxes per the “Supplemental Tax Bill,” or insert the following exception in the OTP:

“Loss, cost, or expense resulting from a portion of the property described on Schedule A, or improvements located thereon, not being assessed for ad valorem tax purposes for the years _____, and subsequent years. In the event of a conflict between this exception and Schedule B 5 of the policy, this exception shall control.”

Coverage Upon Request –LP & ICB Only (Not OTP)

P‐20 (C) Amendment to add coverage:

Company insures that standby fees, taxes and assessments by any taxing authority for the year ________ are not yet due and payable.

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“Not Yet Due and Payable” From October 1 through December 31 – you must determine on a case‐by‐case basis what year to except from coverage and how to respond to a lender request for “not yet due and payable” language.

Scenario #1 Tax certificate shows taxes paid through 2011 and no tax bills for 2012 taxes have been mailed by any taxing authority shown on the certificate:

Except to 2012 taxes on the policies;

At the request of the lender, you may add “not yet due and payable” language, completing the blank with the year 2012.

“Not Yet Due and Payable” Scenario #2

Tax certificate shows taxes paid through 2011 and some –but not all ‐ taxing authorities shown on the certificate have mailed tax bills for 2012:

Except to 2012 on the policies;

At the request of the lender, you may add “not yet due and payable” language, completing the blank with the year 2012 and modifying the language to indicate which taxes are “not yet due” in the following manner:

Company insures that standby fees, taxes and assessments by any taxing authority for the year 2012 are not yet due and payable, as to [insert name of entity that has not mailed bills] only.

“Not Yet Due and Payable” Scenario #3 ‐ Tax certificate shows amount due and owing for 2012 or amounts due are available for all taxing entities on the Central Appraisal District website:

a. If you will collect and pay all 2012 taxes as part of the closing, or are holding an escrow deposit and indemnity with an agreement permitting you to pay the taxes before they are delinquent (according to P‐20):

(1) Except to 2013 on the policies;

(2) According to P‐20, you may not add “not yet due and payable” language because taxes for the year of the policy issuance are due.

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“Not Yet Due and Payable” Scenario #3 ‐ Tax certificate shows amount due and owing for 2012 or amounts due are available for all taxing entities on the Central Appraisal District website:

b. If you will not collect and pay the 2012 taxes:

(1) Except to 2012 on the policies;

(2) According to P‐20, you may not add “not yet due and payable” language because taxes for the year of the policy issuance are due.

Tax Certificates

Tax Office Certificate Private Tax Company Certificate

Review Certificate –carefully! Legal description Street address Owner’s Name Exemptions Assessed Value

Prorations At closing, Taxes must be divided between the buyer and the seller based on the fractional portion of the year that each owns the property.

The seller doesn’t actually “pay” the taxes.

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Prorations If the tax bills have not been issued, the proration should be based on the valuation and tax rate that were used for the previous year.

If improvements were added during the year, an updated valuation must be obtained for use in the proration.

Any tax exemptions that were applicable to the seller but are not available to the buyer should also be taken into account.

Tax Proration Agreement

A Tax Proration Agreement should be signed by the buyer and the seller at closing to disclose and acknowledge:

The source of the information used to make the proration calculation; and

The continuing liability of the parties for the payment of taxes on the property.

Transfer of Tax LiensAn owner may authorize another person to pay the ad valorem taxes due.

A sworn document evidencing the authorization to be filed with tax collector.

A tax receipt is issued stating that a third party has paid the taxes and that the tax lien has been transferred. Note: The collector must attach seal of office.

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Transfer of Tax LiensDocuments required to insure loan of Property Tax Lender:

A certified copy of the document authorizing the 3rd party to pay the taxes; and

Tax receipt from the collector ‐ which must be recorded in the real property records.

Transfer of Tax Liens The person to whom the lien is assigned, or a lender who refinances the tax lien, will have the same “super priority” lien priority as the collector, even though the lien is evidenced by a standard deed of trust form. So, this DOT is not wiped out by the foreclosure of a regular DOT on the property.

Also, the foreclosure of the transferred lien will wipe out everything that a tax foreclosure sale would wipe out.

Transfer of Tax Liens “Property tax lenders” make loans for the payment of delinquent property taxes. In return, they receive assignment or transfer of the ad valorem tax lien and a Deed of Trust from the borrower to secure repayment of the lien.

Because of the “super priority” status of the ad valorem tax lien, some unscrupulous lenders have taken advantage of the system.

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Transfer of Tax Liens In order to put a halt to this practice, legislation was enacted in 2007 to establish a code of restrictions and requirements for property tax lenders.

As a result, the Texas Finance Commission was required to:

Prescribe the form and content of an appropriate disclosure statement that the property tax lender must provide to the property owner before the tax lien transfer is executed, and

Transfer of Tax Liens Adopt rules relating to the reasonableness of closing costs, fees and other charges property tax lenders may assess.

Note: These rules are found in Texas Tax Code §§32.06 and 32.065 and Texas Finance Code Chapter 351.

Transfer of Tax Liens In addition, the legislation includes provisions that require the property tax lender to give notice of the tax lien transfer to any mortgage servicer and any holder of a recorded first lien on the property within 10 business days after the transfer of a property tax lien, and to record a copy of the tax lien transfer in the real property records of the county in which the property is located.

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Transfer of Tax Liens

Note: The change in law applies only to the transfer of an ad valorem tax lien that occurs on or after September 1, 2007. A transfer of an ad valorem tax lien prior to September 1, 2007, is covered by the law in effect at the time the transfer occurred.

Transfer of Tax Liens

A property tax lien that has been transferred to a property tax lender may be foreclosed either judicially or non‐judicially.

However, before conducting a non‐judicial foreclosure, the property tax lender must obtain a court order.

Any application for foreclosure must be served on the holder of any recorded pre‐existing first lien on the property.

Transfer of Tax Liens After foreclosure of a transferred tax lien, beginning on the date the foreclosure deed is recorded, the person whose property was sold or the mortgage servicer of a prior recorded lien against the property may redeem the foreclosed property from the purchaser at the foreclosure sale or that purchaser’s successor in interest.

2 years for homestead; ag‐use; or mineral interest, and

180 days for all other types of properties.

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Federal Estate Tax Lien

Attaches to all property of estate immediately upon death of decedent.

No requirement for filing of lien.

Lien is effective for 10 years.

Procedural Rule P‐11 (b)(9) tells us how to address these liens.

Federal Estate TaxesA more detailed discussion of Estate Tax Liens can be found at pages 20 – 22 of the paper. In 2012, the exemption from federal estate taxes stands at $5.12 million per person, and the top estate tax rate is 35 %.Under current law, in 2013 the estate tax rate will revert to the higher 2001‐2002 levels, unless new legislation is passed again changing the rate (55 %).

Medicaid Estate Recovery Program

Medicaid liens on the real property of deceased recipients have been available since the inception of the Medicaid program in 1965. However, federal law did not provide a means for enforcing the lien; instead, the assumption was that the individual states would enact laws to enforce and collect such liens.

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On March 1, 2005, Texas enacted the Medicaid Estate Recovery Program (“MERP”) to enable the State to seek reimbursement against a deceased Medicaid recipient’s estate, including homestead, for certain long‐term care services received by the deceased recipient from Medicaid after March 1, 2005.


MERP creates lien on deceased Medicaid recipient’s estate

for reimbursement of certain long‐term care services received by the deceased recipient after the age of 55,

and only if the recipient first applied for the services after March 1, 2005.

MERP, continued

The State will not file a claim in certain instances.

Upon death of recipient, a request for info is sent to the estate so State can determine if they want to file a claim.

Amount owed may be reduced by certain expenses.

Contact underwriter for guidance.

TAXES AND TAX LIENS TLTA Webinar

September 18, 2012

PRESENTED BY:

Lisa M. Beville

VP, Agency Support Services and Regional Education Coordinator Fidelity National Title Group Southwest Agency Division 1445 Ross Avenue, Suite 4700 Dallas, Texas 75202 Email: [email protected]

Lisa Beville – Taxes and Tax Liens Page 2 of 23 Last revised: 08/28/2012

TAXES AND TAX LIENS

I. TEXAS PROPERTY TAXES IN GENERAL

A. Introduction

1. Taxation of property in Texas is controlled by provisions found in the Texas Constitution and in the Texas Tax Code.

2. All property owned by individuals, corporations or any other legal entity that can hold legal title to property is subject to taxation. However, Governmental entities are not subject to taxation.

3. Taxing entities include the State of Texas, counties, and other governmental entities such as cities/towns, school districts, utility districts, etc.

4. Every year, the Appraisal District determines the value of each piece of property located within the boundaries of that taxing unit as of January 1st. At the same time, each Taxing Unit sets a tax rate. The tax rate is applied to the property’s value to determine the amount of tax that is due.

Because taxes are based on the value of the property, real property taxes are commonly referred to as “ad valorem” taxes.

5. What constitutes “real property” that is subject to taxation in Texas? Examples are: land; improvements; minerals; standing timber; and other estates or interests in land such as easements and leasehold estates.

6. Examples of “personal property” that are subject to taxation are: furniture, fixtures, machinery, equipment and inventory.

7. Tax bills are sent out by the Tax Assessor/Collector’s office on or about October 1st of each year. Taxes become “due and payable” when the bill is received by the taxpayer. However, taxes are not considered delinquent until February 1st of the following year.

B. The Basics of Ad Valorem Tax Liens

1. Each year on January 1st, a tax lien attaches to property to secure all taxes, penalties and interest that accrue on that property for that year.


2. The tax lien attaches to property “by operation of law,” so no further action is required of the taxing entity to perfect the lien. There is no requirement that a notice of lien be recorded in the real property records.

3. All property taxes are the personal obligation of the owner of the property on January 1st of the year the tax is imposed. Even if the owner sells the property later in the year, he is not relieved of the obligation to pay the tax.

4. Ad valorem tax liens remain in effect until the taxes are paid or until the lien is foreclosed by the taxing authority.

5. However, if real property taxes have been delinquent for more than twenty (20) years, a suit to enforce the personal obligation of the taxpayer may not be filed.

6. As a general rule, homesteads in Texas are protected from foreclosure. However, both the Texas Property Code and the Texas Constitution list certain liens that are valid, enforceable liens against the homestead. One of these valid liens is a lien for delinquent ad valorem taxes.

Therefore, the fact that property is claimed as the taxpayer’s homestead does not prevent foreclosure of the tax lien.

C. Ad Valorem Lien Priority

1. An ad valorem tax lien takes priority over all other liens on and interests in the property, regardless of when the other liens or interests attached. Thus, it enjoys a “super priority” status.

2. Tax liens take priority over the homestead interest of the owner(s).

3. Tax liens assessed for different calendar years have the same priority.

4. Tax liens assessed by different taxing entities have the same priority. Therefore, it is important for a title company closing a real estate transaction to verify that tax statements have been obtained from every taxing entity that has jurisdiction to tax the subject property.

II. EXEMPTIONS – An exemption removes part of the value of the property

from taxation and thus lowers the taxes.

A. Taxpayer responsibilities with regard to Exemptions

1. To receive an exemption, the taxpayer must apply to the appraisal

district that taxes the property. If the property is taxed by more than one


appraisal district, an exemption application must be filed in each district

office.

2. If the taxpayer no longer qualifies for an exemption, the taxpayer

must notify the appraisal district in writing. If the tax district is not notified, and taxes are not paid in full (without the disallowed exemption) the taxpayer faces a 50% delinquent tax penalty, plus interest.

B. Residence Homestead – Section 11.13 of the Tax Code

1. General Criteria

a) The taxpayer must own the home on January 1 of the tax year and use the home as his/her principal residence at that time.

Renting part of the home or using part of it for a business does not disqualify the rest of the home for the exemption.

The homestead can be a separate structure, a condominium, or a mobile home located on leased land, as long as the taxpayer owns the home itself.

b) The homestead may be owned by an individual through an interest in a trust, as long as the residence is occupied by the trustor of the trust.

c) If the taxpayer temporarily moves away, he or she can still receive an exemption as long as there is intent to return and as long as the taxpayer does not establish a new principal residence.

Note: “Temporarily” means an absence of less than two years.

d) A person may not receive a homestead exemption for more than one residence homestead in the same year.

2. Types of Homestead Exemptions

a) School Taxes – All Homeowners – $15,000 exemption.

b) County Taxes – All Homeowners – $3,000 exemption for special taxes for farm-to-market roads or flood control, if collected in that county.

c) Optional Exemptions – All Homeowners – $5,000 minimum – May be offered by any taxing unit in addition to any other exemption.

d) Age 65 or Older Homeowners – $10,000 additional exemption for school taxes. An optional $3,000 may also be offered by any taxing unit.

(1) The owner must be age 65 or older – and may apply immediately following the 65th birthday.

(2) May be continued by a surviving spouse who is 55 years of age or older on the date the qualifying spouse died.


(3) The owner – or surviving spouse – must also meet the General Criteria for homestead exemptions.

e) Homeowners with Disabilities – $10,000 additional exemption for school taxes. An optional $3,000 may be offered by any taxing unit.

NOTE: The various homestead exemptions simply remove a portion of the property’s value from taxation in order to lower taxes. The “homestead exemption” does not mean that the property is exempt from foreclosure in the event of delinquent taxes.

3. Additional benefits for “Over-65” or “Disability”

a) A person who turns 65 at any point during the tax year will qualify for the over-65 exemption for the entire year. Thus, this person will benefit from this exemption retroactively for the entire year.

NOTE: If a person who qualified for the over-65 exemption sells the property to a buyer who does not qualify for the exemption, the over-65 exemption will not apply and the buyer will be responsible for the full tax assessment without the benefit of the over-65 exemption.

b) “Tax ceiling” for total school taxes (and possibly others) – may be established at the amount of the taxes for the year of qualification.

c) Taxes may be paid in installments.

d) Homeowner may “defer” or postpone paying any property taxes by filing a “tax deferral affidavit.” This only defers the tax liability and interest continues to accrue.

4. Disabled Veteran or Survivor – Section 11.22 Tax Code

a) This exemption is not limited to the homestead of the veteran. It may be applied to any property owned by the veteran (or survivor) on January 1 of the tax year, but only one property may receive the exemption.

b) Criteria:

(1) The owner must be a veteran of the U.S. Armed Forces that the service branch or the Veteran’s Administration has officially classified as disabled. The disability must be service related and the veteran must be a Texas resident.

(2) A surviving spouse of a deceased veteran (who met the disability criteria before death or was killed in action) also qualifies if he/she is a Texas resident and has not remarried.

(3) A child of a deceased disabled veteran may also qualify.


C. New Law Effective 9-1-11 re: Exemption Applications

1. Under a new law passed by the Texas legislature in 2011, homeowners who apply for a new property tax homestead exemption beginning September 1, 2011, must provide proof to the county appraisal district that they live in the house they claim as their principal residence. This includes applications for the residence homestead exemption, the over-65 exemption, the disability exemption, the disabled veteran’s exemption, the extended exemption for a homeowner’s surviving spouse and the manufactured home exemption.

2. Note: The new requirement does not apply to homeowners who already have homestead exemptions. It effects only new applications for exemptions sent to appraisal districts.

3. House Bill 252 amended Tax Code Section 11.43 to require that an application for a residence homestead exemption must:

(a) list each owner of the residence homestead and the interest of each owner;

(b) state that the applicant does not claim an exemption under that section on another residence homestead in this state or claim a residence homestead exemption on a residence homestead outside this state;

(c) state that each fact contained in the application is true;

(d) include a copy of the applicant's driver's license or state-issued personal identification certificate and:

(e) a copy of the applicant's vehicle registration receipt; or

(f) if the applicant does not own a vehicle, an affidavit to that effect signed by the applicant and a copy of a utility bill for the property subject to the claimed exemption in the applicant’s name.

4. The address on the driver’s license and vehicle registration must match the address for which the homestead exemption is requested.


D. Title Insurance Concern – Supplemental Tax Bills

1. Several years ago, the tax assessor/collector of Dallas County began to systematically compare the grantors’ names in deeds with the death records of Dallas County. This review uncovered numerous instances in which property was improperly taxed at a reduced value because of one or more homestead exemptions on the property that were no longer applicable. Subsequently, other counties began to follow this practice.

2. Most of these cases involved situations where the land had been owned by a taxpayer who had legitimately claimed the exemption(s). But, upon the death of the taxpayer the homestead exemption(s) remained. When the property was eventually sold, the title company collected the taxes that were shown to be due, and issued a policy which insured that taxes had been paid.

3. The assessor/collector would later determine that the homestead exemption(s) should have been removed at the end of the year of the decedent’s death, and would re-assess the land at a higher value – thus increasing the taxes. The buyer (our insured) would eventually receive a supplemental tax bill for the additional amount of taxes that should have been paid – and the Tax Code allows the assessor/ collector to re-assess taxes for up to five (5) preceding years.

4. Policy claims in this area led to changes in the promulgated tax exception, effective January 1, 2000. The new language clarifies that the standard tax exception in Schedule B, item 5 does not protect the title company from claims based on the retroactive removal of a Section 11.13 homestead exemption(s). Note: See further discussion of policy coverages at Section V. A., below.

III. VALUATION

A. Real Property Valuations

1. All property must be appraised and taxed at its market value as of January 1st. “Market Value” is defined as the price for which the property would sell when both the buyer and the seller desire the best price for the property and there is no pressure on either party to sell or purchase the property.

2. Land that is designated as “agricultural use” is appraised at its value based on the land’s capacity to produce agricultural products. This is sometimes referred to as “productivity value.”

3. The appraised value for a taxpayer who qualifies his or her property for the homestead exemption in the preceding and current year may not increase


more than 10 percent per year. The appraisal limitation first applies in the year after the homeowner qualifies for the homestead exemption.

4. The appraisal district must repeat its appraisal process for property at least once every three years.

B. Agricultural Valuation

Agricultural appraisal lowers the taxable value of the land because the land is appraised on its capacity to produce crops, livestock, or timber, rather than its value on the real estate market.

1. Land may qualify for productivity valuation if it qualifies under one of the two types of agricultural appraisal methods authorized by the Texas Constitution: Texas Constitution, Article VIII, Section 1-d (“Ag-Use”) or Section 1-d-1 (“Open Space”).

2. The Constitution contains specific requirements for qualifying for both the ag-use valuation and the open space valuation.

3. Rollback tax “trigger.”- If the “ag-use” or “open space” land is sold or diverted to nonagricultural use during a tax year, the land is subject to an additional “rollback” tax.

The rollback tax is the difference between the taxes paid (or payable) under the 1-d or 1-d-1 valuation, and the amount of taxes that would have been paid under the higher, market value valuation, for the preceding three (3) years for ag-use land, and for the preceding five (5) years for open space land.

4. Tax lien.

A tax lien attaches to the property immediately upon the sale or change in use to secure payment of any rollback taxes that may become due. The taxing entities do not have to wait until January 1st of the next year to have a lien on the property for rollback taxes. This lien includes any interest and penalties that may accrue. However, any rollback taxes, interest and/or penalties are not assessed immediately, and cannot be collected for and/or paid until the bill for these rollback taxes has been sent to the property owner.

5. Title Insurance Concerns

In sale transactions where the tax certificate shows that the property is currently being assessed and taxed under some alternate valuation method:


a. If the Tax Assessor has not delivered bill for the rollback taxes, a title company has no authority to compute the taxes on its own, escrow the amount, and insure against the risk. Note: See further discussion of this issue at Section V. B., below.

b. The tax collector has no legal authority to accept payment of rollback taxes until a final determination of the amount of taxes due has been made and a supplemental tax bill has been mailed.

c. In 1995, the legislature enacted Sections 23.46 and 23.58 of the Texas Tax Code. These sections allow a lender to require that a borrower establish and maintain an escrow account to pay rollback taxes that may be assessed against ag-use land or open-space land.

.

IV. TAX BILLS AND PAYMENT OF TAXES

A. Tax Bills

1. Taxing units usually mail their tax bills in October.

2. The tax bill is for the calendar year: January 1 – December 31.

B. Payment of Taxes

1. When taxes are paid, the tax collector must provide a receipt, which is evidence of payment of the taxes.

2. If the Appraisal Review Board (ARB) is still reviewing a protest, the taxpayer may make a conditional tax payment – either last year’s tax amount or the taxes due on the ARB order, whichever sum is less. Once the ARB sets a value, the tax collector will send either a supplemental tax bill or a tax refund.

3. If a taxpayer appeals the taxable value to district court, he or she must usually pay the taxes.

4. Taxpayers have no legal right to withhold taxes or to put taxes in escrow to protest government spending or for any other reason.

5. The deadline for paying the tax bill is January 31; however, taxing units must allow taxpayers at least 21 days to pay after the original bill is mailed. If bills are mailed after January 10, the delinquency date is postponed.


C. Failure to Pay Taxes

1. Delinquent Taxes – Taxes that remain unpaid on February 1 are

considered delinquent.

2. Penalty and interest charges are added to the original amount.

a) Regular penalty charges may be as high as 12 percent per month, depending on how long the tax remains unpaid.

b) Interest will be charged at the rate of 1 percent per month, with no maximum.

c) Private attorneys hired by taxing units to collect delinquent accounts can charge an additional penalty to cover their fees.

3. Delinquent Tax Lawsuit – The tax collector’s last resort is to take a

delinquent taxpayer to court, in which case court costs will be added to the delinquent tax bill.

a) Each person who owns taxable property on January 1 is liable for all taxes due on the property for that year.

b) A person who owned taxable property on January 1 can be sued for delinquent taxes even if the property has been sold or transferred since then.

4. Tax Lien – Each taxing unit holds a tax lien on each item of taxable

property located within the boundaries of that taxing unit.

a) The lien automatically attaches to property on January 1 of the tax year to secure payment of all taxes, penalties, and interest ultimately imposed for the year.

b) The lien exists in favor of each taxing unit having power to tax the property.

c) This tax lien gives the courts the power to foreclose on the lien and seize the property, even if its ownership has changed.

5. No Clear Title Until Taxes Are Paid In Full

As a result of the tax lien, someone who purchases real estate cannot obtain a clear title until all the delinquent taxes owed on the property are paid in full. a) If you are buying a portion of a larger parcel of land, check the

taxes on the larger parcel.

b) You will not be able to clear a tax lien against your portion unless taxes on the whole are paid.

c) If a tax suit has been filed, the taxes and costs of the suit must be paid, and the suit must be released of record.


V. TAXES AND TITLE INSURANCE

A. Coverage Provided by Title Policy

1. What is covered by the terms of the policy?

The title policy protects against loss or damage resulting from unpaid taxes and assessments for all years prior to the date of the policy - except taxes and assessments removed from coverage by an exception.

Note: Since title policies insure only real property, not personal property, these

policies only address taxes assessed against real property.

2. What is removed from coverage by the standard Schedule B exception?

Here is the exception, broken down into segments:

Standby fees, taxes and assessments by any taxing authority for the year ____ and subsequent years,

This segment is an exception to the taxes the title agent is unwilling to insure. The blank is completed with the first year they are unwilling to insure. For example, if the agent is confident that all taxes are paid through the year 2011, the blank is completed with 2012.

Most underwriters do not permit insuring taxes on a “piecemeal” basis. That means that if some, but not all, of the 2011 taxes are paid – the exception is to 2011. Only if all of the 2011 taxes are paid, should the exception be 2012.

. . . and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership

This segment is an exception to the consequences of “rollback taxes” which may be due for prior years because of lost eligibility for open space or agricultural valuation.

This portion of the tax exception may be amended out of a Loan Policy or an Interim Binder, but not out of an Owner Policy (in accordance with Procedural Rule P-20).

Because the lien to secure payment of the rollback taxes arises immediately, but the tax bill for these taxes won’t be mailed to the taxpayer until a later date, this clause should not be deleted if the insured transaction may trigger the assessment of rollback taxes.

Effective February 1, 2010, Procedural Rule P-20 was amended to add guidance on “insuring against rollback taxes.” See further discussion below.

. . . but not those taxes or assessments for prior years because of an exemption granted to a previous owner of the property under Section 11.13, Texas Tax Code,

This segment isn’t really an exception – in fact, it is an exception to the exception. It tells the insured that they are covered with regard to taxes for prior years resulting from a lost homestead or “over 65” or “disability” exemption. (“supplemental tax coverage”)

. . . or because of improvements not assessed for a previous year.

The last part tells the insured that they are covered with regard to taxes for prior years resulting from improvements that were not included in the appraised value of the property (“omitted improvements”).


3. In addition, the following promulgated language may be added to the

tax exception in a Loan Policy or an Interim Binder (in accordance with amended Procedural Rule P-20) to assure the lender that taxes for a specified year are not yet due.

Company insures that standby fees, taxes and assessments by any taxing authority for the year ________ are not yet due and payable.

As we previously discussed, tax bills are mailed out on or about October 1 of each year, and become “due and payable” when the bill is received by the taxpayer. Therefore, this language cannot be added to a Loan Policy or an Interim Binder after the tax bills have been sent out, and until those taxes have been paid (from about October 1 until the agent is certain that all taxes, penalties and interest for the year have been paid).

Agents have often been asked to add the “not yet due and payable clause” on a “piecemeal” basis – providing the coverage as to some – but not all – of the taxing authorities, depending on which taxing authorities had mailed out their tax bills. In the past, there was no rule that allowed a title agent to comply with this request. However, a recent amendment to Procedural Rule P-20, effective February 1, 2010, will now allow us to do so. See further discussion of these “piecemeal coverage,” below.

B. Reorganization of P-29 and Bulletin 153 into P-20

The Commissioner of Insurance issued his final adoption order for the 2008 Rule Making Hearing in January of 2010. This Order makes all rule changes effective February 1st, 2010.

One of the changes in the Order was a reorganization of the two Procedural Rules that provided for additional tax coverages in the Loan Policy, P-20 and P-29, into one rule, P-20. A copy of Revised Rule P-20, as found in the Commissioner’s final order, is included on the next two pages of this paper.

The amended P-20 clarifies when you can insure taxes as being paid for the current year. If the lender tells the title company that taxes for the current year have been paid from an escrow account, P-20 (b) allows the Loan Policy to insure taxes as paid for the current year if there is satisfactory evidence that the taxes for the current year have been paid by the lender from a Reserve/Escrow Account held by the lender.

If the title company is not provided satisfactory evidence showing the taxes have been paid, then the title company may accept an indemnity from a responsible party together with a deposit of funds in an amount sufficient to pay the assessed taxes. If the title company has received an indemnity and a deposit of funds, the company shall have the right to pay the taxes according to the terms of the indemnity before they become delinquent. Or, upon receipt of satisfactory proof that taxes for the current year have been paid, the title company will pay the escrowed funds to the proper party, according to the terms of the agreement.

If taxes for the current year have not been assessed by the taxing authorities, you cannot insure that such taxes are paid.


C. Tax Certificates Because Title Insurance policies provide such broad coverage with regard to taxes, the title agent should carefully verify the status of all taxes and assessments against all property to be insured. Tax status can be verified by obtaining a Tax Certificate either directly from the Tax Assessor/Collector’s office, or from a private, third-party tax service.

1. Tax Certificate from Taxing Authority

Tax certificates are available for a charge from the Tax Assessor of the county in which the property is located. The tax certificate will describe the property, and will summarize the amount of taxes, penalties and interest due on the property. If the tax certificate erroneously states that there are no delinquent taxes, penalties or interest due, the buyer will purchase the property free and clear of the taxing unit’s tax lien. However, the seller will remain personally liable for the taxes. Additionally, the buyer may have a claim under the Owner Policy if the policy insures that the taxes are current but the taxes actually remain unpaid.

2. Tax Certificate from Private Service

Tax services provide a tax certificate, for a charge, that provides a description of the property and summarizes the amount of taxes, penalties and interest due. The tax service guarantees their report of the tax records as of the date of the certificate. So, if the buyer suffers a loss based on reliance on that tax certificate, the tax service company will usually reimburse the title agent for a tax claim paid under the title policy. However, if additional taxes are added to the tax roll after the date of the tax certificate – such as for lost exemptions, omitted improvements, or loss of a special valuation – the tax service is not liable and the title agent must suffer the loss. The title agent will look to the owner of the property at January 1st for possible reimbursement.

3. Taxing Authority –vs.– Private Tax Service

Why would a title insurance agent use a private tax service rather than the local taxing authority? It’s usually a matter of timing. Tax services can usually deliver tax information immediately upon request to a title insurance agent, while the local Tax Assessor may take several days, a week, or longer to deliver an individual tax certificate.

4. What do you do when you receive the Certificate? Carefully review the Certificate to minimize losses.


a) Legal description

(1) Do you have a certificate or certificates for all of the land to be insured?

(2) Does the certificate cover the entire legal description? (Not just the North ½ of Lot 1 if you are insuring all of Lot 1)

(3) All information should agree with the legal description in the Commitment: Lot, block, addition name, section and/or phase for platted property; survey name, abstract number and amount of acreage covered for un-platted property.

b) Street address

(1) “Situs” on the tax certificate should match the physical address of the property to be insured.

(2) Does the street address match the address on the contract and on the survey?

c) Assessed owners should agree with the Commitment.

d) Exemptions – Is the property receiving special exemptions such as homestead, over-65, disability or disabled veteran?

(1) If so – does the current owner qualify, or is the exemption being carried over from a prior owner?

(2) If the exemption is for the current owner, who is selling the property? Will the exemption be transferred to a new home?

e) Assessed value

(1) How does the assessed value compare to the contract price and title report?

(2) The value should generally agree with the transaction you are closing.

(3) Is the assessment based on market value – or does the property receive an agricultural use exemption, indicating the possibility of rollback taxes?

D. Proration of Current Year’s Taxes

1. When a property is sold, taxes that are due or will become due on the property must be divided (“prorated”) between the buyer and the seller.

2. Normally, the buyer and seller have included provisions in their contract allocating responsibility for the payment of taxes between the pre-closing and post-closing periods. Therefore, sellers are usually liable for taxes on the property up to and including the date of closing, and buyers are usually liable for taxes on the property after closing.


3. The seller doesn’t actually “pay” his portion of the taxes at closing; instead, on the settlement statement, his prorated portion of the taxes will be deducted from the sales proceeds he will receive, and a credit for these taxes will be given to the buyer.

4. The parties to a sale of property that has qualified for an agricultural valuation should also negotiate which of them will pay the taxes that will subsequently accrue – “rollback taxes.” Because the sale of the property will normally trigger rollback taxes, the parties should agree who will be responsible for payment of the rollback taxes prior to the date of closing.

5. If the tax bills have not yet been issued for the current year, the general rule is that the closer should use the actual valuation and tax rate that were used for the previous year in calculating the tax prorations.

6. However, if a house or other improvement was constructed during the past year, the escrow officer must obtain an updated valuation of the property since the prior year’s taxes would have been based on unimproved land.

7. Any tax exemptions that were applicable to the seller but are not available to the buyer should also be taken into account.

8. A tax proration agreement should be signed by the buyer and seller at closing. In this form, the source of the tax information used and any estimates used for prorations should be disclosed.

In addition, this agreement should recognize the continuing liability of the parties for the payment of taxes on the subject property. This may help the title insurance agent and their title insurance underwriter establish a basis upon which they can recoup any additional taxes that might become due because of additional assessments.

The settlement agent should disclaim liability with regard to the accuracy of tax information provided by third parties (the provider of the tax certificate). Note, however, that this does not absolve the title agent from liability under the terms of the title insurance policy.

VI. Transfer of Tax Liens

1. A property owner may authorize another person to pay the ad valorem taxes assessed against the property. To do so, the owner must file with the tax collector a sworn document stating the authorization, naming the other person authorized to pay the taxes, and describing the property.

2. If the person so authorized pays the taxes, the collector shall issue a tax receipt stating that the taxes have been paid by a person other than the person originally liable for the taxes, and that the tax lien has been transferred to the person who paid the taxes. The collector must also attach his or her seal of office to the document.


3. Most underwriters will insure a lender who refinances a tax lien: (1) they must be provided a certified copy of the sworn document authorizing the third party to pay the taxes from the tax collector; and (2) the tax receipt from the tax collector complying with the statute and with the collector’s seal attached must be recorded in the real property records of the county where the property is located.

4. When the statute is followed, the person to whom the lien is assigned, or a lender who refinances the tax lien, will enjoy the same “super priority” lien priority as the tax collector has per the Tax Code. Therefore, this lien is not “wiped out” by the foreclosure of a deed of trust lien which might appear to have priority.

5. There are lenders, called “property tax lenders,” who make loans for the payment of delinquent property taxes, and receive assignment or transfer of the ad valorem tax lien. In addition, the property owner gives the property tax lender a Deed of Trust to secure repayment of the lien.

6. Because of the “super priority” status of the ad valorem tax lien, some unscrupulous lenders have taken advantage of the system. These lenders loan money to property owners who are behind on their taxes, and fear losing their property to the tax collector. The property tax lenders are smart – they realize that they are stepping into the shoes of the taxing entity that has a “super-priority” lien. If the borrower is one day late, the lender forecloses the tax lien, wiping out all other liens on the property, and thereby owning the property free and clear.

7. In order to put a halt to this practice, legislation was enacted in 2007 to establish a code of restrictions and requirements for property tax lenders. As a result, the Texas Finance Commission was required to:

a. Prescribe the form and content of an appropriate disclosure statement that the property tax lender must provide to the property owner before the tax lien transfer is executed, and

b. Adopt rules relating to the reasonableness of closing costs, fees and other charges property tax lenders may assess. Note: These rules are found in Texas Tax Code §§32.06 and 32.065 and Texas Finance Code Chapter 351.

In addition, the legislation includes provisions that require the property tax lender to give notice of the tax lien transfer to any mortgage servicer and any holder of a recorded first lien on the property within 10 business days after the transfer of a property tax lien, and to record a copy of the tax lien transfer in the real property records of the county in which the property is located.

Note: The change in law applies only to the transfer of an ad valorem tax lien that occurs on or after September 1, 2007. A transfer of an ad valorem tax lien prior to September 1, 2007, is covered by the law in effect at the time the transfer occurred.

8. A property tax lien that has been transferred to a property tax lender may be foreclosed either judicially (by court order), or non-judicially (under the terms and provisions of the Deed of Trust that the borrower signed when the money was loaned). However, before conducting a non-judicial foreclosure, the property tax lender must obtain a court order. Any application for foreclosure must be served on the holder of any recorded pre-existing first lien on the property.


9. Finally, after foreclosure of a transferred tax lien, beginning on the date the foreclosure deed is recorded, the person whose property was sold or the mortgage servicer of a prior recorded lien against the property is entitled to redeem the foreclosed property from the purchaser at the foreclosure sale or that purchaser’s successor in interest.

a. The right of redemption must be exercised on or before the second anniversary of the date on which the purchaser’s deed is recorded if the property was the residence homestead of the owner, was land designated for agricultural use, or was a mineral interest.

b. For any other property, the right of redemption must be exercised not later than the 180th day after the date on which the foreclosure deed is filed of record.

VII. Federal Estate Taxes

A. Introduction

1. According to federal law, a lien to secure payment of any federal estate taxes that might become due attaches to estate property immediately upon the death of the decedent.

2. There is no requirement that notice of the lien be filed in the real property records.

3. The lien is effective for 10 years following the decedent’s death, and the lien priority is based on the inception date of the lien (date of decedent’s death).

4. We cannot insure around this lien, so we must either determine that no tax is due or collect and pay the taxes at close. Procedural Rule P-11 (b)(9) provides the following options:

(a) Examine a balance sheet of the estate and determine that the estate will have no difficulty in paying its estate and inheritance taxes, and obtain an indemnity from responsible persons to protect against loss due to unpaid estate and inheritance taxes; or

(b) Require sufficient money or other securities to pay estate and inheritance taxes to be left in escrow pending payment of such taxes, or pending the receipt of waivers of lien from the taxing authority or authorities; or

(c) Examine the balance sheet of the estate and determine that the

estate will have no difficulty in paying its inheritance and estate taxes, and obtain a letter from a responsible person agreeing to see that such taxes are paid out of the assets of the estate.

(d) Note: if we cannot determine that the estate will owe no taxes, that the taxes have been paid, or that the taxes will be paid by the estate, then we must include a Schedule B exception to the federal tax lien.


B. Detailed Discussion

1. The Federal Estate Tax is a tax assessed against the estate of a deceased person before the decedent’s property is transferred to devisees or heirs according to the terms of a will or state intestacy laws. [Title 26 U.S.C.S., Section 2001 et seq.]

2. With certain exceptions, there is no estate tax due where a spouse succeeds to the estate of a deceased spouse, regardless of the value of the decedent’s estate.

3. Every decedent has an “estate,” which is defined in the U.S. Internal Revenue Code to include both property owned by the decedent at the time of death and certain “un-owned” interests property as well.

a. Real estate (net of mortgage owed); b. Shares of stock; c. Cash; d. Retirement plans; e. Certain “Un-owned Property” or interests in property, such as:

Certain gifts made within 3 years of the decedent’s death;

Certain property held by the decedent for life only (a “life estate”);

Certain annuities, including those with income still payable after the decedent’s death;

Life insurance owned by the decedent regardless of who is named beneficiary;

Life insurance payable to the decedent’s estate; Certain disclaimed property.

4. Taxable Estate

a. GROSS ESTATE - Determining the estate’s tax liability begins with calculating a decedent’s gross estate, which generally includes the value of all property a decedent owns and controls at death. The federal income tax laws assign to inherited property a basis equal to the fair market value of that property on the date of the decedent’s death or six months later if the alternate valuation date is selected. [Title 26 U.S.C.S., Section 2031 et seq.].

b. DEDUCTIONS - After a value has been placed on the gross estate, certain deductions are permitted to calculate the adjusted gross estate. Examples of such deductions are: funeral expenses; estate administration expenses; debts of a decedent; mortgages; charitable deductions; and the estate tax marital deduction. [Title 26 U.S.C.S., Section 2051 et seq.].

c. TAXABLE ESTATE - After subtracting the deductions from the gross estate to arrive at the “taxable estate,” the appropriate tax rate is applied to the taxable estate to compute the tentative tax. [Title 26 U.S.C.S., Section 2101 et seq.].


d. UNIFIED CREDIT - However, the law then provides for a credit against the tentative tax, sometimes called the “unified credit.” The credit is expressed as an “applicable exclusion amount” in the federal code, which may be thought of as providing for an “exemption equivalent” or exempted value with respect to the value of the estate’s property. [Title 26 U.S.C.S., Section 2010(c)]. See further discussion of this “exemption from taxation” at item 4.e., below.

e. Exemptions and tax rates

(1) As noted above, a certain amount of each estate is exempted from taxation by the federal government. The table to the right sets forth the amount of exemption by year that an estate would expect. Estates above these amounts would be subject to estate tax, but only for the amount above the exemption.

(2) As shown, the 2001 tax act would have repealed the estate tax for one year (2010) and would then have readjusted it in 2011 to the year 2002 exemption level with a 2001 top rate. However, on December 17, 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Section 301 of the 2010 Act reinstates the federal estate tax. The new law set the exemption at $5 million per person in 2011, and was indexed for inflation to increase to $5.12 million per person in 2012. A top tax rate of 35 percent is provided for the years 2011 and 2012.

(3) Under current law, in 2013 the estate tax will revert to the higher 2001-2002 levels, unless new legislation is passed again changing the rate.

f. FEDERAL ESTATE TAX - TAX RETURNS - An executor or personal representative of the decedent’s estate is required to file a federal estate tax return, Form 706 (Form 706-NA for nonresidents) with the IRS if the value of the gross estate exceeds the amount of the applicable exclusion amount for the calendar year of the date of death. Executors for nonresident decedents must file a return if the value of the gross estate in the U.S. exceeds $60,000. [Title 26 U.S.C.S., Section 6018(a)]. The executor generally must file the estate tax return and pay the estate taxes within 9 months from the date of the decedent's death. [Title 26 U.S.C.S., Section 6075(a)].

Year Exclusion Amount

Max/Top tax rate

2001 $675,000 55%

2002 $1 million 50%

2003 $1 million 49%

2004 $1.5 million 48%

2005 $1.5 million 47%

2006 $2 million 46%

2007 $2 million 45%

2008 $2 million 45%

2009 $3.5 million 45%

2010 Repealed

2011 $5 million 35%

2012 $5.12 million 35%

2013* $1 million 55%

* under current law

http://en.wikipedia.org/wiki/Tax_Relief,_Unemployment_Insurance_Reauthorization,_and_Job_Creation_Act_of_2010





g. FEDERAL ESTATE TAX LIEN - An estate tax lien securing the payment of the tax attaches at the date of death to all property comprising the gross estate of decedent. [Title 26 U.S.C.S., Section 6324(a)]. The lien is customarily referred to as a special lien because it attaches only to property in the decedent's estate. It is a secret lien in the sense that its validity and priority is not dependent upon filing for record any notice of it.

The lien is enforceable for 10 years from the date of death of the decedent unless the tax is paid sooner. [Title 26 U.S.C.S., Section 6324(a)]. Extinguishment of the lien may be by payment of the tax in full, by issuance of a Certificate of Release [Title 26 U.S.C.S., Section 6325 (a)], or by issuance of a Certificate of Discharge (as to the property therein specifically described). [Title 26 U.S.C.S., Section 6325 (b)]. Subordination of the lien is provided for in Section Title 26 U.S.C.S. Section 6325(d).

VIII. Does Texas have an Estate or Inheritance Tax?

The short answer to the question is no. Before 1995, Texas collected a separate inheritance tax, called a “pick-up tax.” The tax did not increase the total amount of estate tax paid upon death. Rather, a portion of the federal estate tax, equal to the allowable state death tax credit on the federal estate tax return, was deducted from amount due to the federal government and paid to Texas.

However, under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the state death tax credit was phased out starting on January 1, 2005. In response, some states changed their laws to “decouple” from federal system and imposed their own inheritance taxes to compensate for the decline in revenue. Texas did not decouple.

The federal estate tax and the pick-up tax were scheduled to return on January 1, 2011 with the expiration of EGTRRA. However, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which repealed EGTRRA, did not reinstate the pick-up tax. As a result, no state inheritance tax is due on estates with a date of death on or after January 1, 2005.

The new law is scheduled to expire on December 31, 2012. If no new law is passed, the pick-up tax, and the state inheritance tax, will return on January 1, 2013.

IX. Medicaid Estate Recovery Program

Medicaid liens on the real property of deceased recipients have been available since the inception of the Medicaid program in 1965. However, federal law did not provide a means for enforcing the lien; instead, the assumption was that the individual states would enact laws to enforce and collect such liens.


On March 1, 2005, Texas enacted the Medicaid Estate Recovery Program (“MERP”) to enable the State to seek reimbursement against a deceased Medicaid recipient’s estate, including homestead, for certain long-term care services received by the deceased recipient from Medicaid after March 1, 2005.

MERP only applies to long-term care services received by the deceased recipient after the age of 55, and only if the recipient first applied for the services after March 1, 2005.

The following services and programs are affected by MERP:

(1) Nursing Facility Care (nursing homes); (2) Intermediate Care Facility for Persons with Mental Retardation; (3) Home and Community-based Services; (4) Community Living Assistance and Support Services; (5) Texas Home Living Program; (6) Deaf-Blind with Multiple Disabilities Waiver; (7) Community Based Alternatives; and (8) Community Attendant Services.

The state will not file a claim if: (1) The deceased recipient’s spouse is still alive; (2) The deceased recipient has a child under 21 year of age or a child of any age

who is blind or permanently and totally disabled; (3) The estate is valued at $10,000 or less; (4) The amount of Medicaid assistance received was $3,000 or less; or (5) The cost of selling the property is more than the property is worth.

When a Medicaid recipient who received one of the services listed above dies, the State sends a notice to the estate representative or the heirs to remind them that the State can file a MERP claim. The notice will ask for certain information so the state can decide whether or not it should file a claim, or whether one of the exceptions noted above is applicable.

If the State decides to file a MERP claim, they will file a claim with either a representative of the estate or a probate court if an estate is pending.

The amount owed to the State may be reduced by money spent to maintain the home while the deceased recipient was in a nursing home, or spent to pay for in-home care so the recipient could stay in the home longer before entering a nursing home. Receipts must be maintained to support these deductions.

The estate is allowed to pay debts such as funeral costs, legal costs and home mortgages before MERP is paid.

You should contact your Underwriter to see how they want you to deal with MERP.