Title Standard Spotlight
Articles from The Massachusetts Focus
Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Spring 2002, Volume 1, Number 1
Title Standard Spotlight
by Ward P. Graham, New England Region Counsel
The Title Standard Spotlight will be a regular feature of The Massachusetts Focus newsletter. With each issue, we will focus on one or two of the Massachusetts Conveyancers Association Title Standards to better familiarize our readers with the Title Standards themselves and the use of the Title Standards in resolving many of the title issues faced by conveyancers on a regular basis.
In this issue, we will discuss Title Standard No. 61, Massachusetts Estate Tax Liens With Respect To Transfers For Inadequate Consideration. This Title Standard is derived from the revision to G.L.c. 65C, §14, inserted by St. 1985, c. 711, §15, which essentially eliminated the so-called "transfers in contemplation of death" rule. Inasmuch as the Massachusetts Gross Estate has been, with certain exceptions, based upon the Federal Gross Estate under the Internal Revenue Code (IRC), see, G.L.c. 65C, §§1(d) and 1(f), the contemplation of death rule was initially derived from the provisions of IRC §2035, entitled "Adjustments for certain gifts made within 3 years of decedent's death." Massachusetts, however, created its own definition of the contemplation of death rule as follows:
[N]otwithstanding [IRC §2035], the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer, relinquished a power, or exercised or released a general power of appointment, except in case of a bona fide sale for an adequate and full consideration in money or money's worth, by trust or otherwise, during the three year period ending with the date of the decedent's death; provided, however, that the value of such property or interest therein so transferred or subject to the power so relinquished, exercised or released exceeds ten thousand dollars for any person during a calendar year; . . .
G.L.c. 65C, §1(d)(1). In other words, the value of any property of a decedent transferred for no or nominal consideration (a gift) within 3 years prior to his or her death was brought back into the Massachusetts Gross Estate even though the property was not owned by the decedent at the time of the decedent's death nor had the decedent retained any legally recognizable interest in the property until death. Nonetheless, being part of the Gross Estate, such property was subject to the Massachusetts Estate Tax Lien created under G.L.c. 65C, §14.
The effect this "transfers in contemplation of death" rule had on conveyancers and title examiners was to require that the title to such property be run out for nominal consideration transfers in the grantor indices and in the Probate indices to see if there was any evidence of the transferor dying within three years from the transfer, thereby triggering the application of the Estate Tax provisions to the transferred property. The problem was that there was always the possibility that the transferor may have died in another county or state and no record of the death may have been found in the county in which the property was located so one would never know if the property was subject to the Estate Tax provisions. Furthermore, if you were doing a transaction within the three-year period and even if you knew the transferor was alive at that time, you had to keep your fingers crossed that the transferor did not die before the three-year period expired. Until a statutory amendment to G.L.c. 65C, §14, in 1985, bona fide purchasers from the nominal consideration transferee were not protected.
Since being amended by St. 1985, c. 711, §15, G.L.c. 65C, §14(b), has provided protection against the Massachusetts Estate Tax Lien for bona fide purchasers from the nominal consideration transferees, but only when the transfer is an outright transfer of the transferor's interest in the property. The second sentence of c. 65C, §14, provides:
Any part of such real property, which, prior to the decedent's death, was conveyed by a deed of the decedent not disclosing an intention that it take effect in possession or enjoyment at or after his death and such deed was recorded or registered prior to the decedent's death, and any part of such personal property transferred by, or transferred by a transferee of, such spouse, transferee, trustee, surviving tenant, person in possession of property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, to a bona fide purchaser, mortgagee or pledgee, for an adequate and full consideration in money or money's worth shall be divested of the lien provided in subsection (a), and a lien shall then attach to all the property of such spouse, transferee, trustee, surviving tenant, person in possession, beneficiary, or transferee of any such person, except any part transferred to a bona fide purchaser, mortgagee or pledgeefor an adequate and full consideration in money or money's worth. (Emphasis added.)
In other words, if the decedent had transferred title to real property for nominal consideration and the deed (1) was recorded prior to death and (2) did not disclose an intention that it take effect in possession or enjoyment at or after his death, then what I refer to as an "Evaporating Estate Tax Lien" or a "Domino Estate Tax Lien" arises with respect to that property. Under this provision, the lien is there against the property until it is transferred by one of the various categories of transferees mentioned in the statute to a bona fide purchaser, mortgagee or pledgee, for value. Notice that the statute does not require that the bona fide purchaser, mortgagee or pledgee (I'm not sure what that might be in a real estate context) have to be without notice of the lien. All they need to do is pay value. Thus, as to a bona fide purchaser or mortgagee, the lien evaporates from the property upon the recording of the deed or mortgage to them. As to the nominal consideration transferee (donee), the lien evaporates from the property deeded to a bona fide purchaser or mortgaged to a bona fide mortgagee but then attaches to all the remaining property of the donee, including the proceeds of the sale or mortgage loan. Even then, however, upon sale or mortgage of any of the donee's remaining property, the lien evaporates again as to the bona fide purchaser or mortgagee and remains with the remaining assets of the donee and attaches to any proceeds of the transaction coming to the donee. Thus, as to the donee, the lien is more in the nature of a domino lien than an evaporating one.
As a result of this statutory amendment, we need no longer be concerned about the Massachusetts Estate Tax Lien being imposed on property transferred outright by a decedent before his or her death no matter how long or short the time frame, so long as the deed is recorded prior to death. Accordingly, we just need to run the owner of property up to the point the deed is recorded to make sure there is no evidence in the Registry or Probate records of the transferor's death before the deed gets recorded. There is still the risk, of course, that the transferor may have died prior to recording but outside the county or the state. But, first, that is still relatively rare and, second, given the intent of the statute, under those circumstances, a purchaser for value would not only be a bona fide purchaser but a bona fide purchaser without notice of the pre-recording death and, therefore, the potential attachment of the lien, and would be protected against any assertion of the lien by the Department of Revenue.
The Massachusetts Conveyancers Association eventually adopted Title Standard No. 61 to help guide conveyancers and title examiners in the basic application of the bona fide purchaser protection under c. 65C, §14(b). That standard provides as follows:
A transfer of an interest in real estate is free of the Massachusetts Estate Tax Lien, where, prior to a transferor's death, such transfer is made for apparently less than adequate consideration, and
(1) the deed or other instrument evidencing the transfer did not disclose any intention that it take effect upon or after the death of the transferor; and
(2) such deed or other instrument was recorded prior to the transferor's death; and
(3) subsequent to such recording or registration such real estate interest was transferred by the transferee or by his subsequent transferee to a purchaser for adequate consideration.
With reference to (1), a deed reserving a life estate in the transferor discloses an intention that it takes effect upon or after the death of the transferor.
With reference to (3), the last referenced transfer may have occurred before or after the original transferor's death.
As indicated by the Comment with respect to item number (1) of the standard, one of the major issues that usually arises in these situations is determining if the nominal consideration transfer deed "disclose[s] an intention that it take effect in possession or enjoyment at or after [the transferor's] death." If it does disclose such an intention, then the "evaporating" lien provisions of the statute won't apply as indicated by the Title Standard. The life estate situation discussed in the Comment is quite common nowadays and presents a clear instance in which possession and enjoyment by the remainders must, as a legal matter, await the life tenant's death. Of course, there are other obvious situations, such as when the transferor deeds to himself and others, thereby retaining a fractional interest as a tenant in common, joint tenant, or tenant-by-the-entirety (ignoring the moiety aspects of the latter for purposes of this issue).
In addition to the more obvious retained interest situations just mentioned, we have other types of interests that may be considered to take effect in possession or enjoyment at or after the transferor's death that may not be so obvious. Revocable transfers may be considered as taking effect at death, particularly where the right to revoke does not expire until the transferor does. Revocable trusts would be a classic example, especially where the transferor is the lifetime beneficiary and other beneficiaries must await his or her death to obtain their remainder interest. Less subtle would be a transfer to a trust, whether or not revocable, in which the transferor is the lifetime beneficiary and the trustee. In accordance with IRC §2038, revocable transfers might also include transfers with retained powers to alter, amend, or terminate the transfer or the trust. Such provisions are frequently seen in Massachusetts in real estate title holding trusts, whether nominee trusts or true trusts, so be very circumspect about nominal consideration transfers to trusts. A transfer in which some form of power of appointment (i.e., the power to control who ends up with the property), by Will or otherwise, may also be deemed to fall within the category of transfers considered to take effect in possession or enjoyment after death of the transferor. While not seen very often, a lease-back arrangement, especially with nominal rent, may also fall within this category. Essentially, about the only time you're safe in relying on the "evaporating" lien provisions of c. 65C, §14, and Title Standard No. 61 is when the transfer is an outright transfer of all of the transferor's interest in the property. As always, however, if you have any questions or doubts about the application of the statute or the Title Standard to any such situation you encounter, please don't hesitate to call your friendly Stewart Title underwriting counsel to discuss your situation.
1 G.L.c. 65C, §14(a) provides: "Unless the tax imposed by this chapter is sooner paid in full, it shall be a lien for ten years from the date of death upon the Massachusetts gross estate of the decedent . . ." (Emphasis added.) Thus, even if the decedent didn't have any ownership interest at the time of death in property brought back into the Gross Estate under the "contemplation of death" rule, the property was subject to the Estate Tax Lien. [Back to Text]
2 It seems that a comma should have been placed here so that the rest of the discussion about the property being divested of the lien upon transfer out of the donee to a bona fide purchaser would apply to the real property conveyed by an inter vivos deed as well as to personal property. Without the comma, grammatically, it might look like the lien divestiture provision applies to such real property immediately upon the inter vivos recording of the deed to the donee without the necessity of a transfer by the donee to a bona fide purchaser. Such a result, of course, wouldn't make much sense. [Back to Text]
3 I'm going to drop reference to "pledgees" from this point forward. [Back to Text]