EJS with Sale

EJS with Sale, is it safe?

Once upon a time, a buyer found a good deal: a lot in a prime subdivision priced 20% below market.

[This is a hypothetical story based on lessons from Atty. Mejia's lecture.]

After inquiring about the property, he discovered its owner had passed away, and the heirs had yet to transfer the title to their names.

The heirs didn't have the cash to settle their father's estate, so they hoped a buyer could advance the money for the taxes. The heirs' broker advised that they could execute an "Extra-Judicial Settlement (EJS) with Absolute Sale," basically two transactions combined into one–an EJS and a Deed of Absolute Sale.

The buyer asked his contacts whether the EJS with Sale method was safe. His contacts said it was safe for as long as the sellers secured an heir's bond.

[An heirs' bond is an insurance coverage that guarantees payment to any claim by an heir or creditor deprived of participation in a decedent's estate.]

The buyer followed his contacts' advice and proceeded to purchase the lot. Moreover, he withheld the estate tax from the heirs' proceeds for added protection. The heirs got paid, and the buyer got the title to the property—done deal.

When the buyer passed the necessary documents to the tax regulator, the examiner discovered that the decedent owned several properties under his TIN. Thus, the examiner rejected the documents submitted by the Buyer and told him that the heirs would have to settle the other properties as well–and not just the lot he purchased.

The buyer immediately reported the problem to the heirs, who, upon hearing this, were willing to help the buyer. The problem is, however, the heirs needed additional money to settle the estate tax for the other properties.

And thus, the buyer was stuck with a title that he couldn't transfer to his name. To make matters worse, the delayed sale transaction was beginning to incur penalties for non-payment of taxes.

End of story.

Lessons:

I surmise that this is one of the reasons why Atty. Mejia proposes to separate the two transactions: EJS and the sale. It would be better if sellers fix the EJS first before selling the property. You can expect the tax regulator to dissect every transaction presented to them.

For example, I've witnessed the regulator require heirs to submit a newspaper (actual copy; not a digital copy) that showed the price of the decedent’s club share from years ago.

As I mentioned in last Friday's post, the BIR will not allow the estate settlement per property–it has to be for the total known estate. I put "known" because addendums to the estate may be made for as long as the BIR is unaware of the other properties.

There are two ways for the regulator to know what properties a decedent owns. First, they could check this in their system via the decedent's TIN (which buyers provide in property acquisitions). They could also request a report from the City Assessor called "Certificate of Aggregate Landholdings."

For these reasons, it would be best to have the seller settle the estate first.

If the buyer really wants the property and would like to get the right of first refusal, he could "lend" the money to the heirs so they could settle the estate tax. The parties will execute a promissory note and have the contract annotated on the title to serve as a warning to any other party.

[Just thinking out loud.]