Estate Tax Closing Letters and Real Estate Releases of Lien
To close the decedent’s estate, the executor must obtain tax closing letters and releases of lien for real estate. If you filed a Form 706 tax return, you must complete estate tax closing letters before you close the estate. The IRS and the state impose an estate or inheritance tax lien on any real estate the decedent owned. To release the lien, you must pay the taxes or prove that no taxes are due.
Obtaining tax closing letters
If you filed a Form 706 tax return and/or a state estate or inheritance tax return, you need to complete estate tax closing letters from the IRS and the state taxing authority before you can close the estate. At this point, you pay any added taxes caused by adjustments. The following are the two types of tax closing letters you’ll receive:
From the IRS: The IRS issues an estate tax closing letter when it concludes that the return is accepted as filed or that the required adjustments are completed. You can then proceed to close the estate.
From the individual state(s): After you’ve received your federal estate tax closing letter, file it with your state tax authority, including any information on adjustments made to the estate tax return as filed. The state taxing authority then issues its closing letter, making any adjustments based on the federal return.
Don’t put the federal estate tax closing letter in the pile of things to get to when you have a chance. File it promptly in any states where you’ve also filed an estate or inheritance tax return or paid any estate taxes. Remember, you can’t put this task of estate administration behind you until you finish all these seemingly minor details.
Obtaining releases of lien for real estate
When someone dies, the title to any real estate he or she owned has an estate or inheritance tax lien imposed by the IRS and the state. This prevents you from selling the property with a clear title until you, the executor, have taken care of it. You can only release the lien if you pay the taxes or prove to the taxing authority that no taxes are due.
Federal: To obtain a federal estate tax release of lien, request that a Form 792, Certificate of Release of Lien, be issued when filing your Form 706.
State: Check with your state’s department of taxation to see what steps you need to take to release the state’s lien. Liens should be released prior to the sale of the property, but that’s not always possible. The state sends someone to the closing to collect the taxes owed in exchange for a release of lien.
If there’s no taxable estate for federal estate tax purposes, you can’t get a release of lien. Instead, have your real estate or estate attorney prepare a recordable affidavit stating that no estate tax is due, and sign it in your capacity as executor, administrator, or trustee. After obtaining the release of lien or affidavit, file it with the Registry of Deeds in the county or town where the property is located as soon as possible.