Estate Tax Closing Letters and Real Estate Releases of Lien

If you filed a Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return, and/or a state estate or inheritance tax return, you need estate tax closing letters (letters saying that the IRS and the state have accepted the returns) before you can close the estate. At this point, you pay any added taxes caused by adjustments; if you’re lucky enough to avoid those, you may even get a refund.

The two types of tax closing letters you’ll receive are

  • 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 receive 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. (You may have a deadline on this filing, so be aware.) 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 — but actually fairly important — details.

Whenever someone dies, the title to any real estate he or she owned gains a little cloud, an estate tax lien, that prevents you from selling the property with a clear title until you have taken care of it. Liens are how states and the federal government make sure that they receive the taxes they feel are due, and you can only release the lien if you pay those taxes.

The lien attaches to the property automatically, and no recorded notice is required. The IRS may decide to file a lien for recording with the Register of Deeds (or its equivalent in your state) to gain protections not afforded by the general estate tax lien.

To obtain a federal estate tax release of lien where the lien has been recorded, use a Form 4422, Application for Certificate Discharging Property Subject to Estate Tax Lien, to request that a Form 792, Certificate of Release of Lien, be issued when filing your Form 706.

If no estate tax lien was recorded or no Form 706 is required to be filed for your estate and your purchaser wants proof that there is no lien or that it has been satisfied, provide the purchaser with either

  • A copy of the Form 706, the estate tax closing letter, and proof of payment or

  • Documentation showing that no Form 706 was required to be filed

Check with your state’s department of taxation to see what steps are required to release the state’s lien. Liens should be released prior to the sale of the property, but that’s not always possible. Don’t fear if some taxes are due but you don’t have the money to pay them; the state sends someone to the closing to collect the taxes owed in exchange for a release of lien.

If there’s some question as to whether taxes are due, the state often accepts an escrow payment, which it refunds after a final tax determination has been reached.

If there’s no taxable estate for federal estate tax purposes, you can’t get a release of lien, but you can sometimes 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, whichever applies.

After you have the release of lien or affidavit in your hands, run to the Registry of Deeds in the county where the property is located to record that baby. The release of lien or affidavit becomes part of the title history attached to that property, and every time it’s sold or refinanced, that lien and its subsequent release or the affidavit will be noted on the title examiner’s report.

Check with your local probate court, register of deeds, or a local probate attorney to see which method is used in your state to obtain clear title on the real estate.

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