Discharge Federal Estate Tax Liens Prior to Sale of Property

Generally, before the estate of a decease person can sell real estate, the individual(s) named as executor in the will must probate and be formally appointed as executor.  If there is no will, then the closest heir at law must apply to the surrogate’s court to be appointed as administrator of the estate.  An administrator would follow the same steps as an executor in order to sell real estate.

Estates with a value in excess of $5,450,000 are subject to federal estate tax pursuant to IRC Section 6324.  IRS estate tax liens automatically attach to real property (“real estate”) which was owned by a decedent on her date of death.  In order to have this tax lien discharged, the seller must follow these steps in order to close on the sale of the property and have the federal estate tax lien discharged:

The executor of the estate must complete and file IRS Form 4422 and provide the required supporting documents.  In order to compete this form you must know the value of all estate assets and expenses.  And you must have the required supporting documentation including: the last will and testament, the contract for sale of the real estate, the closing statement or proposed closing statement for the sale (which shows all payments, credits, expenses and offsets), the federal estate tax form 706 and documentation reflecting the value of all the estate’s assets.  With Form 4422 the executor must also submit for 8821, a tax information authorization form.  Additionally, IRS Form 4422 must be filed at least 45 days prior to the closing of the sale of the real estate.

The executor must either come to an agreement with the IRS allowing an escrow agent (typically an attorney) to be appointed to hold the entire net proceeds of the sale or the full amount of proceeds  of the sales will be deposited with the IRS.

Once Form 4422 has been reviewed and accepted by the IRS, it will provide a conditional commitment to discharge the property from the federal estate tax lien.

After the closing has been completed, the executor must provide to the IRS a final fully executed closing disclosure from the sale and a check in the amount of the proceeds, or proof that the executor has complied with the escrow agreement.

The IRS will then issue a “Certificate Discharging Property Subject to Estate Tax Lien” to release the subject property from the federal estate tax lien.  This Certificate should be provided to the Buyer’s title company.

The closing proceeds which have been held in escrow will be released after the IRS issues an estate tax closing letter.

This is a long and complicated process which must be complied with for any estate valued over $5,450,000.00.  If the value of a decedent’s estate is below $5,450,000.00, the estate is not subject to federal estate tax and there is no lien against the property and therefore no discharge is necessary.   If the buyer’s title company requires  letter stating that no estate tax is due and the property is not subject to a lien, the executor can file Form 4422 to obtain such a letter.

The estate attorneys at McLaughlin & Nardi, LLC are well versed in real estate transactions and estate administration and can assist you in navigating this cumbersome process.  Please contact us by telephone at 973-890-0004 or e-mail.