Changes to the Estate Tax Lien Process

Estate planning is heavily dependent upon the law both at the time of planning and at a person’s time of death. The law is constantly changing, especially laws that impact estate planning. That is why it is crucial to make sure that you work with an experienced estate planning attorney that can help you stay abreast of changes in the law that could affect your estate plan. Recently, such a change occurred regarding the estate tax and lien releases.

What is an estate tax lien?

Internal Revenue Code 6324 says that a federal estate tax lien is put in place on the day a person passes away. This allows taxable assets to be determined, at which point property may become subject to an assessment lien until such time as any taxes due are paid in full. What this means is that the executor of a person’s estate, or the people responsible for the disposition of the deceased person’s property, cannot dispose of real property until it is discharged from either the estate tax lien or the assessment tax lien. If you try to dispose of any real property prior to it being discharged, the buyer of the property will be unable to take the property free and clear of any liens that may be placed on it. This could cause unexpected delays and other issues related to the disposition of property within an estate. By placing such liens, the Internal Revenue Service is able to ensure that any taxes due to it by the deceased or as part of the deceased’s estate are actually paid.

What changes have occurred to the lien release process?

A recent article notes that the IRS changed discharge procedures for these types of liens last year without making a formal announcement. In cases where those responsible for the disposition of a deceased person’s assets wish to transfer assets that may be subject to estate tax or assessment liens before filing the required estate valuation documentation, filing for a release of lien had been routine in the past. However, the IRS is now requiring net proceeds from the sale of such assets be placed in an escrow account or into the estate’s estate tax account – if one has been established – until a final determination is made on taxes due.

As one can imagine, this has caused trouble for many estate across the country because the tax process can be lengthy. It is especially troublesome in clear-cut scenarios where no estate tax is due for estates valued under $5.49 million, which is the current limit per individual for the estate tax exemption. The American Bar Association has been working with the IRS to help address these issues, and the IRS has issued guidance as to how requests for discharging these liens should be processed.

The guidance also provides that IRS agents should consider whether any estate tax due has been adequately provided for in discharging property while allowing for discharge without the need for escrow in situations where no taxes would be due. The Internal Revenue Service still recommends that you submit requests for discharge of liens at least 45 days prior to the date on which the discharge would be needed for a legal transaction involving the disposition of property, like selling a home. You can find more information about applying for the discharge here.

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