IN THIS CHAPTER

Getting the necessary documentation to close the estate

Taking care of the last administrative expenses

Doling out the rest of the distributions

Preparing and filing the final paperwork

Administering the estate has been a long haul, but the finish line is within easy reach now. If you’re ready to close the estate, you just need to make sure that you wrap up all loose ends. Closing the estate may seem like a lot of work, but trust us: Compared to what you’ve already accomplished, this final step is a cakewalk.

In this chapter, you reach the culmination of your hard work, dedication, and attention to myriad details on behalf of your decedent. Here’s where you find everything you need to do as executor to wind up the estate and just how to do it: getting releases of lien for real estate, paying final administration costs, making final distributions to residuary beneficiaries, preparing probate accounts and getting them approved by the court, preparing final income tax returns, obtaining tax closing letters, and filing with the probate court all those receipts you collected from the beneficiaries.

Obtaining Tax Closing Letters

If you filed a Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return (see Chapters 16 and 17), 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, as filed or with adjustments) 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 (although that’s unlikely).

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 (check out Appendix B for a list of states that currently charge taxes on estates or inheritances). Remember, you can’t put this task of estate administration behind you until you finish all these seemingly minor — but actually fairly important — details.

Acquiring Releases of Lien for Real Estate

Whenever someone dies, the title to any real estate he or she owned (whether alone or with someone else) gains a little cloud, an estate (or inheritance) tax lien, that prevents you from selling the property with a clear title until you (the executor) 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 (see Chapter 16). 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 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. 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 hot little hands, run, don’t walk, to the Registry of Deeds in the county or town 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.

Paying Final Administration Expenses

When you’re about to finish administration and close an estate, it may be tempting to make final distributions to residuary beneficiaries before you pay amounts still owed for administration. Be patient, though, and make sure that all administration expenses are paid first; otherwise, you may find yourself begging, usually unsuccessfully, for the residuary beneficiaries to give back some of what they received so you can pay what’s still owed. Here are the fees that are typically still owed as you come toward the end of the estate’s administration:

• Attorney’s and accountant’s fees: For preparation of Form 706 and Form 1041, and for the probate accounting.

• Executor’s or administrator’s fee: Pay yourself your executor’s fee, which must be reasonable. You establish your fee in one of several ways: The decedent’s will determines the amount (or at least spells out how to calculate it), state statute fixes the amount based on a fee schedule, or in some jurisdictions, your fee as executor must be what would be considered reasonably necessary (or words to the same effect). Some of the factors that may be considered in determining your fee include

  • The size of the estate and the extent of the risks and responsibilities you assumed
  • The complexity of estate matters that you’re called upon to handle
  • The amount of time you spent administering the estate (here’s where your detailed time records are useful)
  • How well you did your job
  • Fees received by others for similar work
  • The results of your efforts

  You’re also allowed reimbursement for reasonable expenses you incurred in administering the estate, from appraiser’s fees you paid out of pocket to the cost of envelopes and postage.

  Be sure to itemize all such expenses in your accounting so the court can see where the money has gone.

• Miscellaneous administration expenses: Pay any other unpaid expenses of administration, including to other professionals and the court, or set aside funds for their payment. Any funds set aside, which should be minimal at this point, should be kept in a noninterest-bearing account to avoid having to recalculate the estate income tax for very small earnings or file another year’s return to satisfy the IRS.
• Estate income taxes: Although owing any estate income taxes on the final returns is uncommon, make sure that you pay anything you do owe.

Here’s where your up-to-date checkbook and accounting records come in handy. Check them to see what fees are outstanding. Also check out Chapter 8 for more info on paying these different expenses.

Making Final Distributions to Residuary Beneficiaries

Although you can sometimes make partial distributions of residuary (what’s left after payment of expenses, debts, taxes, and specific bequests and devises) shares after the period for filing claims has passed and you know the amount of the estate and inheritance taxes, such partial distribution is by no means required. However, in order to completely close the estate, you should make final distributions of residuary shares when you’ve settled all the affairs of the estate, including receiving the estate and inheritance tax closing letters, and prepared the final account (and, in some circumstances and/or jurisdictions, not until after its allowance by the probate court). If you haven’t paid all the final expenses, keep a reserve to do so. (Refer to Chapter 8 for the lowdown on how to make distributions to residuary beneficiaries.)

Preparing and Filing Final Estate Income Tax Returns

After you distribute all the estate assets, you may now prepare the final estate income tax returns, even if you haven’t reached the end of your tax year. Because no tax is due, you’re not in any danger of paying taxes before you have to; you’re only making sure that you don’t forget this important step. Write the dates of the tax year you’re using at the top of the form, and be sure to mark this return “Final” by not only checking the box but also writing the word Final across the top of page one in black or red marker. Trust us, this part feels terrific! Chapter 19 explains just what happens to the estate income and deductions for tax purposes in the final year of the estate.

Check out Chapter 18 for a thorough discussion of how to prepare the estate income tax returns. You’ve no doubt been preparing and filing these right along on a yearly basis and in a timely fashion, even if you haven’t done much other accounting work until now, because Uncle Sam waits for no man, woman, or executor.

Readying Accounts for Allowance by the Probate Court

You may feel that we overemphasize the importance of keeping good records, but good records really come into play now when you’re closing the estate and preparing the estate accountings for allowance (approval by the probate court). Those records you’ve kept will pay off in spades.

The exact procedure and order of events for allowance of accounts and for closing your estate varies by your decedent’s state (and even county) of domicile (the decedent’s legal residence) and by the type of probate you’ve elected (see Chapter 6). The following sections set out some of the typical options found in a state that has adopted a version of the Uniform Probate Code. Be sure to check with your local probate court for the proper procedure and order of these events; you’ve come so far; it would be a shame to mess up now.

For all the probate court forms we reference in the next sections, check out your local probate court’s online system or your states online system. There’s a good chance one or both entities have posted the necessary forms for you to download at your leisure. You can also check in person with your local probate court for these forms.