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IRS Makes Executors Ask, ‘Mother May I?’

close view of a row of gray mailboxes
photo by James Lee

Administering an estate is never a joyous task, but it is a necessary one. We usually want to get it behind us as quickly as we can in order to move on with life’s business.

Yet for reasons known only to itself, the Internal Revenue Service has just added a new item to an executor’s to-do list in order to settle an estate.

In an update to its Frequently Asked Questions on estate taxes, the Service stated that, as of June 1 this year, executors who file a federal estate tax return must actively request a “closing letter,” which states that the estate has satisfied its liabilities. These letters used to be issued automatically. Now the IRS asks that estates allow at least four months before even making the request, and nobody knows how long they should expect to wait thereafter before receiving the letter. (Even under the old system, my experience has been that closing letters took anywhere from six months to two years to be issued.)

Not every estate needs to file an estate tax return. In fact, only a small percentage - those that report taxable transfers greater than the $5.43 million exemption amount in 2015 - actually owe any tax. The IRS workload for processing those returns would be pretty small, except that on large estates, the IRS often gives close scrutiny to the values reported on the return. Also, these days many smaller estates file returns to make a “portability” election to carry unused exemption to a surviving spouse’s future return.

So with as little fanfare as possible, the IRS decided to stop issuing closing letters automatically. Instead, it will only issue the letters on request. How do you make this request, and when, and to whom? The IRS has not yet said a word. There is no formal (or informal) guidance as to what form the request should take or how to submit it. Wealth Management.com reported that, according to the IRS helpline, no formal procedures have been established thus far. We can only hope the Service will weigh in on the matter by October, when the first estates filing returns under the new rule will have passed the four-month initial processing period.

A closing letter sounds like a minor administrative detail, but it isn’t. The document is evidence that the IRS has accepted an estate tax filing and that federal tax liability has been satisfied. In many situations, a decedent’s real estate cannot be sold without a closing letter to prove that the IRS will not claim to have an unrecorded lien against the property. Courts frequently require a closing letter to document that an estate’s liabilities are satisfied before allowing remaining assets to be distributed to heirs and discharging the executor from his or her duties.

In short, the absence of a closing letter can end up holding executor and estate hostage when everyone involved would rather just move on with their lives. Given the limited publicity afforded to the new IRS position, we can expect some estates will be waiting for months or years for a closing letter that will not arrive until well after someone gets around to asking for one in the first place.

The IRS has automatically issued closing letters for decades. Why stop now? The official line is that this change will save administrative resources, meaning the cost of the paper, toner and postage used by the Service to issue the documents. But how will that stack up against the manpower costs of processing proactive requests - something the IRS never does very efficiently in any circumstance - and answering inquiries from executors who are waiting to close their estate? Not very well, in all likelihood.

The IRS action looks like a solution to a nonexistent problem. But if the Service wants a problem, it can certainly find one in the many estates that will now linger in administrative limbo awaiting a response to a request they don’t even know how to make.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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