The Estate Tax Closing Letter

An estate lawyer with paperwork.
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An estate tax closing letter is a form letter that the Internal Revenue Service (IRS) will send to you after your IRS Form 706 has been reviewed and accepted. Form 706 is a rather lengthy return that the executor of an estate will file after the death of an individual. The form determines the amount of estate tax due pursuant to IRS Code Chapter 11. Form 706 is also used to determine any generation-skipping taxes following IRS Code Chapter 13.

The closing letter allows an estate to settle and close probate. The estate can't do so until issues of estate taxes have been resolved if the estate is large enough to owe them. The requirement to file Form 706 and receive a closing letter depends on the gross estate value. The IRS has changed this value over the years. As an example in 2016 estates above US$5.45 million needed to complete and file the form, the value increased to $5.49 million in 2017, $11.18 million in 2018, and is $11.4 million for 2019.

Estate Taxes at the State Level 

In states that collect a state estate tax, the taxing authority will issue an estate tax closing letter as well. This indicates that the state estate tax return has been reviewed and accepted by the taxing authority.

The document may also be required to clear any estate tax liens placed against a property. Once taxes are paid and the lien is satisfied the property can be transferred to beneficiaries. Even if estate taxes are not due at the state level, this type of lien typically goes into place automatically until it's determined that this is the case. The closing letter acknowledges no taxes are due and lifts the lien.

Among states that impose their estate taxes, the thresholds are typically much lower than the federal exemption. As an example, the 2016 New Jersey exemption was only $675,000. 

Fifteen states and the District of Columbia had an estate tax as of 2018 according to the nonprofit Tax Foundation. Among these, several are working to increase their exemptions or otherwise change this status. 

  • The District of Columbia is in the process of phasing in a higher exemption amount.
  • New York and Maryland are working to increase their exemption amount to match that at the federal level and expect to accomplish this by 2019. 
  • Minnesota will increase its exemption to $2 million as of 2020. 
  • Tennessee's estate tax phased out entirely in 2016. 

In some states, such as Florida, an estate that's taxable at the federal level must file the IRS estate tax closing letter with the probate court when it is received. The estate can't be officially closed until this is done, even though Florida does not have an estate tax of its own. 

When an Estate Can Expect a Tax Closing Letter

According to the IRS website, heirs can expect a closing letter within four to six months from the date Form 706 is filed. But this is if the return is without errors or special circumstances. Count on either receiving the closing letter or a letter informing the executor that the estate's Form 706 is being audited within six to nine months from the date Form 706 is filed.

Wait at least five months before calling the IRS estate and gift tax unit at 866-699-4083 to check on the status of IRS Form 706 after it has been filed. 

NOTE: State and local laws change frequently, and the above information may not reflect recent changes. Please consult with an attorney or accountant for the most up-to-date advice. The information contained in this article is not legal or tax advice, and it is not a substitute for legal or tax advice.