Many non-US heirs need a professional executor to get federal transfer certificates.
What is a federal transfer certificate?
It is an IRS document, specifically, Form 5173. It is used to confirm through the IRS that there is no estate tax due, or it’s already been paid. The certificate allows the financial institution off the hook for taxes.
In absence of this, they can be liable! For example, lets’ say E*Trade has a brokerage account for a decedent who was a non-resident, non-citizen. If any tax was owed, but E*Trade releases the funds prior to the tax being paid, then E*Trade owes the IRS those taxes. This transfer certificate is the IRS’s way of letting E*Trade know that it is safe to release the funds to the executor or heirs. Because of this liability, banks and brokerages will not release the money without this certificate.
When is a federal transfer certificate required?
First, the decedent should be a non-resident alien (NRA). Second, the decedent’s assets must be US assets: stocks, real estate (but not bonds, cash, checking account, etc.).
The executor must send the certificate to the financial institution, or else the bank cannot and will not release funds.
If estate is large enough that it requires a federal estate tax return (706NA), just file the return instead using the federal transfer certificate. After filing the federal estate tax return, you will receive a closing letter from the IRS stating that they agree with your return and that the matter is closed. You can take the closing letter to the bank, and they will release the funds without the federal transfer certificate. You do not need to do both.
Recently, we’ve found that some institutions interpret to mean that if there there is a US professional executor (as opposed to a foreign executor), then no federal transfer certificate is needed. Hurray! Right? Unfortunately, this is usually not the case. Even if the law has changed, most financial institutions have not caught up. They are still requiring federal transfer certificates.
But, even if a federal transfer certificate isn’t required, the US executor is personally liable for estate tax. For that same reason, I, as a professional US executor, will not release the funds until I have filed the estate tax return. I will apply for the tax clearance anyway, so it’s really just a similar situation with the same result. Somebody has to make sure the taxes are paid so it doesn’t come back to hurt them later on.
How to get a federal transfer certificate
There are detailed instructions on the IRS website: https://www.irs.gov/businesses/small-businesses-self-employed/transfer-certificate-filing-requirements-for-the-estates-of-nonresidents-not-citizens-of-the-united-states
The application information for the federal transfer certificate is substantially similar to the estate tax return (706NA).
The IRS website says it can take 6 weeks to 6 months to respond to the application for certificate. However, as we know, it has been taking much longer these days. We have discussed previously about the numerous IRS delays, and as a result, the turnaround time is unpredictable. It could take years, unfortunately.
We trying to set the expectations as realistically as possible. Even if we file immediately, it won’t move the IRS any faster. This can be very frustrating, especially for the heirs.
If you want to learn more about professional executorship, especially if you are in another country, my book “How to Hire an Executor” will help shed more light on the topic.
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