According to Internal Revenue Code Section 6166, a personal representative (PR) may defer payment of federal estate tax if the decedent’s equity interest in a closely held business exceeds 35 percent of his adjusted gross estate.
In order to be eligible for a Section 6166 election, the closely held business must qualify as an active trade or business engaged in the manufacturing, mercantile or service industries.
Code Section 6166 permits the PR to pay the tax attributable to the closely held business in up to 10 annual installments beginning no later than 5 years subsequent to the due date for the Form 706 Federal Estate Tax Return. During those 5 years, only the interest on the deferred tax must be paid. Generally, interest will be charged on the balance of the deferred tax at 45% of the rate in effect for underpayments of tax. However, a special 2 percent interest rate applies to a portion of the deferred tax. (The portion of the tax to which the special 2 percent rate applies is the lesser of the full portion of the estate tax attributable to the closely held business, or the product of multiplying the 40% tax rate by the inflation-adjusted taxable value set by Code Section 6166. For decedents dying in 2017, the estate tax to which the 2 percent interest rate applies would be $596,000.)
If you plan on taking advantage of Section 6166, be aware of actions that will accelerate the payment of all unpaid tax that has been deferred. If a distribution, sale, exchange, disposition or withdrawal of 50 percent or more of the decedent’s interest in the closely held business occurs after the date of death, the payment of all unpaid tax will be accelerated. In addition, the payment of all unpaid tax may be accelerated if a required payment is not paid within six months of the date on which Form 706 must be filed.
In summary, we have only provided a cursory overview of Section 6166. The Code is quite complex and restrictive as it only applies to a very small percentage of estates. If considering Section 6166, first consult with your tax and legal advisors.
Gary Ringel, CGREA