Home  >>  Financial Planning  >>  Individual Planning  >>  Financial Planning D...  >>  Tools to achieve you...  >>  Why Estate Planning?  >>  Defer Estate Taxes

Defer Estate Taxes

SECTION 6166 DEFERMENT

Federal estate taxes are generally due and payable nine months after the date of death. In the event that an estate does not have adequate liquidity, IRC Section 6166 may, under certain circumstances, provide some relief.

To qualify for a Section 6166 deferment a closely held business or farm must constitute more than thirty-five percent of the adjusted gross estate of the decedent. For the purpose of Section 6166, adjusted gross estate is defined as the gross estate minus deductions for estate expenses, debts, and estate taxes. If this is the case the executor may elect to defer paying all or a portion of the estate taxes attributable to the business interest for up to five years at which point taxes may be paid in up to ten annual installments. During these years, the estate must make interest only payments.

Over the following ten years the estate taxes and interest can be paid in equal installments. Federal Estate taxes can be deferred a maximum of fourteen years. Although it may seem that the total number of years of deferment should be fifteen years this is not the case as the first installment payment is due at the same time as the last "interest" payment rather than a year later. Further, the due date for payments may be accelerated for certain withdrawals of funds from, or the sale of a certain portion of the business.

The definition of a "closely held business" for a Section 6166 deferment is limited. To qualify the business interest must generally fit one of the following descriptions:

A) An interest in a proprietorship as a proprietor.

B) An interest in a partnership with fifteen or fewer partners.

C) Ownership of stock in a corporation with 15 or fewer stockholders or owning 20% or more of the voting stock of a corporation which is included in the gross estate.

SITUATIONS THAT MAY WARRANT USE OF SECTION 6166

1) Payment of estate taxes within the nine-month time period would cause a severe hardship for the survivors of the decedent.

2) The closely held business represents a substantial portion of the estate and a funded plan does not exist to liquidate the business in a timely manner.

3) The IRS "lien" on the business would not interfere with its operation or disposition.

Section 6166 rules are complex. While the above provides an overview, careful review by a competent tax or legal advisor is necessary to determine eligibility and application of Section 6166.