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.
