Installment Payment of Estate Tax

Generally the most significant liquidity need of an estate is its liability for federal estate taxes. These taxes are due nine months from the date of the decedent’s death. Recognizing that closely-held businesses are likely to face serious liquidity problems, and attempting to create a relief provision to make it unnecessary to sell the business interest to pay death taxes, Congress enacted a provision to permit the deferral of estate tax payments. §6166.

§6166 is available only if the decedent was a U.S. citizen or resident at the time of death, and the value of the decedent’s interest in a closely-held business exceeds 35% of the value of the decedent’s adjusted gross estate (defined in the same manner as under §303. §6166(a)(1). If these tests are met, the personal representative of the decedent’s estate can elect to defer for 5 years payment of the portion of the estate taxes attributable to the closely held business interest (multiply the total estate tax liability times the ratio of the value of the business interest to the value of the adjusted gross estate) and thereafter pay the deferred portion in up to 10 annual installments. The estate tax attributable to non-closely held business assets is due at the regular time, 9 months from the decedent’s date of death.

Chapter 22 of Business Planning Succession describes the installment payment of estate tax and the intricacies of using that method of paying federal estate taxes.