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Estate Tax Deferral Offers Relief to Some Business Owners

If a substantial portion of your wealth is tied up in a family or closely held business, you may be concerned that your estate will lack sufficient liquid assets to pay estate taxes. In such cases, heirs may be forced to borrow funds or, in a worst-case scenario, sell the business in order to pay the tax.

For some business owners, Internal Revenue Code Section 6166 provides welcome relief. It permits qualifying estates to make an election to defer a portion of their estate tax liability for up to 14 years. Generally, during the first four years of the deferment period, the estate pays interest only, followed by 10 annual installments of principal and interest.

Consider your eligibility

An estate tax deferral is available if the value of an ‘interest in a closely-held business’ exceeds 35 percent of your adjusted gross estate. A business is closely held if it conducts an active trade or business and it is a:

  • Sole proprietorship
  • Partnership or LLC (if your gross estate includes 20 percent or more of its capital interests or the entity has 45 or fewer partners or members)
  • Corporation (if your gross estate includes 20 percent of its voting stock or the corporation has 45 or fewer shareholders).

To determine whether you meet the 35 percent test, you may only include assets actually used in actively conducting a trade or business. Passively managing investment assets does not count. Unfortunately, it is not always easy to distinguish between the two — particularly when real estate is involved. The IRS considers several factors and has issued guidance on the matter.

Get professional guidance

An estate tax deferral might lend a helping hand to your family and business. But the rules are complex. We can provide professional guidance on whether this is the right strategy for you.

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Talk with the pros

Our CPAs and advisors are a great resource if you’re ready to learn even more.