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% of your adjusted gross estate. A
business is closely held if it conducts an active trade or business
and it’s a:
- Sole proprietorship,
- Partnership or LLC (if your gross estate includes 20%
or more of its capital interests or the entity has 45 or fewer partners or
members), or
- Corporation (if your gross estate includes 20% of its
voting stock or the corporation has 45 or fewer shareholders).
To determine whether you meet the 35% test, you may only include
assets actually used in actively
conducting a trade or business. Passively managing investment assets doesn’t
count. Unfortunately, it’s 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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