Estate Tax: Extension and Installment of Payment

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Generally, the executor of an estate has 9 months after the death of the property owner to pay any estate taxes due on the property. Family businesses may find paying these taxes difficult if the estate is land rich and cash poor, like many family farms, ranches, and forest lands are.

However, the Internal Revenue Code (Section 6166) allows for deferral and annual installment payments of estate taxes due on closely held businesses, or family businesses. This is a great tax break that heirs inheriting family farms, ranches, and forest lands can take advantage of. This allows you to make “interest only” payments up to the 5th anniversary of the due date of the return. Then for additional 10 years you can pay the tax off in installments. Interest will accrue when you elect to defer or make installment payments. However, the 14 year timeframe is a maximum, so you can pay off the estate taxes sooner if you would like to.

To qualify for this the value of interest in the family business must make up more than 35% of the adjusted gross estate and the decedent must have been a U.S. citizen or resident at death. Also, the tax break applies only to the taxes owed on the business, not the taxes on the rest of the estate.

A closely held business is defined as:
• A proprietorship that carries on a trade or business.
• An interest in a partnership that carries on a trade or business. Deceased partner's interest that is included in the gross estate must be 20 percent or more of the total capital interest in the partnership or the partnership has 45 or fewer partners.
• Stock in a corporation carrying on a trade or business if 20 percent or more of the value of voting stock of the corporation is included in the gross estate, or the corporation has 45 or fewer shareholders.
 
Be aware that if you sell off or divide up the family business the full amount of the estate tax may become due at that time.

To take advantage of the deferral and installment payments, you must make the section 6166 election on Form 706 Federal Estate Tax Return in a timely manner.