Estate Tax Payment Deferral (Code 6166)

Code 6166 allows for deferral of estate taxes payable when 35% of the value of the estate is constituted by a Closely Held Business (CHB). This is a liquidity provision that aims to avoid the situation whereby a family may have to sell the family business to meet the tax obligations of the estate. In theory deferral of the taxes gives the family time to make alternative arrangements for sources of liquidity. The deferred tax is payable in no more than ten equal annual installments, beginning on a date that is not more than five years after the due date of the Federal estate tax return, which is generally nine months from the date of death.

There are many factors to consider in application of Code 6166 provisions and its use is always the result of careful collaboration between client tax and legal advisors. The four main requirements are:

1) decedent must have been a US citizen or resident at time of death
2) the value of the decedents interest in the CHB exceeds 35% of the gross estate value
3) the business must qualify as a CHB
4) there must be a timely election made on form 706 

Mr. Client dies with the following assets:

– 100% shareholder ownership in the “closely held business” that he founded 48 years ago which has a FMV on his date of death of 14,700,000 USD
– a securities portfolio worth 6,240,000 USD
– a home worth 2,700,000 USD
– 1,290,000 USD in outstanding debts and estate expenses

> Adjusted gross estate value: 22,350,000 USD, of which 65.77% (>35%) is in CHB stock.

> The family tax adviser consults with the family lawyer to determine that there would be no adverse consequences for making a timely election on Form 706 and using Code 6166 given the family’s circumstances at that time. They both agree that the election would be beneficial and provide valuable time for Mr. Client’s surviving children to cope with the loss of their father, and come to terms with their new responsibilities in the family business.

> The Code 6166 election is made, giving Mr. Client’s Children 10 years to pay the total estate tax balance owed in annual installments (being careful not to fall afoul of the acceleration rules).

> Mr. Client’s children are able to concentrate on sustaining their father’s business legacy without having to worry about selling family assets against a ticking clock; taking advantage of the investment income from their father’s securities portfolio, and operating profits from the family business to make the tax payments.